Corporate Development = Good VC GP?

Increasingly it seems that there is a steady stream of individuals leaving big Internet or tech companies from the Corporate Development track, eager to launch new funds to invest in the next big thing.

Although my point of view mainly focuses on China, I believe this trend must be seen in other parts of the world as well such as in other Asian markets (Japan, Korea), Silicon Valley, and maybe even Europe.

The paradigm is most often something like this:

VP of Corporate Development or Senior VP of Corporate Development, who “runs” the team of a Massive Internet company (say US$10BN or above market cap) that has invested in all the notable high flying “unicorns” whether it is in content, or mobile commerce, or even the lessor dieties (say, US$1–5BN market cap type companies). Some huge M&A deals happen sometimes. Typically when Massive Internet Company gets involved the post cap well exceeds US$1BN, maybe even US$10BN or US$20BN!

The investment activities of said Massive Internet company is the basic talk of the town, at the dinner parties, and the drinks or tea late night. Massive Internet Company has billions on the balance sheet, and loves to do deals. Hard to find a deal they don’t like. Putting in $5, $10, $20 (million) is not a big deal if there is some reasonable way to dot-dot-dot a strategic angle with Massive Internet Company.

Let’s take a typical high flying Series B or Series C, with a startup that is giddy that it just broke, say US$100MM in market cap (Ser B) or US$500MM in market cap (Ser C). A really hyped-up company. When massive Internet company shows up to a financing party, the M.O. is classic — a white shoe law firm, if in China that means the deal-running lawyer is based in Hong Kong, and offers the deadly combination of cut rate deal to the client (massive Internet company) but unlimited service on the transaction. Redlines of every other word in every document, pushing for unreasonable reps and warranties that are one sided, etc. Often times this comes with some sort of binding development agreement, or if a online game developer, maybe a binding publishing agreement.

“Everyone’s his friend” — when meeting with any number of well known GPs in the venture community, and if you drop the name of this Corp Dev head, universally he (separate topic but is usually a “he”) is well liked. Everyone says he’s their friend. Seriously. Never can get anyone to say anything bad about him. Translation: you don’t want to cross the guy because he may be the one to buy your startup later.

Occasionally big transactions emerge. Massive Internet company wants to buy a company. Sometimes they are big, and sometimes the target is itself a listed company. Maybe a major video portal, or an analytics firm, or a game developer with a AAA title that is worth hundreds of millions of USD in revenue an year. In that case the Corp Dev head is just dripping with power. Every manner of investment banking M&A Managing Director ambitious M&A director does whatever they can to get in on the deal. Fees? Who cares. If you can’t get in on the action then maybe throw in a fairness opinion which lets the IB put the transasction on their pitchbook for future deals. A huge pecking order. The same analogy in the legal side as well.

Okay, I think I’ve painted the picture. A few observations:

  • Massive Internet Company’s deal’s occur mainly because it is, well, Massive Internet Company. They always get a seat at the table, and can always crash a party even if unannounced.
  • In Asia, particularly (maybe Silicon Valley is the same), the deals are mostly initiated by the Massive Internet Company’s CEO or founder. I mean, who “pulls the trigger”. The Corp Dev head is not an intellectual lightweight, but certainly the big shots are called by the CEO or the founder. The person with the supervoting shares who can put the balance sheet to work, buying companies that have just eyeballs, or a future concept, etc.
  • On the other, bottom end, of the totem pole, you’ve got an entire team of Corp Dev executives, working for the Corp Dev head, who do actually all the work. They are the ones that have to negotiate with the other side, work with the lawyers, pore through the term sheets and agreements, look at the tax implications, copyrights, IP, liabilities, etc.
  • So in my opinion the Corp Dev head is typically sandwiched in the middle. What is the intrinsic value they are actually providing? How much of this “skill set” will transfer out if the person ever were to depart Massive Internet Company?

The reasons to compel one to leave Massive Internet Company, from a Corp Dev head position are intuitive and linked with money. Well, making more money, massively more money, and a sense of entitlement that they, not the founder or CEO are the ones driving everything, making things happen and that they deserve more.

There are always people out in the wings, companies, people who are the Exhibit A’s of FOMO and who have capital and want to “get in”. Or, even sometimes backed by other investors who just want in their pocket someone with an inside track to a Massive Internet Company. So there are many voices whispering at the parties to encourage the person to “get-out” and start a new fund.

I would say that there is really nothing systematic that would indicate a former Corp Dev head can be a good GP especially for early stage venture. I think the world has enough “deal makers” and “transactions” don’t necessarily make for good venture investing experience.

I didn’t really think of this much but then, as it happens in the world, at least in the U.S. world, people want reference checks. So you are asked to find out more about the work, what goes inside, because your friend’s team may want to “put some money to work” with this new fund that is being established. But you talk to the people actually inside Massive Internet Company, whether it is the CEO or founder, or the working level people “in the Corp Dev team” and the feedback is usually pretty poor.

What happens if you take money from a new fund like this and your company’s business plan goes south? What if you need to pivot and retool your idea? What if your plan was fully funded but now it looks like you need another 6 months of capital? Or even more rudimentary, if you are a founder of a new company, what if what you need is a good product manager or a head of sales?

Just my two cents.