Insights: 6 takeaways from our CVC webinar with Mach49 and Touchdown
By Stu Willson
Faced with both opportunity and potential disruption from both the explosion in startup funding and the degree to which technologies and consumer preferences have changed the playing field, many corporations have sought to ride this wave and launch corporate venture capital (CVC) efforts. The growing popularity of CVC as a strategy is clear: since 2010, the number of CVC investments is up 238% and the amount of capital invested by CVCs has grown 752% to $72.4 billion in 2020 — from just $8.5 billion in 2010. By establishing their own VC branches, many have managed to adjust to the changing business environment, and at the same time, a new type of investment relationship, between large corporations and groundbreaking startups, has emerged.
For our most recent edition of Build, Buy or Partner recorded on July 28th, we talked with two leading figures in the world of corporate venture capital: Scott Lenet, President and Co-Founder of Touchdown Ventures, which partners with leading corporations to manage their venture capital programs, and Paul Holland, the Managing Director and VC-in-Residence at Mach49, where he leads the company’s Corporate Venture Investing Practice. Dave Knox, author of Predicting the Turn, moderated the discussion.
In this interview, we looked into what makes the best corporate venture capital (CVC) team, how corporations have learned to build their own VC operations so quickly, and the basic rules that any new CVC team should try to follow. Here are six key takeaways:
Why It’s Done
Scott Lenet: Corporations are waking up to the idea that if you operate in a cave and ignore what’s happening in the outside world, you’re probably going to get blindsided in some way. They’re recognizing that not everything can be invented in-house. In my opinion, corporate venture capital is the best way to stay informed and understand what’s happening in the world of external innovators — startups and venture capital — because it mobilizes capital to fund startups and receive equity back. And that arrangement could take many forms, including buying startups when they’re small, or simply doing commercial deals with them. We touch on all of those things in our investment programs.
Outside In Vs. Inside Out
Paul Holland: There are two main components to Mach49’s work — first, there’s disrupting outside-in, which can only come by investing in external innovation. But disrupting inside-out is an even bigger business for us, and that’s the process of helping to launch and incubate new businesses inside the corpus of some of the world’s largest companies: Shell, Stanley Black & Decker, Hitachi, and Intel are just a few examples. By the end of last year, we launched 40 new companies inside these organizations. Linda Gates, our Founder and CEO, describes these two practices as the Yin and Yang of corporate venture capital. And so many of our clients work with us on both components.
Strategy vs. Financial Return — Know Why You’re Doing It
Scott Lenet: I think people have created this false spectrum between strategy and financial return — the two are not mutually exclusive. A successful CVC should maximize both. I mean, if it’s a bad financial investment, don’t invest! Do something else: do a commercial deal, go buy the startup, or establish a friendship with them and learn from what they’re doing. But don’t put dollars at risk in equity if you don’t think you’re actually going to make money doing it. No entrepreneur is going to respect that. No traditional VC is going to want to work with you — that’s how people get the “Dumb Money” label.
On the other hand, if there’s no strategic angle of any kind, and the startup has nothing to do with your company, then you shouldn’t fund it. There has to be some established mutual benefit. The company can offer something to help the startup grow and in return, the startup’s innovative approach feeds the corporation. Investing in startups helps corporations reinforce their leadership position by watching out for disruptive trends. If there’s no relevance, and you’re just interested in a financial return on the investment, then you’re not even a CVC — you’re just a VC.
How to Build a Team
Paul Holland: We want to develop people internally. We want to do that because they know where the antibodies are; they know where the resistance points are; and they also know where the key stars are within the corporation. Scott will be the first to tell you that a key success factor for these funds is to deliver the value add — look, Silicon Valley doesn’t need any more money. What it does need is customer relationships, expertise, operating experience, and so forth. So that’s one of the key things that we kind of drive for when we’re working with these companies — we find that Dave Knox who’s inside that Corporation, grow them, and get them into a position where they’ve got breadth, visibility, and a network.
Experience is Essential:
Scott Lenet: The number one determinant of a program’s longevity is whether the people involved have prior Venture Capital experience. If you go it completely alone, you’re rolling the dice, and if you have someone who’s never done a venture capital deal, the chances that you’re going to get the terms wrong or taken advantage of are high. There are probably 100 new CVCs started every year, and only a fraction of them are deciding to collaborate with an external partner. So plenty are deciding to take their chances. But for those who say, “I want to go faster, and I want a guide to help me develop my own internal CVC operation,” they’ll choose to work with a firm like Touchdown or Mach49.
The Changing Geography of Corporate Venture Capital:
Scott Lenet: You know, we used to joke around when I lived in Silicon Valley that if you can’t get there on a tank of gas in a Ferrari, then you shouldn’t go. I guess today’s equivalent would be a single charge in the Tesla. When I moved from the Bay Area to Sacramento to start the Frontier VC fund with Tim Draper and the rest of the crew there, people said, “Sacramento! Oh my God, it’s so far away!” It’s like I was going to Siberia or something. But now, people are doing their due diligence over zoom and figuring out partnerships globally — they want to invest in best-of-breed startups. It doesn’t matter where they’re located — great companies can be born anywhere in the world. Between all of our corporate partners, we work in seven time zones around the world. You know, the bigger challenge is maintaining a semblance of a home life while waking up at bizarre hours for international conversations.
For more insights from Radicle: here.
