Accordingly, the context here in centres on corporate venture capital (CVC) investment programs designed to locate, nurture, and deploy technologies developed in entrepreneurial start-up companies. Although a good investment rate-of-return is important, the key success driver is the value created in the business in using the technology. When the program is off and running, the team is making investments and begins to focus on harvesting some of the seeds it has sown. Some may grow into mighty oaks, some may wither and die. For the strategic, what makes the difference, and what’s the secret in cultivating more mighty oaks?
Following are a few items to consider, some of which might be warning indicators for strategic investors.
ERRATIC CORPORATE SUPPORT
Today some CVCs are barely in business after blazing brightly for a while. Usually it is erratic corporate support driven by corporate spreadsheet jockeys managing budgets and cash flow that disturb the team’s ability to function. My counsel to the senior executives setting up a CVC program is unless you know explicitly why you are doing it, have a stomach for it, and intend to stay the course; don’t do it.
TIME & COST
Strategic venture investing is expensive and time-consuming, with returns unlikely for five years or more with potentially poor returns as the investment team learns the game. It’s a risk portfolio play; some winners, some losers, and uneven returns. It is natural for individual failures to cloud the overall performance of the portfolio. There’s a credible learning curve while the team matures its practices. During this time anxious people may apply pressure to limit financial exposure and expect and pressure for earlier cash-flow break even. At the inception it is critical to set proper expectations with those who will manage and govern the CVC team and continue to manage them through the program life.
INADEQUATE GOAL ALIGNMENT
Be true; pick the rights deals guided by the reasons the group exists. Significantly, a strategic must be attentive to deals that will not be done under any circumstances. Restrain investment decisions and dismiss such opportunities using deal filters that match corporate strategic intent. Perhaps the company never intends to generate utility power to supply to the grid. Accordingly, many power generation opportunities will not fit the bill – no matter how great an investment, or how green.
The deal stage is also an important goal alignment constraint. Technology-driven investing suggests that earlier stage deals better fit the profile, when the corporation can contribute expertise and value alongside its equity funding. CVCs have been known to pile on late in the game and such ‘end money’ is often labeled ‘dumb money’. When the product is done and capital goes to scale up, then perhaps the corporation should just buy the product instead of investing.
However, in a nascent CVC team some later stage investing can train the team and build morale. Early winners carry great weight far above the strategic contribution. So, it might be appropriate to invest in some later stage deals that are readily accepted in the business units and already show signs of technology success. Some IT deals fit this profile for strategics. Perception is everything, so the upside could be early acknowledgement of team success.
UNFAIR CHARACTERIZATION
Financial venture capital (VC) investors hear bad things about strategics. For example, they’re here today gone tomorrow, they do not play by the rules, and they reduce the exit opportunity. Only sustained fair performance over many years, many deals, and with several partners builds the good reputation that dismisses such beliefs. A good reputation takes a long time to build, must be nurtured and protected continuously because it can be destroyed very quickly.
A MISSING CHAMPION
"Will the dogs eat the dog food," is the final arbitration of strategic CVC success. Experience indicates CVC teams exercise little influence over decisions to deploy the technology. Absence of a champion in the business might imply inadequate opportunities for technology transfer. To alleviate the problem, engage business and subject matter experts at the earliest credible time in the deal selection stage. Validation of the core technology and its business application is best performed by internal champion(s) when deal filtering occurs, and then continues into diligence with the chosen targets. A champion who buys in at this stage can become the flag bearer for the whole deal, successfully seeding technology development trials and eventual deployments. The CVC team alone should not arbitrate on what’s a good deal or not. If you cannot get a champion, then perhaps it’s the wrong deal.
LEGAL & RISK
It is not my intent here to disparage lawyers, because they will play a very important part particularly in identifying and assessing risk. However, it is the business’ job to determine the level of risk it will take. Lawyers may tend towards removing all the risk, and when all the risk is gone so is the opportunity.
Also, for joint development agreements frame the contract with both sides’ expectations of how the rewards of a successful deal would be shared. Then ask the lawyers to make the legal words fit. Avoid the common practice of negotiating by ‘red-lining’ a current contract, over and over – hard (impossible) to understand, inefficient, expensive, and time consuming. That’s why VC’s offer term sheets.
INTERNAL Intellectual Property (IP)
Invention and IP ownership can be much misunderstood in corporations. It is complicated but touched on lightly here to indicate same issues and fallacies. A corporation describes its invented solutions as IP in trade secrets or patents. It is important to understand when IP ownership fits, and when it is secondary to the corporate mission. To illustrate here are two examples:
1. A clever engineer in a large corporate might be happy when a start-up company agreed to implement his idea, but then perturbed when the start-up patented his invention. In the scheme of things, perhaps receiving a useful deployable product is better than maintain ownership of an invention the corporate would never commercialize.
2. Protectionism can be self-defeating. Operating companies may refuse to talk to outsiders for fear secrets that drive superior economic results might leak. Such behaviour could drive innovation to a competitor. After great success in deploying a start-up company’s more efficacious solution, a competitor may not care about old secrets.
NIH (Not invented here)
"Change is hard because people overestimate the value of what they have-and underestimate the value of what they may gain by giving it up." James Balesco & Ralph Stayed, Flight of the Buffalo, 1994.
Corporate internal research and development (R&D) work can present difficulties for a start-up bringing new technology that is perceived (rightly or wrongly) as competition. Similarly, competition also occurs when an external innovation challenges people or policies dedicated to a favorite vendor or a particular way of solving the problem. Conflict also arises where a corporate group must assess external technology but also develops competing technology. It’s not too difficult to imagine where the inherent NIH bias leads. Sometimes, the effort to overcome such challenges is not time well spent for the CVC team or the start-up. For strategics, select non-conflicting deals; the tales of healthy creative tension between internal and external competition are grossly exaggerated! For entrepreneurs, the best course of action may be to find those who want to work with you. Perhaps those that do not have large centralized groups trying to do what you’re doing.
INADEQUATE PROJECT FUNDING
Equity financing alone may be insufficient to capitalize certain ventures. Startups may need to partner with corporations to refine and test its solutions against specific business problems. A corporation may bring the application knowledge and the entrepreneur the technology expertise. Following equity funding, one way can be a joint development where the corporation funds specific refinements in exchange for rights and privileges on successful maturation of the ideas.
However, timing is everything. Corporate budgeting cycles can demand enormous advance notice for expenditures, allocating little discretionary spending anymore. This creates an impedance mismatch between start-up cash immediacy and corporate delivery capacity. CVCs might consider early on if the deal should be made at all, regardless of the technology potential. Also, corporates may need to consider new discretionary funding options for best integration of external technologies.
Close
The foregoing is a light overview of some pragmatic warning signs of obstacles to corporate investing. Corporate venturing is an incredibly rich and rewarding experience. It has elements not found in institutional VCs concerned with the efforts to facilitate technology transfer into the business units. A CVC needs a deep sense of the core business, technology; and the acumen to make the match, plus skills in marketing, sales, mentoring, and contract negotiation. Additionally, there are many other topics pertinent to success of corporate venture investing such a governance structure, decision-making processes, team/consensus issues, which I can explore at another time.