Over the years we have worked with numerous forwardthinking corporations as they navigated the perilous seas of corporate venturing.
Sometimes, my partners and I feel we have seen every possible mistake that could be made.
So in the spirit of helping others avoid repeating the errors of our ways, I would like to share some basic pitfalls of corporate venture investing.
10 Strategic focus: It is critical to remember that venture capital is a long-term proposition. An effective venture programme needs to be aligned with a clearly articulated long-term corporate strategy. Unfortunately, some corporations have strategies that are fuzzy or seem to change with the chief executive’s mood. The specific mission of the venture programme needs to be well defined within the context of the corporate strategy.
9 Internal politics: These can wreak havoc on a corporate venture programme. Senior managers can promote pet projects that benefit their business units. Or a powerful executive may pressure the venture group to finance a brother-in-law’s latest dot.com inspiration.
8 Employee turnover: Portfolio company managers and co-investors need to establish relationships that will last the life of an investment. Turnover in a corporate venture group or by business unit employees acting as champions for a particular investment can disrupt collaboration efforts. Furthermore, organisational change in the executive suite can lead to confusion and uncertainty in the venture group.
7 Compensation policies: The venture industry has its own approach to motivating and rewarding professionals with a combination of salary and carried interest. Many corporate compensation policies are too inflexible to adopt these approaches, so it can be extremely difficult to attract and retain experienced venture professionals.
6 Legal liability: Managing venture investments and sitting on boards of directors of portfolio companies can create a series of legal and fiduciary obligations.
The first five issues all relate to internal corporate dynamics. The final five are a function of how external parties perceive corporations.
5 Silicon Valley outsiders: There is a common view of large corporations as interlopers in the clubby world of venture capital. Successful venture capitalists have established dealflow based on long-term relationships and previous investment syndicates. It can be almost impossible for corporations to break into this network.
4 Heavy-handedness: Executives from industry-leading corporations can assume it is reasonable to seek special investment terms, such as rights of first refusal or a veto on sales to a competitor. However, such demands can be viewed as heavy-handed efforts that create a misalignment with other stakeholders. Consequently, corporations may be excluded from the best opportunities.
3 Slowness and bureaucracy: Frequently, the keys to success for a venture-backed company are agility and speed. Entrepreneurs and venture investors typically avoid corporate venture investors that bog down progress.
2 Unreliable co-investors: Corporations are seen as unreliable co-investors. Venture-backed companies often need to raise several rounds of private financing before they reach cashflow break-even or an exit for the investors. Consequently, venture firms try to organise investor syndicates that will provide consistent financial support. Unfortunately, many venture firms have learned that some corporations do not come through.
1 Late-stage dumb money: Some venture firms avoid sharing attractive early-stage investment opportunities with corporations. Instead they wait until a portfolio company is far advanced in its development and then seek out passive corporations that will pay a ridiculously high price to invest. Obviously, being a source of "late-stage dumb money" is not an ideal strategy for generating either attractive financial returns or strategic value.
Now that I have convinced you corporate venturing is crazy, next month I will show you how it can work.