Corporate venturing is the least understood category of venture capital. Most venture capitalists fear – if not despise – corporate venturing, while entrepreneurs are often confused about whether they should take this capital or not.
The concept of corporate venturing is simple. A company takes a minority stake in a start-up or growth-stage company, typically, to achieve its own short-term or long-term strategic goals. The investee company, in theory, gets access to all the resources of the investing company.
The concept has been around in the US and other developed countries for a long time. Quite a few of the Fortune 100 companies – Intel, Cisco, Unilever, BP – have a separate venture capital entity for such investments.
In India, corporate venturing is a relatively recent phenomenon. Local companies such as Reliance, Airtel and Future Group have started their own investment entities.
Of late, mid-size companies have launched their own units, such as Quest Software in the US and an Intel Capital portfolio company, One97 Communications, which has started investing in mobile value-added services companies in Asia.
Of course, for an entrepreneur it is not that simple, and dealing with a venture capital firm can be overwhelming. Here is a cheat sheet based on my experience at Intel Capital, a corporate venture capital group of Intel.
Align interests
Entrepreneurs are best served if they take the time to understand the investment philosophy of a corporate venture capital firm, because this will influence its management of the investment. Some companies invest with the intention of potential acquisition, while others want to develop an ecosystem of technologies or products that will ultimately drive demand for their own products.
Befriend the investment champion
The performance of the investment champion is typically judged by the performance of the companies in the investment portfolio, so it is in that person’s best interest to make the start-up successful. This champion will know the law of the land at the parent company and will be able to help you navigate multiple businesses and political hierarchies within the corporate to extract appropriate value for your company.
Have an engagement plan
While the parent companies of the investment firm can offer a wealth of resources, one has to work at getting these resources made available. Just because a company invests in a start-up, it does not mean all the different business units and people working there are automatically aligned with the new entity. The start-up should have an engagement plan designed to extract maximum value from the relationship. Develop this plan with the investment champion.
Don’t expect top valuation
A common myth in the venture capital world is that a corporate venture capitalist will always offer valuation that is higher than that of a financial investor. For some key strategic assets, these entities may sometimes pay a much higher valuation than pure financial venture capital, but that is not always the case. Corporate venture capital entities are rated according to both strategic and financial performance, so they really cannot offer a much higher valuation than venture capitalists.
Expect changes
Most corporate venture capital firms are part of large, complex organizations. The set of assumptions that a company makes at the time of the investment may not hold true over a period of time as its own business agenda – including its own objectives, resources and market positioning – may change over the life of the investment. Sometimes the resources promised may not be available anymore, or the initiatives that were planned may not pan out. Entrepreneurs should always have a plan B to deal with such situations.
If done properly, a corporate venturing investment can be a game changer for a company. Imagine being able to tap into the resources of a Fortune 100 company – not only can it do wonders for your company from an operating perspective, but it can also create formidable competitive differentiators. The trick, of course, is to understand how it works and plan how to extract the maximum value.
The views expressed are Pradeep Tagare’s own, and not those of the company