Bending Bullets
How Corporate Venture Capital Can Improve Outcomes for Entrepreneurs & Financial VCs
My wife and business partners can tell you I enjoy a good disagreement — if it is civil — and one of my favorite debates is whether venture capital investors can really make a difference in what happens to their portfolio companies. As VCs, are we simply stock pickers, or can active management improve outcomes?
I don’t intend to demean stock picking. It requires understanding markets, technologies, competitive dynamics, and most terrifying of all, people. Stock picking, especially in the private markets, is very difficult.
And it’s a wonderful-sounding notion for an entrepreneur to grow a company to great success without much effort required from his or her VCs. It makes me think of kicking back and drinking a beer while day-dreaming of spending the profits on new pajamas for my kids — pajamas that don’t have holes in the feet. But it rarely works that way. Being an entrepreneur is really hard work, and there is now more capital funding more competitors than ever. Entrepreneurs need every edge they can get, which is why the smart ones attract investors who make an effort to offer more than just money. And obviously, a VC is not going to make the effort if she believes it won’t make a difference.
The best way I ever heard this described was by John Fisher at DFJ, who framed the question by asking whether it’s possible to alter the course of events “once the bullet has left the gun.”
As a fan of movies based on indie comic books, this makes me think of Wanted, starring Angelina Jolie and James McAvoy, where a group of underground assassins demonstrate the ability to bend bullets in mid-air, after the bullet has left the gun.
What is active venture capital management? It’s the idea that investors don’t simply monitor and judge the results of their portfolio companies, but actively roll up their sleeves to help. If things are off-target, we try to help an entrepreneur bend her metaphorical bullet and alter the flight path of the company.
So what can go wrong and how can VCs help? Let’s be honest, everything can go wrong. You might need assistance with your strategy, your product, your marketing plan, hiring and firing employees, raising additional capital, creating commercial relationships, and eventually working through liquidity options.
From personal experience, I have seen the value that good investors can provide to a startup. In the most extreme examples, VCs can even step into temporary management roles to help a company, as my partner Frank Foster from Frontier did when he became CEO of Prolacta Bioscience before recruiting current CEO Scott Elster and Chairman John Bacich. That company, which is growing, profitable, and has provided critical nutrition to thousands of premature infants, would not exist today without investor intervention.
I can think of many more examples of my venture capital friends and partners helping entrepreneurs during my nearly two decades in the venture business. Thankfully, I can think of only a few examples where we messed it up, which is probably a great topic for another time.
A number of smart VCs have also written about helping entrepreneurs (including Mark Suster’s summary of how investors played pivotal roles in the success of some very high profile companies in point #2 of his excellent rebuttal “Why VCs Aren’t Dumb”), but over the past decade I’ve become increasingly impressed by just how much corporations can do for their venture capital portfolio companies. Among the benefits that corporate VCs can deliver, I believe that commercial relationships can be especially valuable, as these often deliver the revenue that helps a startup grow and become profitable.
These commercial transactions can include technology licensing, supply chain collaborations, distribution or reseller agreements, co-marketing arrangements, and even straightforward vendor relationships. Almost all of these types of deals can flow in either direction (in other words, the large corporation can help the startup with manufacturing, or potentially the other way around). While an institutional VC with a strong Rolodex can certainly make introductions that lead to commercial relationships, corporate investors can act as principals to execute those deals together with executives from their parent companies.
Seeing this in action helped convince me to become more active in the world of corporate venture capital. When I first met my Touchdown co-founder David Horowitz, he was a partner at Comcast Ventures and we served together on the board of a company called Ninth Decimal. One day, the CEO of the company showed a slide with their top 10 customers, and there was Comcast! Becoming a customer wasn’t required as part of Comcast’s investment, it was just something that David pursued because it made sense for both sides. I remember being a little jealous that I hadn’t created that kind of value for the company, and really glad that David had invested.
In the Wanted analogy, VCs who actively manage their portfolios are like Angelina Jolie’s Fox character, a savvy veteran of the bullet-bending secret society. CVCs (like David had been at Comcast) are like James McAvoy ’s Wesley— a bit newer to the game, and often underestimated as a tad too nerdy, but with world-altering potential.
Venture capitalists are paid a management fee by limited partners, so it has always been my philosophy that we should actively manage our deals. That means bending bullets, and corporate VCs may have the best natural bullet-bending capabilities in the venture business. I think this is why more and more entrepreneurs and traditional VCs are actively seeking strategic, corporate investors to help their startups hit the target.
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Scott Lenet is President of Touchdown Ventures, a Registered Investment Adviser that provides “Venture Capital as a Service” to help corporations launch and manage their investment programs.
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