The Most Overlooked Skill in Corporate Venture
Deal management requires more effort than all other activities combined
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Based on my experience with over 100 transactions in venture capital, M&A, and business development, I believe there are five basic activities in the life cycle of most corporate innovation deals: 1. sourcing (find deals), 2. evaluating (diligence deals), 3. transacting (close deals), 4. managing (make deals successful), 5. exiting (get a financial return from deals).
Many corporate innovation executives launching new programs focus on the immediate task at hand: sourcing and evaluating opportunities. This makes intuitive sense, because you can’t close the deals you don’t see. At the beginning of a program, there is probably no deal flow yet, so innovation professionals focus on how to see opportunities and decide if they are good.
In the process, however, corporate development executives sometimes forget to prepare for the other key activities that follow sourcing and diligence: transacting, managing, and exiting deals. Of these, neglecting deal management may be a critical oversight, as management is the most intensive activity of them all.
Why is this the case? Consider the amount of time spent on each activity, and type of skills required to execute each activity well:
1. Sourcing
Time frame: minutes
Key skills: networking, communication
External helpers: your network, investment bankers
Sourcing consists of identifying and capturing information about a potential deal. “Identifying” simply means learning about a deal from an external source. Importantly, sourcing also includes capturing that learning in a way that allows follow up, which usually means recording the lead in a networked database. Typical sources include proactive research, industry publications, conferences, investment bankers, unsolicited deals sent “over the transom,” university research, venture capitalists, and other network relationships.
While you might spend a career developing a network that will send you opportunities, the act of identifying an individual potential deal takes only the time required for someone to tell you about it. Logging a deal in a database initially consists of capturing basic notes and requires only a few minutes.
2. Evaluating
Time frame: months
Key skills: diligence, financial analysis, technical analysis, synthesis
External helpers: other VCs, investment bankers
Evaluating is the process of validating that a deal makes sense and preparing for internal approvals. This includes primary and secondary research, financial modeling, technical analysis, evaluation of corporate and legal agreements, and reference calls. Evaluation typically begins with a first meeting and can result in hundreds of hours of work. Ultimately, all of these diligence materials are summarized into a report (a “deal memo”) that recommends why the deal makes sense based on the work completed. M&A deal memos are the most complex, followed by investment memos. Many commercial transactions do not require a deal memo at all.
For business development deals and venture capital investments, typical diligence lasts a month or two. Venture capital diligence can be as short as a few weeks if an external lead investor or investment banking firm provides diligence materials to accelerate your work. For acquisitions, diligence usually requires several additional months. For all transaction types, complex diligence with commercial milestones can require much more time.
3. Transacting
Time frame: months
Key skills: negotiations, knowledge of terms & structures
External helpers: lawyers, investment bankers
Transacting is the process of closing a deal. Generally, this starts with a non-binding memorandum of understanding or term sheet, and closes with definitive documentation and depending on the type of transaction, wiring of funds. MOUs can be several pages long and definitive legal documents can be hundreds of pages long. Typically, lawyers translate MOUs and term sheets into definitive documents, dramatically reducing the burden on the corporation’s deal team. Lawyers are often available to assist with negotiations as the details outlined in term sheets become more concrete in final documents. Along the way, innovation professionals must secure approval for the transaction.
In venture capital investments and commercial deals, typical deal closings can take about a month. Sometimes these require as long as six months, for very complicated deals. For M&A, transacting often requires three to six months. Large scale M&A can require much more time.
4. Managing
Time frame: years
Key skills: financial management, recruiting, compensation design, product development, sales & marketing, strategy, crisis communications, integration
External helpers: consultants
Managing a deal requires a variety of skills, and it’s nearly impossible to predict what might occur on any individual deal. Acquisitions must be integrated, made productive and sometimes scaled, while trying to retain founders and keep what made the company worth buying in the first place. With venture capital investments, deal management is often expressed through a role on the startup’s board of directors. Board oversight requires all manner of strategic, fiduciary, and operational contributions — this includes replacing CEOs, finding emergency funding, deciphering financial statements, and much more. With business development deals, innovation professionals have the responsibility, but rarely the authority, to make the deal productive by ensuring a functional relationship between the external party and business unit leaders.
There is little external assistance in managing your deals. Bankers go away once you’ve completed an acquisition and they’ve collected their fees, but there are firms like Optia Group that help with integration. In VC, you might get assistance from other board members, but they usually have their own goals and motivations. In business development, you may also be able to find consultants to help keep deals on track.
While some acquisitions later result in divestitures or write offs, the idea is that these deals should last forever. In venture capital, the average investment lasts seven years, according to the most recent data from Pitchbook. I haven’t seen good data on the average length of business development relationships, but the average is likely more than a year, based on my experience. Again, the goal is usually a long term relationship.
5. Exiting
Time frame: months
Key skills: negotiations, knowledge of terms & structures
External helpers: lawyers, investment bankers
Exiting (getting out) is the mirror image of transacting (getting in). This stage pertains mostly to M&A divestitures and corporate venture capital investments. As in the case of transacting, this starts with a non-binding MOU or term sheet, and closes with definitive documentation and wiring of funds. Again, lawyers translate MOUs and term sheets into definitive documents, and lawyers and bankers can assist with negotiations. Terminating a commercial agreement is usually contemplated in the initial agreement and does not require considerable effort.
In divestitures and venture capital liquidity, typical deal closings take between three and twelve months. As previously noted, large scale M&A needing regulatory approvals can require much more time. Mercifully, write offs take very little time.
As you can see, managing acquired companies, investments, and commercial partnerships can require more time than all other activities combined. It also necessitates the greatest variety of skills and offers the least amount of formal external assistance. Investment bankers and lawyers, the most common external advisors, play a minimal role in deal management when it comes to representing the corporation. As a general rule, it is far easier to get into a deal than to make that deal succeed. Corporate innovation professionals would therefore be prudent to devote resources to the critical activity of deal management. Or as my friend Lee Sessions of Intel Capital frequently says, “focus on your portfolio.”
This article originally appeared on Forbes.
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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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