George Ugras, managing director at computing company IBM’s investment subsidiary IBM Ventures, and Ilya Strebulaev, professor at Stanford Graduate School of Business, talked through the differences of traditional venture capital and corporate venturing.
Ugras and Strebulaev were joined on stage by Will Gornall, assistant professor at University of British Columbia’s Sauder School of Business; Kenneth Gatz, founder and chief executive of deals database ProSeeder, who moderated the discussion; and James Mawson, editor-in-chief of Global Corporate Venturing.
Strebulaev picked up on the emerging importance of corporate VC for future entrepreneurs, pointing out that in 2016, for the first time, he organised a module on corporate venturing for PhD candidates hoping to launch a company following their dissertation.
Strebulaev also talked about his study on the performance of corporate venturing units, previously mentioned at the GCVI Summit in January 2017. While the final results are not yet available, Strebulaev and Ugras noted that funds offering carried interest perform better than those that do not.
Early results from the Stanford, Harvard and Chicago business school-led project, in collaboration with Global Corporate Venturing, found more than 60% of CVC units have compensation based on strategic performance as a first priority, with a fifth declaring financial performance is the main goal. Judging these groups by realised annual rates of performance – internal rates of return (IRR) – Gornall said those with a primarily financial focus had realised IRR of almost 20%, while those with strategic goals as their top priority averaged about 12%. Those with an even mix of aiming for both financial and strategic returns showed a financial performance between the two outliers at about 17% IRR, Gornall said.
However, while traditional VC firms are interested only in financial returns, corporate VCs usually need to align with business units. Corporates largely get what they pay for – those with a strategic mission make gains in that area, while those with a financial target succeed in generating returns.
In fact, the panel agreed, the companies that have had a big impact are those that have developed an innovative business model rather than new technology, and Mawson noted that some of the most disruptive companies in recent years, such as ride-hailing platform Uber, are “asset-light”.
Steve Jobs, Ugras added, was a genius not because he created some fund in China, but because he came up with iTunes. He had worked out that you would want to carry music in your pocket and that you were willing to pay 99 cents a song for the privilege.
Ugras said corporate venturing divisions, above all, must not remain static for long – venture capitalists tended to have a 10-year horizon, but in the CVC model the investment unit needed to evolve with the corporate.
Mawson said Global Corporate Venturing could not identify a single CVC unit that was pursuing exactly the same strategy as it had 10 years ago.
What happens once a startup is acquired by a large corporate, Gatz asked, wondering how the agility of a team could be maintained as it was aligned with other business units.
Ugras said that, internally, he used the phrase “the golden thread” – admitting he did not coin it – find an engagement for the team that is single-threaded and where you can easily see a path to success. If you keep it broad, you will fail.
Finally, Ugras joked: “If I find myself in a room with more than five or six people, I leave – and I highly recommend that” – provoking laughter from the audience.