James Mawson, editor-in-chief
Shift: Accelerating Corporate and Venture Partnerships was a meeting of the best venture investors’ minds in New York at the end of October. The 200 people at the event, co-hosted by Global Corporate Venturing (GCV) and US trade body the National Venture Capital Association (NVCA), heard from industry luminaries, such as Alan Patricof, whose 46-year career as a venture capitalist most recently includes founding Greycroft Partners; Lisa Lambert, managing partner at Westly Group and former vice-president at Intel Capital; and Venky Ganesan, partner at Menlo Ventures and chairman of the NVCA.
From the corporate and strategic venturers came Jon Lauckner, chief technology officer and head of General Motors Ventures; William Taranto, head of Merck Global Health Innovation Fund; George Hoyem, managing partner at In-Q-Tel; and Claudia Fan Munce, chairman of the GCV Leadership Society advisory board and former head of IBM Venture Capital. She is now an adviser to New Enterprise Associates.
Given the shrinking number of active VC firms, there were two central questions under discussion in opening remarks to the event by this author: how could corporations create “ideal conditions for success by co-investing, acquiring portfolio companies, being a supplier or customer to startups. and commit and become more active as limited partners in VC funds”?
Ganesan’s presentation, using data from PitchBook, showed how the VC industry had consolidated, with 211 US firms doing at least five deals a year now, compared with 1,000 or more in 2000, and with 60% of money now raised in funds being secured by the top 16 firms.
The NVCA chairman said the implications were clear. “The gap is being filled by corporate venture capital,” and quoting an African proverb, he added: “If you want to go fast, go alone. If you want to go far, go together.”
Ganesan said that with companies staying private for longer – he gave the example of network equipment provider Cisco and online retailer Amazon floating with less than $1bn of annual revenues, compared with social network Facebook and e-commerce provider Alibaba which waited until they were worth $100bn and $200bn, respectively – then corporations needed to get involved to see information on the entrepreneurial ecosystem.
In her keynote presentation, Rita Gunther McGrath, professor at Columbia Business School, said starkly that “most companies have an innovation problem”.
She went on: “A recent McKinsey report found that 86% of respondents to a recent CEO survey felt that innovation was absolutely critical to their firms’ futures and fully 80% felt that their business models were likely to come under some major threat. And yet, in the same survey, only 6% felt comfortable with their own company’s innovation performance, with the majority of their respondents not understanding the reasons they struggled so much.”
Corporate venture investing can help close the innovation gap, Gunther McGrath said. Corporate venturing, therefore, has been rising as an industry.
Alan Patricof, co-founder and managing director of VC firm Greycroft and co-founder of what is now buyout firm Apax Partners, described how when he started venture investing in the 1970s, having raised an inaugural $2.5m fund, he worked with CVCs such as General Electric, Exxon, Xerox and International Nickel, which subsequently “went away”.
Now, in Greycroft’s four funds, CVCs were involved in 31 of its 90 investments as “there is a whole new generation and more positive contribution by CVCs”, in particular noting the “good job” done by another speaker, Urs Cete, managing partner at Bertelsmann Digital Media Investments.
The GCV Analytics data platform tracks more than 800 CVCs striking at least one deal a year and 224 with five or more investments from 2015 to the end of September 2016.
Trends indicate they will be doing more in future. CVCs funded 257 initiatives, raising an aggregate $30bn in the first nine months of the year, compared with 269 raising a combined $23.8bn in the whole of last year, according to GCV Analytics. Of these initiatives, corporations backed 131 VC funds and set up 50 dedicated CVC units – excluding incubators and accelerators as separate categories – in the first nine months, compared with 144 and 56 respectively over the whole of last year.
The blurring of lines between corporate intelligence coming directly from investing or indirectly from committing to a VC fund that passes on information was one of the most troubling questions raised during the debates.
Kay Min, director of corporate development at Cisco, which manages more than $1bn in direct and indirect venture capital, said it valued VC commitments where the fund manager shared its broader deal pipeline each month or quarter rather than just an annual update on deals done. However, she made it clear that VCs should share only non-confidential information.
Fellow panellists Eric Steager, managing director of strategic innovation portfolio at Independence Blue Cross, who probably travelled furthest having spoken in Russia the same week as part of GCV’s panels at the government’s innovation summit in Moscow, and Tony Chao, general manager of Applied Ventures, the corporate venturing unit of tech company Applied Materials, agreed, saying they also valued seeing this wider pipeline for opportunities it created to co-invest with the VC, or strike deals that they turned down.
Part of the reason for looking at deals passed over by VCs – given VCs are assumed to invest in one out of every 1,000 deals they see – could be down to strategic insights, but speakers said it was hard to show strategic insights if the portfolio company went out of business and the CVC failed to make money and was closed down.
In an opening discussion with Fan Munce, Josh Lerner, professor at Harvard Business School, provided context for corporate venturing’s cyclicality. He said by 1968-69, 150 CVC units had been set up, but by 1973 all but 10 had gone. Similar patterns repeated themselves in the 1980s and 1999-2000, and Lerner warned those setting up in the most recent cycle: “Clearly, there will be some of that [closing of CVC units] again. Some have done a great job and some have been less thoughtful.”
Reflecting Ganesan’s insights that the venture capital space was changing, Lerner said: “Two things have fundamentally changed as the venture ecosystem has become more complicated. First, whereas there used to be little angel investing and an active IPO market, now the domain for VC has shrunk. There has been an explosion of early and late-stage money. This has been a permanent change in the landscape. Second, corporations’ research funding has changed. They have moved from the false illusion that the bulk of ideas will come from internal to a far more outward-looking model of open innovation.”
As to what made some successful and others closed, Lerner said the main challenge was the so-called “Christmas tree” problem of having too many often incompatible goals set for the CVC, and developing “staying power”.
Harvard Business School, Stanford Business School and University of Chicago Booth School of Business are working with GCV on a survey – results to be published in our World of Corporate Venturing 2017 annual review published at our Global Corporate Venturing & Innovation Summit in January – to “learn best practices in corporate venture capital, market corporate venture capital to policymakers and the public and guide academic research”.
However, Lerner gave an early insight into the survey’s likely conclusions when he said the “recipe for success” included CVCs concentrating as much on knowledge transfer from portfolio companies to the parent corporation as on finding the good investments.
He said: “Financial returns rarely move the needle for a large corporation, so ultimately to deliver value you have to show strategic benefit, which involves bringing knowledge back in, but a CVC with three people is super-stretched and has limited time on missionary work inside the corporation.”
Lerner’s insights were supported by corporate venturers. Michael Chuisano, chief operating officer at Johnson & Johnson Innovation–JJDC, a luminary member of the GCV Leadership Society and the oldest CVC in healthcare, stretching back more than 40 years, said it encouraged this knowledge transfer by requiring business units to provide half the money in a deal, with the remainder coming from JJDC’s balance sheet.
This, along with quarterly reviews with portfolio companies, liaising with J&J’s business units, strategic planning and a two-year overall review meant it had a close understanding of how its portfolio was performing on this broader measure as well as with regard to the financial risks.
Skyler Fernandes, managing director of Simon Venture Group (SVG), the corporate venturing unit of the world’s largest listed retail real estate group, said the good CVCs were also focused on supporting the portfolio companies. He said: “VCs answer entrepreneurs’ questions by saying how they can help but CVCs are way more honest. SVG has a list of the 450 chief investment officers at traditional retailers, who have more sales than Apple and Amazon combined, and how these entrepreneurs can meet them.”
However, that support can only be provided effectively by CVCs that retain their teams. In a discussion on “playing in the sandbox” together, Christina Kaarapataki, vice-principal at Schlumberger Technology Investments, the corporate venturing unit of the oil services group, said its unit had started in 2008 and did not rotate staff every one to two years, “which helps build tight relationships”.
Paul Sestili, general partner at Rogers Venture Partners, the corporate venturing unit of the Canada-based telecoms group, said the venturing experience was crucial. “When I started Chevron’s corporate venturing program in the 1990s, I did not know what I was doing,” Sestili said. “Now, at Rogers, I do, as you gain more and more experience.”
With the average CVC unit leader having more than nine years’ experience, according to the J Thelander annual survey (see analysis), there are increasing numbers of people with comparable experience.
Rachel Lam, group managing director of Time Warner Investments since 2001, said in a panel moderated by Ian Goldstein, partner at law firm Fenwick & West, that early-stage deals in particular were high risk and it was important to know if others in the investment syndicate would “behave well”.
John Doherty, senior vice-president of corporate development at Verizon and chairman and chief investment officer at Verizon Ventures and its predecessor companies since 1986, said the unit had pared its investment committee to three “of the right people” from eight as an example of how a big company could “fail fast and learn quickly”.
Part of this experience has resulted in supporting entrepreneurs by having “clean term sheets”, which financial VCs can support easily, rather than worrying value might be affected by conditions such as a corporate parent having the right of first refusal to buy a portfolio company, Doherty added.
In his keynote interview with Bobby Franklin, president of the NVCA, Patricof said beyond terms imposed, CVCs let entrepreneurs down if they held a company back by being slow or not looking to follow on an investment in future rounds. Patricof gave the example of Exxon, which invested in a company in the 1970s and joined its board only to refuse to vote until the director had checked back with the parent each time. Patricof added: “It held the company back, it could have been a big company.”
Instead of necessarily being on boards or committees, Patricof pointed new CVCs to how they could help young companies by giving “access to decision-makers in their corporation”.
In a fascinating insight to how a corporate-backed accelerator could do exactly that, Steve Barsh, chief innovation officer at Dreamit, who was interviewed by John Riggs, partner of innovation and corporate venturing at accounting firm PricewaterhouseCoopers, said it provided customer immersion for those using its platform.
By working with corporate partners such as Blue Cross Blue Shield, J&J and Merck, Dreamit provides “curated dealflow” by taking its entrepreneurs on investor roadshows rather than “putting lipstick on a pig” through demo days. Referencing Lerner’s earlier point about having clear objectives, Barsh said his “love metric” was the percentage of post-accelerator graduates that raise funding within six to nine months.
But as well as “beating the shit” out of entrepreneurs to get them ready to work with corporations, as Barsh graphically described, there is also work required by the large corporation.
In a panel on how to “think like a VC”, moderated by David Horowitz, founder and CEO of multi-corporate-backed VC firm Touchdown Ventures, Jessica Peltz, partner at KBS-plus Ventures, the corporate venturing unit of the advertising agency, said it was important to “evangelise venture so all [in the corporation] can talk on it”.
Sam Landman, managing director at Comcast Ventures, the corporate venturing unit of the cable company, and former colleague of Horowitz before his departure to set up Touchdown, agreed and said this helped “grease the skids” for portfolio companies to work then with business units.
Gus Warren, managing director of South Korea-based conglomerate Samsung’s Global Innovation Centre, listed the ways it worked with entrepreneurs, including through accelerating, investing, buying and partnering, as it wanted them to work with Samsung’s business units at some stage.
Warren said Samsung wanted to avoid “suffocating” the startup, and the CVC unit was encouraged to “push back against resistance” by corporate business units. In fact, he said he was nearly not hired by Samsung because they feared he might be “too nice” to push back in this way.
However, with venture investing apparently moving more towards support offered to portfolio companies after an investment than simple deal selection, the types of personnel and their skillsets in the industry becomes more important.
In a panel moderated by Sandi Knox, counsel at law firm Sidley Austin, looking at the next generation of the industry, Charlie O’Donnell, partner and founder of VC firm Brooklyn Bridge Ventures, said the “perception of venture capital affects who wants to come” into the industry.
O’Donnell said his inbox was full of MBAs talking about their interest in being a stock “picker and selection” specialist rather than how they could “help, coach, counsel and connect” startups. He recommended changing the job descriptions as a start, with panellists making suggestions of useful applications, such as Textio.
Susan Lyne, president and founder of BBG Ventures, a VC firm backed by AOL that grew out of the media group’s #BuiltByGirls initiative, said it was “important to get women at the investment table” and referenced Jess Lee, Polyvore’s CEO, who recently joined prestigious venture capital firm Sequoia Capital as its first female investing partner in the US.
With the move from entrepreneur to VC increasingly common, other initiatives to support founders were also encouraged, with Andrew Gaule, partner of the GCV Academy, sharing the stage with his pre-teen daughters to discuss their Upstarts4Startups initiative.
Knox said female investment partners made up 7% of the VC industry but described how corporate venturing could be an “entry point to change” given 11% of investment professionals in the J Thelander survey were women.
Kate Mitchell, general partner at Scale Venture Partners and a former chairman of the NVCA, said corporations had a potential advantage over VCs by taking a long-term perspective and looking at the data on people and how diversity subsequently helped sponsor them in their careers.
Jeff Dunn, CEO of children’s production company Sesame Workshop, then ran through why it had chosen Collaborative Fund to help it develop its corporate venturing initiative. After his introduction by Lauren Loktev, venture partner at Collaborative Fund, Dunn said Sesame had been founded by Joan Cooney based on the insight that if you can “hold children’s attention then you can educate them”.
Sesame sees its purpose as building “smarter, stronger, kinder” people based on a whole-child curriculum, he added, with Collaborative chosen to bring VC expertise and social mission”.
Social does not have to mean underpaid. Jody Thelander, president and CEO of Thelander Consulting, said a CVC unit leader on average earned $537,181 over the past year, compared with the average VC’s $873,662, with top-paid people bringing home $1.5m.
And in a sign of the meeting of minds from the event, as all delegates seemed to agree, she encouraged all CVC leaders to push for the top rate.
Below: Shift conference attendees, Claudia Fan Munce and Josh Lerner, Lisa Lambert, Jody Thelander, Andrew Gaule on stage with his daughters, Jeff Dunn.
