Corporate VCs Are Like Basketball Point Guards
C-suite executives often struggle to make sense out of the variety of innovation options at their disposal. Should the corporation build internally, launch an incubator, partner with an accelerator, start a venture fund, expand an M&A program, or engage in more than one of these activities? The choices can appear complex and overwhelming, even when reduced to basic options like “build, buy, partner, or invest.”
Among these paths, the greatest confusion can come from how to manage external innovation options. For the most part, this means learning how to work with startups. Big companies sometimes panic at the mere idea of engaging with startups, because there are so many of these smaller companies.
Worse still, multiple corporate development executives may unknowingly be interacting with the same startups. Someone from a business unit may be discussing a commercial deal with a startup, or the M&A team could be considering the same company as an acquisition target. This creates justifiable concern about how a corporation can stay coordinated and avoid appearing disorganized to startup executives or their investors.
One potential benefit of starting a corporate venture capital (“CVC”) fund is that the discipline of investing tends to evaluate opportunities in a manner that can help the entire corporate development team prioritize opportunities and assess which innovation approach — if any — would be most appropriate for particular sectors and startups.
This is because the practice of corporate venture capital is designed to review large number of opportunities, speak or meet with many entrepreneurs, and learn about these businesses in a surprising level of detail. This detail, including financial performance data, helps the corporate venture capitalist guide how the parent corporation should engage with a startup ecosystem and with any individual startup.
In basketball, the point guard normally brings the ball up the court, directs traffic, calls the play, and passes the ball to the other players on the court to try to score for the team.
In corporate VC, the “ball” is the entrepreneur and the investor frequently makes first contact, which is akin to bringing the ball up the court like a point guard. By collecting financial information on a group of related startups, the CVC is often able to see patterns of market adoption and potential disruption, and recommend a course of action for the corporate parent.
The Inside Game (M&A and R&D)
Internal R&D teams are the equivalent of the center on the basketball team. They are often closest to the core of the business and can be a dominant force in the parent corporation’s business. Functionally, these teams tend to build their own new products while mostly ignoring the outside world.
They don’t meet with a lot of startups, as they are effectively competing with external innovators. One can easily imagine the awkwardness of conversations between R&D teams and startup CEOs:
“Hi, I might be here to compete with you. Would you mind sharing information about what you’re doing and how far along you are?”
Most startups would pass on this “opportunity,” but internal R&D teams should want to know whether it’s a smart idea to compete with startups. It might be the case that a large corporation is best positioned to bring a new technology to market, or there might be hundreds of millions of venture capital invested into dozens of startups, and one or more of those companies might be more likely to win. Corporate executives need to assess these situations by surveying the market. Unfortunately, R&D teams don’t assess a broad market of startups effectively — venture capitalists do.
Like R&D, the M&A team plays the “inside game,” in this case by bringing external innovators inside the corporation. The M&A team is like the power forward in basketball, with a similar ability to make a dramatic impact.
Being acquired by a large corporation is the dream of many startup CEOs, but the prospect is also scary. The volume of diligence information requested by M&A teams can also be daunting for startups and an impediment to serious conversations that include financial disclosures. Many entrepreneurs are cautious and slow to trust when approached for a buyout by a big company, as few of these deals make it to the finish line and the process can be an emotional and practical distraction from running the business. While M&A professionals typically do a more thorough job of surveying the market than R&D teams, the volume of deals reviewed rarely approaches the hundreds or thousands of deals per year processed by venture capitalists. The M&A team may spend as much time meeting with investment bankers as they do with companies surfaced by a comprehensive industry analysis.
The Perimeter Game (Business Development and Strategy)
In my experience, business development teams are usually attached to business units and focus on identifying, signing, implementing, and managing commercial transactions with external partners, including startups. These executives review a larger number of deals than the M&A and R&D teams. In other words, they work primarily from the outside and take more shots, just like a shooting guard in basketball.
Commercial deals can range from truly strategic relationships to short term pilots, and these contracts can frequently begin with smaller tests. As a result, business development deals may be relatively superficial, and it’s uncommon for these professionals to gain the kind of in-depth knowledge of a startup’s financials or business model that are part of the M&A or venture capital process.
The corporate strategy team looks inside and out, helping the corporation understand how to plan for the future and attempting to see the big picture. In this way, strategy performs a role like a basketball “swingman” or small forward. However, strategy executives don’t typically meet with a lot of startups, instead reviewing secondary research and talking to other big companies, consultants, or bankers.
As is the case with R&D, corporate strategy executives don’t have much to offer startups unless there is a clear path to acquisition. Most startup founders I know would say “no, thank you” if offered the chance to educate a large potential competitor and help them prepare for the future, with no prospect of any commercial relationship. However, learning is one of the things that venture capitalists do best. So if the CVC team can share consolidated insights gained from many conversations, the corporate strategy team may benefit. And startup CEOs may be more willing to speak to the strategy team if introduced by a corporate VC — the CVC can write a check.
Corporate VCs, therefore, may have the best risk-adjusted offering for startups. CVCs offer capital that could be essential for a startup’s survival, along with the lure of differentiating commercial relationships, and even the possible upside of an ultimate acquirer. This optionality makes the CVC a potentially ideal point of entry to the corporation, and the norms of the venture capital world dictate that entrepreneurs may more comfortably share useful information with corporate investors, compared to other corporate development personnel. After all, raising capital every year has become a normal part of running the business for many startup CEOs, so talking to potential funding partners is just part of the game if you’re growing.
But while corporate venture capital personnel might be first to meet an entrepreneur, the best path may be to engage in M&A discussions instead, or to focus on a commercial pilot in the near term, or just to learn. Good corporate VCs coordinate with their colleagues in these other innovation functions, and recognize when a venture capital investment is not the right way for the parent company to engage with startups. That’s when CVCs metaphorically pass the ball to another player on the team. Obviously, good CVCs protect their reputations by treating information from entrepreneurs confidentially, sharing details internally only with permission.
If managed professionally and in coordination with other corporate development professionals, a CVC effort can help avoid the chaos of “street ball” and organize the corporation’s approach to external innovation.
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