The logic behind collaboration between corporations and start-up companies (together with their venture backers) is clear and compelling. Start-ups have a reputation for efficient innovation and market disintermediation while corporations have established paths to global markets and mass. As markets grow increasing competitive, both groups need to re-imagine how they pursue their future ambitions. The question is not so much of “IF” but rather “HOW” they engage for sustainable success.
Venture capital investing is a high-risk/high-reward endeavour. This is a business where experience matters and the lessons necessary for success are not taught in business school. While the figures may ebb and flow, the industry adage that its take seven years and $50m to train a venture capitalist remains intact. Unfortunately, most corporate venture programs don’t have the luxury of a seven-year – $50m post-graduate education for their practitioners.
These facts of life argue for collaboration and partnerships between corporations and experienced venture capital firms – each contributing their expertise, resources and relationships to supporting the growth of innovative start-up companies. The challenge for corporations is that the venture community is basically a tight knit club composed of individuals/firms that have worked together in the trenches over an extended period time – through good times and bad – building trusted relationships in the process. Corporations often find themselves on the outside, looking in.
Make no mistake about it, a young company (and its backers) in desperate need of capital will welcome anyone who can write a cheque when their options are between slim and none. For a corporation in this circumstance, the cashed cheque does not mean acceptance into the country club. Shortly after I began my career in venture capital, I received a call from one of the most recognized venture firms in the country – offering to show me an investment. I excitedly shared the news with my far more experienced partner who advised me to run. His rationale, if they are calling you, it’s because everyone else has turned them down. Fortunately, today, I am in a very different position, but it has taken 16 years to get here.
While capital is important in the venture community, the ability to 1) mitigate risk, 2) accelerate growth, 3) erect barriers to entry, while 4) improving the probability of success are always in short supply. You often see this in how venture capitalists syndicate with one another to assemble these synergies and improve their probabilities of success. This is the opening for corporate investors looking to engage the start-up community. Whether a corporation partners as a limited partner (investor) with a venture firm, thereby becoming an associate member of the club, or chooses to go it alone, an ability to deliver value that improves the potential success of a start-up company is essential.
Corporations approaching venture capital firms and their portfolio companies should lead their discussions with what they can deliver in term of value to advance the success of a given start-up. Once involved with a company, the corporate investor needs to deliver on the value-add they promised. This is where a corporation differentiates itself and earns the trust and respect of venture capital investors. Those that can do this on a sustainable basis over an extended number of years, become members of the club. And this is a club you need to be a member of – if your goals are long-term profit and success.
Conversely, failure to deliver on promises of strategic value can severely undermine the credibility and desirability of a corporate investor. While a corporate investment team cannot guarantee how their corporate parent will engage with a start-up, realistic expectations should be set, managed and delivered. When things don’t go right, the corporate venture team needs to be pro-active in taking the lead in getting things back on track. In one of my former portfolio companies, a corporate investor’s parent made a benign decision that had a significant adverse impact on our shared investment. Their investor representative went to bat aggressively to see that decision changed as it related to our portfolio company. Another corporate investor in the same company failed to deliver on their stated commitments – turning what could have been a major strategic win into a significant competitive disadvantage for our shared portfolio company. Reputation is everything in the venture community. It takes a long time to build one and no time at all to lose one.
Corporations are often viewed as suspect within the venture community due to their history of personnel turnover and lack of long term commitment – here for two or three years and gone. Short-term relationships seldom warrant the respect or consideration that is a hallmark of success within the club. A corporation that can deliver value that demonstrably reduces risk and contributes to the success of a start-up goes a long way towards filling out a competitive application for club membership.
Bob Ackerman is a former serial entrepreneur and the Founder and Managing Director of seed and early-stage venture firm Allegis Capital – based in San Francisco. As a start-up executive and for more than 16 years at Allegis, he has been at the forefront of partnerships between start-up companies, strategic corporate partners and the venture capital community. Ackerman has worked with dozens of strategic corporate investors as limited partners in his funds and as partners with Allegis portfolio companies.
For 15 years, Ackerman has been the chairman of the IBF Corporate Venturing and Innovation Partnering conference – forging winning partnerships between corporations, entrepreneurs and the venture capital community.