You could be forgiven for thinking there aren’t many differences between corporate venture money and traditional venture capital these days.
In many ways, the corporate venturing approach is converging with the venture capital business model. CVCs are starting to do many of the things that VCs do. Increasingly, for example, CVCs are spinning out from their corporate parent to create independent funds similar to VCs and are raising money from either other corporates or external investors.
CVC funds are also often led by former VC professionals, have more autonomy over investments, and increasingly have adopted financial incentives to reward good performance, just like their VC cousins.
But, are there still things that venture capital firms typically do that CVCs should shy away from? We asked industry experts to weigh in on aspects of the VC model that corporates should not try to mimic.
1. Avoid the boom-bust cycles
Too many traditional VCs are willing to invest at huge valuations during booms, only to cut back sharply when market conditions change, says Josh Lerner, professor of business administration at Harvard Business School. For CVCs, “a slower-but-steady approach makes far more sense.”
His comments are echoed by Scott Lenet, president of advisory firm Touchdown Ventures, who points out that often institutional venture capitalists will inflate the holding valuations of their portfolio companies when it’s time to go to market for their next fund. “Once the new fund is raised, those valuations often come back to earth with a thud,” says Lenet. “CVCs don’t need to do this and should opt to be as honest as possible at all times with their corporate parents about the performance of each portfolio company.”
Others say CVC money is sometimes responsible for increasing valuations and that a case can be made that corporate investors should be more disciplined. “CVC money is easier money than VC money,” says Naoki Kamimaeda, partner at Global Brain, a Japanese venture capital firm that oversees corporate venturing funds. “CVCs tend to accept high valuations. This is why CVCs have failed in the past.”
2. Think strategic as well as financial
Corporate investors shouldn’t lose sight of their role as a strategic investor. It is how they differentiate themselves from the pure financial investment business model of venture capital. “Traditional VCs will try to capture as much of the cap table as possible whenever they have high conviction because this is how they make their money,” says Kevin Ye, corporate investing partner at advisory firm Mach49. “This priority often doesn’t matter as much for corporates. Whatever financial return corporates make, it is usually more about having skin in the game and both providing and unlocking strategic benefit.”
That is not to say that financial discipline is not a must. Making sure every investment is financially sound and not just strategic is required for CVCs to survive long term.
3. Don’t take board director seats
It is generally not a good idea for CVCs to seek board seats, say experts. While traditional VCs prefer to have a seat on the board of directors of a portfolio company, CVCs should shy away from these positions and go for board observer instead. This is mainly because corporate VCs have obligations to the corporate parent that could make it tricky to fulfil the duty of care and duty of loyalty that you have as a board director.
Corporate investors also do not tend to have the know-how to take board seats. “In many cases, CVC team members who may have come up in the mothership usually don’t have the training or experience to be an impactful director from the get-go,” says Ye.
Others say it is ok for CVCs to hold board seats as long as a member of the fund’s investment team is holding that position and they are representing the interests of the portfolio company. To avoid conflict of interest it is important for CVC funds to have clear separation between business development and the investment side. “In many cases, you would have a clear ethical walls and even separate data rooms that the investment teams would have access to,” says Liz Arrington, co-founder of the GCV Institute.
The complexities of CVCs holding board seats has prompted the GCV Institute to consider developing a certification that would teach CVCs the fiduciary responsibilities and ethical conflicts of holding board positions.
4. Don’t lead rounds, at least in early-stage investments
If CVCs lead in fundraising rounds in early-stage investments, it could scare off other corporate investors, putting the startups’ potential at risk, says Kamimaeda of Global Brain. “It could signal ‘this is mine, not yours’” to other corporate backers, he says, adding “the competitive corporate landscape makes it complicated.” He advises CVCs to be more focused on leading in later stage investments when it is more advantageous for corporates to come on the scene “with a bigger cheque”.
5. Think longer term, be a pioneer
Startups appreciate corporate venture capital for being patient and steady forms of capital. But not enough funds are willing to take risks, commit to something visionary but unproven, and think truly long term.
Corporate VCs could have a longer time horizon and will be willing to support companies for much longer than traditional VCs can expect liquidity, says Ye. “I don’t see a whole lot of that today because, unfortunately, we have few vehicles in the market that operate on those time horizons.”
Climate tech in particular is a sector that needs investors with long time horizons because of the complexity and high costs of the technologies necessary to prevent global warming. “A lot of traditional VCs are not going to have the patience or will run out of cash before these technologies get to the market or to the stage where they can meaningfully change the state of our planet,” says Ye.
“Some truly forward-thinking CVCs that are willing to dedicate capital on a longer time horizon and be a long, steady partner because they believe this technology has to exist for the future of society, would be something great to see,” he adds.
6. Think about your team’s reputation, not your own
It is often the case in venture capital that individuals in the fund will aspire to go off and create their own funds based on their reputations. For this reason, individual venture capitalists will proactively use social media platforms such as Twitter to gather likes and coverage to promote themselves, sometimes in controversial ways.
CVCs are typically staffed by veterans of the parent company and should seek to build a reputation to “enable the success of their team and mothership brand, not necessarily to advance themselves in the long term,” says Ye.
7. Protect and promote the company’s brand more
In a similar vein, most CVCs can do a better job of marketing their organisations through thought leadership to remind the startup ecosystem that they are active investors, says Ye. But he cautions CVCs should avoid the common VC practice of actively participating on platforms like Twitter and going out to “stir the point with the founder and investor communities”. CVCs “have an additional layer of corporate brand that they have to protect,” he says.
