In May I spoke at the Global Corporate Venturing Symposium in London. Thanks to the team including Toby Lewis, James Mawson and Tim Lafferty of Global Corporate Venturing for building such an energising community.
It was great to catch up with Rahul Sood and meet some of the influencers in the community, including Dermot Hill, Adam Caper, Geert van de Wouw, Joseph Vaillancourt, Mark Muth, Deborah Magid, Bob Ackerman, Andrew Gaule and Erik Sebusch. Here are some of my lingering observations about the industry from the conference.
Capital for development or venturing?
When it comes to private venture capital, investors are only in the game for one thing – a return on investment. This is not the case with corporate venturing. Only a minority of investors care about creating companies with big exits. Most care about something called strategic value, or the value derived directly by business units of the parent company. In this sense, many corporate venturing arms serve to create partnerships of benefit to their company today rather than investing on the basis of what could disrupt the industry. It makes much of corporate venturing a business development or perhaps an external research and development function rather than a venture function.
There is nothing wrong with this, except for the confusion it causes. In my mind, corporate venturing that focuses on spin-outs and investments to generate a return on investment should be described as venture, whereas strategic value should be described as business development or external research and development. Otherwise, it is not fair to the entrepreneurs and the conversation cannot evolve.
Corporate venturers should carry more
In my book I write about why entrepreneurs do not trust corporate investors. The reason is because corporate venturers by and large do not have skin in the game and operate in a structure where they do not have carry – a share of the returns generated by a fund. Essentially, they take the same pay whether or not the entrepreneurs they back are successful. An investor who does not get carry is like a wealth manager who does not invest his money with the clients or a chef that never eats his own cuisine.
From my conversations, lack of carry is a key reason investors use corporate venturing as a stepping stone into the private sector and not vice versa. The flow of talent out of corporate venturing contributes to negative comparisons made by investors such as Fred Wilson and Mark Suster on a corporate venturer’s ability to add value to companies.
Corporate venturers need to convince their executives that they deserve a share of the upside and get them to understand and care that the private sector provides better alternatives. Innovation creates tremendous value, and most companies are in dire need of it today. The people that create it must be compensated, or it will never happen.
Correlation vs causation
In my conversations with corporate venturers, two statistics were brought up to defend the industry as one that is both making forward progress and performing optimally.
The first is that in the past year corporate venturers appeared more frequently in investment syndicates. The conclusion drawn is that they are more popular. The convenient alternative left out is that corporations are struggling more than ever to keep up with technology and so they are investing more aggressively. Because most deals can be bought into, popularity of a venture capitalist can only be measured by its ability to get into a deal without offering better terms. Popularity is certainly not measured by the number of dollars invested in given period.
The second statistic is that corporate venturers invest in more companies that succeed and fewer that fail than their private counterparts. The problem with this statement is that is has nothing to do with returns. It is easy to score well on this metric if one does not take enough risk or invest very early. Y‐Combinator invests in an incredible number of companies that fail, but the minuscule number that succeed give it incredible returns.
Communities can make progress only if they embrace their weaknesses. Weakness is opportunity, not something to hide.
Into the future
Global Corporate Venturing is a fantastic organisation that I am looking forward to being involved with. I met many welcoming and open-minded individuals at the conference and I recommend it highly.
This article first appeared on LinkedIn