After decades of on-again, off-again forays into corporate venture capital, companies have turned their engines on again. Last year, technology-oriented corporations invested $1.9 billion in venture capital deals, up from $1.35 billion in 2009, and this brisk 40 growth rate is on track for a repeat performance this year.
The corporate world realizes it has little choice but to be a venture capital player. Whether it is hot new mobile or social media applications, better ways to expand Internet infrastructure or the latest medical device or healthcare IT technology, startups are far more likely than established companies to be on the vanguard of change. Corporations have to pursue investments in entrepreneurial companies as outside R&D labs to add new technologies into their DNA.
Just like VCs, they have to play the game right, however. If they are to be successful in venture investing, they have to time their investments well, deliver on their commitments, add value, check their egos and make sure their bureaucracy doesn’t stifle the startups in which they invest. If you’re a corporate VC, here are some top tips:
• Know when to invest. In most instances, the best time to invest in a startup is when it has actually developed a product and is ready to ship it. This is when startups can best leverage corporate distribution channels and the corporation’s installed customer base to boost sales. Periodically, corporations do invest successfully at an earlier stage. But the odds are not good because the startup’s business model is often still evolving, requiring a lot of ongoing hands-on work and give-and-take. This very early investing is most often the domain of traditional venture capitalists that focus on early stage investments and have more experience and resources to support companies at this stage of development.
• Make synergism a priority. Corporate culture is a lot different from startup culture. Corporations measure themselves by their brand recognition, revenues, stock market value and number of employees. And they’re cautious. Startups are exactly the opposite. They are small, fast, efficient, untethered and irreverent. Understanding and working through the cultural mismatch is often the biggest challenges in corporate-startup relationships. Corporate VCs need to be able to smooth the inevitable friction associated with these two disparate cultures working together.
• Be a long-term partner. The corporate venture investor community has a track record of jumping in and out of venture capital. Venture investing is an environment where reputations are built over extended periods and where predictability and trust are the watch words to help successfully manage risk. If you wanted to be treated like a trusted partner, you will need to be around for the long term and work through the inevitable tough times that accompany investment cycles. This is where investors prove their mettle and earn the respect of their co-investors. Investors who move in and out of the market in search of short term gains or in response to their own economic cycles are perceived to be “hot money” and ultimately are not wanted. If corporate venture capitalists don’t stay the course going forward, they will be viewed as unreliable investors who increase, rather than lower, risk.
• Do no harm. A small move magnified by the mass of a large corporation can have a hugely disruptive impact on a small startup. A corporation needs to understand the implication of its actions on its startup partners – negative as well as positive. Young startups often chose to partner with large corporations as a way of accelerating their growth, erecting competitive barriers to entry, lowering capital requirements and de-risking their operating plan. On the flip side, a corporation’s action can, even inadvertently, have a severe negative reaction on a small startup partner. Building a reputation as a true value-added investor is not an easy thing for a corporate investor. But it is crucial; a successful reputation built from years of successful work with young startups can be quickly undone when a corporation takes an action that puts their “startup” partner at risk. Bad news spreads faster than good news.
• Add value beyond capital. Capital is a commodity – though an essential one. A successful startup will usually have no problem raising critical investment capital from the venture community. To be successful, corporations should focus their investment activities by providing critical resources that are expensive and difficult to develop – market knowledge, access to distribution channels and customers, brand leverage and support networks. Delivering resources that can lower the risk and improve the magnitude of success for a startup is the key to being perceived as a true value-added investor – one that will be welcomed by startups and venture capital investment syndicates alike.
• Focus on managing internally, as well as externally. Corporate venture investments often fail due to a lack of internal support. If a corporation funds a new research program, it takes on a life of its own because an internal ecosystem is built up to protect the project. But an ecosystem seldom develops to support a startup investment. People in R&D typically view the startup investment as dollars they would prefer to spend and the CFO views the startup as a source of financial volatility he or she cannot control. Corporate venture capitalists must work to enhance the internal visibility of the startup and build the critical linkages into their corporate DNA.
• As part of internal management, make it a priority to secure executive level and line of business support. To mitigate the tendencies cited above, corporate venture capitalists must spend a lot of time building supportive constituencies inside corporate walls. They should also recruit a line-of-business sponsor for the startup, perhaps for a spot on the startup advisory board, and find multiple ways to measure and communicate the startup’s “soft” value until its bigger strategic benefits begin to materialize.
• Corporate VCs should not “pound their chests”. In fact, they should be humble. They should not expect special treatment and avoid boasting about their company’s brand, stock market valuation or size. Too often, corporate VC investors fail to appreciate that Silicon Valley innovation is about two people in a garage trying to reinvent the future. Established companies, at least to some extent, are viewed as yesterday’s news. Approaching the corporate – startup relationship from a position of “equals” will likely generate greater returns over the long term.
Robert R. Ackerman, Jr. is the founder and managing director of Allegis Capital. He blogs here and tweets here. Opinions expressed in this piece are entirely his own.