This article, the first of two*, contains ideas for successful corporate venture investing – particularly where the goal is creating additional value in core business through access to new technology – drawn from my experience in operations in corporate companies, several start-ups providing products and services to corporates and corporate venture capital investing with an oil major.
Why do corporate venturing?
Here are the main reasons:
l To make money – similar to any other institutional venture capital firm (VC)
l To build market by investing in technologies that can increase demand for the corporate’s own products.
l For early access to emerging technologies and companies that can be acquired.
l To nurture technologies capable of generating value when adopted by the corporate’s business units.
My experiences focus on the fourth type of investing, where a well-managed technology investing programme can be healthy for a corporation and is the least threatening to the VC community.
However, a corporate must be an active investor using good investing manners and must contribute useful governance to the venture to promote success.
Such behaviour will cultivate potential for future activity of a corporate venturing programme. Dealflow is the essence of all venture capital investing and good partners share good deals with other good partners.
Don’t push up a rope
It can be astonishingly difficult for a corporate venturing team to introduce new technologies. People leave corporations to join start-ups because large organisations can fail to innovate.
The fundamental reasons for that failure are often the same as those that prevent adoption of out-side technologies.
A corporate lexicon may include innova-tion and leverage technology but these may perhaps be received as well-intentioned but rather impertinent words. But endemic cultural obstacles may frustrate the requisite risk-taking, and obstinate work processes can over-whelm any new direction.
Ironically, internal corporate "antibodies" kill any threatening new species, with corporate culture conspiring to keep things the way they have always been. The coporate venturing team can take two approaches.
High leverage research and development
This is a great concept wherein a corporate takes a minority position in a compelling deal, say 5%. When it works the corporation leverages that 5% potentially to receive 100% of the benefit.
It is not free though, it takes work. The corporate must be intimately involved, rolling up sleeves and helping with governance, technology validation, testing, and even product management/marketing.
Outside research and development often brings unconstrained lateral thinking to solve problems in ways that go unseen internally. Corporate experts are more likely to be reluctant to step away from a path trodden for many years.
Senior scientists with decades of experience in a field can be thrilled by fresh thinking or ideas repurposed from a distant business.
VCs don’t want your money, unless…
Generally, VCs do not really want or need equity investments from corporates. It makes sense only when more than the money comes to the table.
Therefore, the corporate must greatly improve potential for deal performance; removing inherent risk by:
l Ensuring the deal is perfectly aligned with corporate business goals.
l Affording subject matter experts to validate the technology and ensure the start-up solves the actual rather than perceived problem.
l Matching portfolio companies with early adopters in its business units for test beds, prototypes, trials and cus-tomers for the final products and services.
l Assuring timely, adequate, sometimes non-budgeted, discretionary funding for the work of its own staff, and potentially the start-up staff, in support of the technology development.
The best of the strategic investors will also encourage its own competitors to use the technology, because the goal is to provide first-classproviders of products and services to the whole market.
Play fair
To stay in business, corporates must play the same game as VCs in the same way. Once in a deal, learn the rules, play by the rules and play to the end.
Those imply always investing your share, even if the start-up actually veers from the original strategic alignment. The corporate staffer managing the investment must be counsel to internal groups, alerting them to and educating them about processes that may be foreign to corporate life.
Such counsel must cover corporate behaviour to ensure corporates do not hug start-ups to death. It means eliminating expectations of services rendered without charge, and paying appropriately and on time.
Reputation
Work to enhance the reputation of corporates. For example, burdensome diligence processes tie up the star-tup and may threaten follow-on funding.
Do the diligence, share the diligence, use sound decision-making processes, but be agile and do not get swamped in corporate decision-making bureaucracy that suffocates potential. The cadence of VC investing is fast, and failures to keep up means future invitations to deals are revoked.
Pick winners
Pick the right deals to assure back-end success. Pick alignment with the core business. Understand that great technology transfer value cannot happen with marginally strategic deals, or those threatened by internal corporate behaviour – don’t pick them.
However, strategic deals can involve incubation, validation and test time-lines that are rarely sustained by venture funding. Know this up front and prepare for follow on project or joint development funding before the equity investment.
Winning deals can come from introductions from internal subject matter experts who like to champion adoption initiatives. Even if the champion did not find the deal, bring him in at the early stages of technology scrutiny, before the investment.
Keep him involved – he will carry the ball. Great deals can also happen where a single entity inside a corporate can make an all-inclusive buying decision for a technology or product.
Some corporations use a top-down command and control structure which facilitates positioning the product of such investments. Often, the corporate IT group makes corporate-wide purchases and may be relatively easier to penetrate. This is an especially useful way to pick winners for a new corporate venturing team.
Corporate support
When venturing goals are to develop technology, then a reporting structure tied to the technology base of the cor-poration, such as direct to the chief technology office, will probably develop sustainable behaviour.
Attached to a chief financeofficeror finance-affiliate group, venturing success can be challenging because native metrics always gravitate to the familiar internal rate of return, which can kill strategic intent.
The value of the deal is most determined by the business value created by the use of the technology. This idea leads to formulating plausible metrics that measure venturing performance appropriately.
Without these, the venture team will visit the same criticism many times over. Also, enhancing corporate support means the venturing team will play an education and counselling role.
Corporate staff invariably needs education that an investment extends no more rights to the corporation than to any other investor around the table. If additional or more timely product or project work is needed, or discounts or exclusivity are demanded, these can come only from an independent investment in a joint development activity, where rights can be negotiated for the project cash awarded.
Reporting performance
Reporting metrics are necessary, complex, and the details are outside the scope of this introduction. Venture investing invariably brings lumpy financial returns.
Once the money is invested, the venturing team has little or no control of the financial outcome – some take longer, and some generate more. Consequently, performance cannot be reasonably evaluated on a quarterly or even annual basis, and must be shaped or normalised to provide a reasonable view.
You cannot even think of developing such metrics until a venture group is mature. It will take several years to learn the business, and for the first of your hockey-stick returns to appear above the zero line.
However, align reporting metrics with the ultimate goals of the investment group. For instance, to monitor performance of a technology transfer-based venturing team, concatenating three perspectives can provide a convenient metric – IRR, a financial measure of adoption of the technology, and quantitative value created in improved production equipment or work processes. Normalising the lumpiness in the combined metric can lead to very stimulating discussions.
Conclusion
The foregoing is a light overview of observations for corpo-rate investing with some pragmatic advice. Corporate ven-turing is a rich and rewarding experience. It has elements not found in VCs concerned with the efforts to facilitate technology transfer into the business units.
A corporate venturer 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.
* The second article will deal with obstacles and failure signals. Not all deals assert conflict,so understand that and bring deals home that do not. Work on education, and negotiate alignment through win-win scenarios between the internal groups and the start-up. Education can take a long time, but is awfully satisfying when the results bear fruit.