In June 2014 I joined the Kauffman Fellows programme under 3M mentoring. It has been a great experience, which I recommend to any venture capitalist who wants to build an investor network globally and learn from the most successful venture capital investors (VCs) and entrepreneurs in Silicon Valley.
As part of the Kauffman Fellows programme I have been looking at the recent trend of corporate venturing. Since 2011, corporate venturing organisations have been popping up like mushrooms and there are now close to 1,500 such organisations globally – 25 of the 30 Dow Jones companies have one and in 2014 corporate investors accounted for close to 20% of total VC investments in the US.
Given the significance of this trend, I wanted to understand the entrepreneurs’ perspective on corporate venturing investments and their motivations for acquiring corporate investors. This information would help corporates become better investors and build some of the greatest companies in the market.
Between May and July, I surveyed 88 entrepreneurs in a bid to answer the three questions.
- Why do entrepreneurs reach out to corporates for investment?
- How happy are they with their corporate venturing investors?
- How does the experience compare with that of VC investors?
The results have painted a more positive picture of corporate investing than expected. I am happy with the contributions corporate venturers have made to entrepreneurs, but at the same time I recognise that these results are probably biased. I distributed the survey through a channel that was most readily available for me – through my corporate venturing colleagues. This means I have probably sampled the best performing ventures in the industry – why would a corporate venturing manager send such a survey to the worst-performing ventures? To correct this bias, I reached out to some entrepreneurs on Linkedin, but their response rate was relatively low.
A detailed summary of the study results including commentary can be found here. These are the top 10 takeaways:
- 80% of startups are happy or neutral about their corporate investors. If they were to choose again, they would go either with the same investor consortium or with even higher participation from strategic investors.
- Corporate venturers seem to give slightly better financial terms than VCs and they fill a capitalisation gap in some sectors not served well enough by VCs, especially chemicals and materials as well as hardware products.
- The future of corporate venturing looks bright – two-thirds of startups believe corporate venturing investments will increase slightly or significantly over the next few years and most of them are happy with today’s widely practised model of in-house corporate venturing, for example 3M New Ventures, BASF Ventures).
- Most startups (80%) wish to find a customer (50%) or a distribution partner (30%) in their corporate investor. Commercialisation experience and market access are the two most popular motives for an investment from a startup’s perspective. Brand and capital access are almost as important. Access to the corporate’s technical know-how is significant, but secondary.
- When it comes to the actual value contributions by corporates, all startups – except those in the enterprise software space – think more could have been done in providing market access. In particular, chemicals and materials corporates have helped little in commercialisation efforts and have mostly contributed with technical support.
- 90% of corporates no longer put limitations on exits, which is great news for startups.
- 75% of startups deem it unlikely there will be an exit to their corporate partner.
- If you are a startup aiming to acquire funding from a corporate investor, plan at least six months – better nine – for the due diligence process. Also be prepared to give up some exclusivities, especially if you are a materials or hardware supplier, albeit not in your core areas.
- Startups in areas completely new to the corporate are least likely to initiate collaboration with their partner. Most successful collaborations are in areas at or adjacent to the core and have already started before an investment or a collaboration agreement at investment closing.
- Corporate venturers are good at many things, but not at board representation and investor acquisition for future rounds. Fortunately, VCs fill these gaps well.