In last month’s Global Corporate Venturing, I presented the top 10 reasons for a corporation to avoid strategic venture investing.
My goal was to help others avoid some of the basic pitfalls. That list began with the inherent problems caused by myopic corporate strategies and culminated with the risk of corporations inadvertently acting as a source of late-stage dumb money.
This month I present a corporate venturing model that can work. Many of the world’s leading corporations employ strategic venture programmes to access external innovations.
These companies recognise change is critical to their survival. However, they frequently discover that venture investing is a challenging endeavour. One solution to this dilemma is to partner a venture capital (VC) firm in order to access that firm’s expertise and dealflow network.
This approach can include the formation of a dedicated fund in which the corporation is the sole limited partner (investor) and the VC is the general partner.
Such a dedicated fund can be designed so the corporation remains actively involved in the venture process. This hybrid model can combine the domain knowledge and resources of an industry-leading corporation with the operational best practices of a VC firm.
Each party focuses on what it does best to achieve the joint goals of strategic and financial returns. This structure also addresses many of the basic pitfalls of corporate venturing.
The underlying principles for the success of a properly co-managed corporate venturing model can be remembered by the mnemonic "ABC2D3" as follows.
Alignment: This model aligns the financial interests of all parties by compensating the VC via industry-standard carried interest (performance fees). Entrepreneurs and co-investors will recognise the VC is committed to the financial success of each investment. This structure also allows the VC to hire and incentivise talented investment professionals.
Buffer: This co-managed fund structure insulates the corporation from legal liability and allows it to avoid boardrelated fiduciary obligations. A VC’s investment process also eliminates company politics as a factor since the VC remains independent of internal corporate issues.
Continuity: An independent VC partner guarantees continuity regardless of executive turnover or changes in corporate strategy since VC professionals can be involved in every portfolio company.
Collaboration: A co-managed venture programme ensures the investment process is driven by the strategic imperatives of the corporation. Collaboration is essential to translating these strategic needs into an effective investment programme.
Dealflow: A corporation can access the VC’s network of relationships with universities, national laboratories and entrepreneurs. Additionally, an experienced VC firm will have co-invested with other financial and corporate investors. The corporation benefits from the VC’s dealflow network and its insider status in the venture community.
Discipline: The VC partner provides a disciplined investment process that facilitates consistency and transparency in decision-making. Ideally, the VC will have a track record as a responsive and reliable follow-on investor.
Diligence. A good VC partner emphasises rigorous due diligence that leverages the market and technical resources of the corporation while using valuation and risk assessment metrics that keep the corporation out of the late-stage dumb money trap.
With the right VC partner, the corporation will be a valueadded smart-money investor well positioned to generate strategic value.
Comment and questions, email rpyne@atriumcapital.com