Last year, technology-oriented corporations invested $1.9bn in venture capital, up from $1.35bn in 2009, and this brisk 40% growth rate is on track for a repeat performance this year.
The corporate world realises it has little choice but to be a venture capital player. Whether it is a hot new mobile or social media application, better ways to expand internet infrastructure or the latest medical device or healthcare information technology, start-ups are far more likely than established companies to be in the vanguard of change.
So corporations have to pursue investments in entrepreneurial companies as outside reasearch and development (R&D) labs and thereby introduce new technologies into their DNA. Combining the efficiency of start-up R&D with the strength of corporate branding, distribution and support can be a significant win-win for both the corporation and the start-up.
Corporations have to play the game right, however. If they are to be successful in venture investing, they have to time their investments well, deliver on their commitments, add value, check their egos and make sure their bureaucracy does not stifle the start-ups in which they invest. With this in mind, here are eight tips that corporate venture capitalists must take seriously:
1 Know when to invest. In most instances, the best time to invest in a start-up is when it has actually developed a product and is ready to ship it. This is when start-ups can best leverage corporate distribution channels and the corporation’s installed customer base to boost sales. Periodically, corporations do invest successfully at an earlier stage. But the odds are not good because the startup’s business model is often still evolving, requiring a lot of coninuous hands-on work and give and take. This very early investing is most often the domain of traditional venture capitalists who focus on early-stage investments and have more experience and resources to support companies at this stage of development.
2 Make synergism a priority. Corporate culture is a lot different from start-up culture. Corporations measure themselves by their brand recognition, revenues, stockmarket value and number of employees. And they are cautious. Start-ups are exactly the opposite. They are small, fast, efficient, untethered and irreverent. Understanding and working through the cultural mismatch is often the biggest challenge in corporate/start-up relationships. Corporate venture investors need to be able to smooth the inevitable friction associated with these two disparate cultures working together.
3 Be a long-term partner. The corporate venture investor community has a track record of jumping in and out of venture capital. Venture investing is an environment where reputations are built over extended periods and where predictability and trust are the watch-words to help manage to be treated like a trusted partner, you will need to be around for the long term and work through the inevitable tough times that come with investment cycles. This is where investors prove their mettle and earn the respect of their co-investors. Investors that move in and out of the market in search of short-term gains or in response to their own economic cycles are perceived to be "hot money" and ultimately are not wanted. If corporate venturers do not stay the course they will be viewed as unreliable investors that increase, rather than lower, risk.
4 Do no harm. A small move magnified by the mass of a large corporation can have a hugely disruptive impact on a small start-up. A corporation needs to understand the implication of its actions on its start-up partners – negative as well as positive. Young start-ups often chose to partner large corporations as a way of accelerating their growth, erecting competitive barriers to entry, lowering capital requirements and derisking their operating plan. On the flip side, a corporation’s action can, even inadvertently, have a severe negative reaction on a small start-up partner. Building a reputation as a true value-added investor is not an easy thing for a corporate investor, but it is crucial. A successful reputation built from years of successful work with young start-ups can be quickly undone when a corporation takes an action that puts the start-up partner at risk. Bad news spreads faster than good news.
5 Add value beyond capital. Capital is a commodity – though an essential one. A successful start-up will usually have no problem raising critical investment capital from the venture community. To be successful, corporations should focus their investment activities by providing critical resources that are expensive and difficult to develop – market knowledge, access to distribution channels and customers, brand leverage and support networks. Delivering resources that can lower the risk and improve the magnitude of success for a start-up is the key to being perceived as a true value-added investor – one that will be welcomed by start-ups and venture capital investment syndicates alike.
6 Focus on managing internally, as well as externally. Corporate venture investments often fail due to a lack of internal support. If a corporation funds a new research programme, it takes on a life of its own because an internal ecosystem is built to protect the project. But an ecosystem seldom develops to support a start-up investment. People in R&D typically view the start-up investment as dollars they would prefer to spend and the chief financial officer views the start-up as a source of financial volatility he or she cannot control. Corporate venture capitalists must work to enhance the internal visibility of the start-up and build the critical linkages into their corporate DNA.
7 As part of internal management, make it a priority to secure executive level and line-of-business support. To mitigate the tendencies cited above, corporate venture capitalists must spend a lot of time building supportive constituencies inside corporate walls. They should also recruit a line-of-business sponsor for the start-up, perhaps with a spot on the start-up advisory multiple ways to measure and communicate the start-up’s "soft" value until its bigger strategic benefits begin to materialise.
8 Corporate VCs should not "pound their chests". In fact, they should be humble. They should not expect special treatment and should avoid boasting about their company’s brand, stockmarket valuation or size.
Too often, corporate venturing investors fail to appreciate that Silicon Valley innovation is about two people in a garage trying to reinvent the future. Established companies, at least to some extent, are viewed as yesterday’s news. Approaching the corporate/start-up relationship from a position of "equals" is likely to generate greater returns over the long term.