In defense of corporate VC investment
On the record or off, I consider the legendary Fred Wilson’s recent statement that startups accepting corporate venture capital is the same as dealing with the devil, a real bummer.
During his appearance at CB Insights’ Future of Fintech he claimed that corporations shouldn’t just make partial investments in startups. They should simply acquire the startups or not do any investment in them at all.
He calls for startups not to accept money by corporate VCs, which according to me is a very unnecessary argument leading to no useful conclusion. According to Mr. Wilson whatsoever, corporations are only good at investing in their own business but very bad at investing in general.
I think he might have gotten few things wrong in that part.
The rationale behind why a traditional VC would invest in a company and why a corporate VC would invest in a startup largely differ. It is never the same.
What is considered success or successful exit from a point of view of a corporate investment is not always a great deal from the point of view of the traditional VC fund.
While a traditional VC fund investment is inspired by purely financial reasons and rich exits, corporations may invest in companies for several other reasons as well. Not all investments made by corporate VC funds have purely financial reasons in their mind. Some of them invest for strategic and business reasons such as the possibility of the startup they are investing in opening up new or latent markets that can boost the demand of the corporation’s primary products. Or helping the company transit into emerging technologies and markets faster thus avoiding the Innovator’s Dilemma.
Such was the case with Intel’s investment in Berkeley Networks in 1997. Berkeley used existing Intel processors to make low-cost switches and routers for communications networks — a new market for Intel products:
As Intel performed its due diligence on its investment, though, it began to see the outlines of a possible strategy shift, one that might result in the widespread use of its products in network switches. Initially, this view was controversial within the company: At the time, Intel’s communications business was focused on making products (for example, network interface cards for PC networks) that were compatible with the prevailing Ethernet network standard. Since the Berkeley approach competed with the Ethernet standard, Intel had to balance the benefits of promoting a new network architecture that used Intel’s core Pentium products against the threat that the Berkeley-inspired architecture posed to Ethernet networks. After some sharp internal disagreements — and after the value of Berkeley Networks began to grow — Intel decided to adapt its strategy to pursue this opportunity, culminating in the Intel Internet Exchange Architecture, launched in 1999. The investment in Berkeley Networks helped Intel identify a promising opportunity more quickly than it might have otherwise. (Emerging investment)
Claiming that the corporation which only partially invests in a startup does nothing in particular when instead it should just buy the startup is just plain wrong for several reasons.
For example by letting a startup in which IBM for example has invested work autonomously it may develop process which the entire IBM structure may benefit from later on. However if they simply acquire it and fully integrate in within their existing operational capabilities that would mean that they are merely pulling the innovator towards the status quo and undermine the whole cause of investing in new technologies (which by all means will require new processes as well).
Corporate Venture Funding in the case of India until June 2016 has been the highest since 2012 as per CB Insights figures, standing up to $171 million, almost 5 times higher than the past 2 quarters. This tells a lot.
Next time when established corporations express interest to invest in your company, don’t think it is a work of the devil.
Corporations may not want to invest in you purely because of the evanescent promise of quick return but instead hope to unlock more strategic value from the emerging market you will help unlock. That is even more awesome if you ask me rather than having the company of a pure financial driven investors who already plans how to sell you out the moment they invest in you.