Earlier this week, I attended a Corporate VC Summit, at the British Consulate in Cambridge, MA. The event was very well attended, with most leading corporate VC groups represented in the audience and panels. I am a non-corporate VC myself but very much enjoyed some of the panel discussions, and would like to share some of the most interesting takeaways from that event.
1. Strategic investing
Corporate venture capital investors are also referred to as “Strategic Investors”. This implies that there is a strategic agenda for their financing of a new company, in addition to the obvious financial motivations. Strategic motives can take various forms, such as
- gaining privileged access to new entrepreneurial technologies (treated as external R&D)
- enabling the formation of an ecosystem around the parent company and its products
- securing some advantage over non-investors in case of M&A opportunity down the line
2. Corporate VC involvement
When involved with startups, corporate VC programs can use the parent company to provide certain benefits, such as
- synergetic use of complementary capabilities and resources
- stronger bargaining power with suppliers
- access to established distribution networks
- endorsement on the future viability of the venture
When it comes to board seats and shareholder activity, most corporate VCs with whom I have spoken are happy to take a less active role and let their independent counterparts take the board seat and handle the more active shareholder tasks.
3. Corporate VC commitment
During the panel, doubts were expressed about the reliability of corporate VC investors in the long run. It was argued that changes in the strategy of the parent company, or in its leadership, can have drastic impact on the portfolio and on the scale of future investments.
Panelists agreed that there was an increased volatility due to the organizational nature of the programs, but countered that many independent VC fund are equally likely to disappear if they are unable to raise a new fund, which introduces a comparable level of volatility.
Entrepreneurs in the audience also worried that corporate VCs are more likely to abandon ship early and focus on their core P&L during difficult times.
4. Dynamics of co-investing with corporate VCs
Corporate venture capital groups often try to co-invest with independent VC funds. This provides a validation of the potential for financial returns, in addition to the strategic potential which they have identified.
Independent venture capital funds have mixed feelings about co-investing with corporate VCs. On the one hand, they can be useful operational partners, and represent a good exit strategy down the line. They are also an early validation of potential customer buy in. On the other hand, they are less active, and are more likely to cut their losses when a venture has difficulties raising money. Their incentives may also not be completely aligned depending on the strategic interests driving the investment.
5. Effects of the economic downturn
In a downturn, venture investors who still have significant reserves of cash are in a good competitive position as capital gets scarce. Independent VC companies who have recently raised a new fund are able to compete in a less crowded market and are benefiting from their fundraising timing.
This is also true for corporate venture capital programs who still have access to cash. Corporate VC Panelists in this position were unanimous in saying that they are receiving phone calls from independent VCs who have historically preferred to bring in other independent VCs as co-investors. “We have more friends today than we used to”, one of them humorously pointed out.
There was at least one consensus across entrepreneurs, corporate VCs, and independent VCs: “more than ever during these difficult economic times, we need to all be pulling together”