How to Staff a New Corporate Venture Capital Effort
Whether to Build Internally or Hire an Outside Partner
The number of new corporate venture capital units continues to rise. According to CB Insights, 264 new corporate venture (“CVC”) funds invested in 2018, a 35% increase over the prior year. As more corporations consider adding this innovation function, it’s natural to worry about how to implement a venture capital effort properly. After all, many corporate venture programs die young. According to a 2017 INSEAD study, the average corporate venture capital program lasts only four years!
How to staff the effort is one of the most important questions when starting a corporate fund. While there can be considerable strategic benefit from controlling a fund with internal team members, it is usually challenging to find internal team members with sufficient venture capital expertise. A popular alternative is to hire seasoned venture investors, an approach that typically requires a meaningful budget to motivate and retain an experienced team with relevant investor relationships in your sector.
It may also be worthwhile to evaluate external partners, because corporate venture capital demands a combination of trained professionals and focus that can be challenging to assemble in-house. In fact, there are four main reasons to consider outside assistance to launch your corporate venture capital effort: experience, scale, independence, and professionalism.
As demonstrated by many successful companies like Intel, Comcast, and Google, an external partner isn’t the only path to building a great corporate venture capital program. The discussion below highlights considerations for starting an internally-staffed CVC program, too. Regardless of whether you choose to promote from within, hire from the outside, or partner externally, you can use these criteria to help design interview questions if you are launching a corporate venture capital program, and hopefully boost the longevity of your program.
Experience is essential, because it tends to attract quality deal flow and circumvent costly mistakes.
The same INSEAD report mentioned above also indicates that hiring at least one experienced venture capitalist correlates with ongoing success. An external partner or an experienced individual can lend credibility to new entrants in the venture capital market, because trust is typically earned through shared investing experiences over time. Whether your corporation is evaluating an outside partner, or attempting to hire experienced venture capital investors to start a group internally, look to hire a team with established reputations among other VCs and entrepreneurs. These investors should have a demonstrated capacity to generate about a thousand opportunities per year. Your prospective partner or internal hire should be able to provide evidence of these relationships and deal flow, especially by providing references.
The ability to assess entrepreneurs, identify key risks, understand business models, and avoid errors derives from the experience of reviewing thousands of businesses. When considering an external partner, look for a team whose professionals have met with thousands of entrepreneurs, completed at least 25 investments, and served on about 10 private company boards. These figures roughly correspond to Malcolm Gladwell’s “ten thousand hour” rule, which is especially relevant because investing requires time and experience to recognize the many challenges that can arise with venture-backed startups. The same filter applies to hiring internally. If the prospective team leader doesn’t have the experience, it’s unfair to assume the judgment will be there.
Quite simply, an investor’s network (including other VCs, entrepreneurs, service providers, and many others) grows based on experience, and provides access to the best investment opportunities. Outside partners and external hires should demonstrate active relationships developed over decades with professionals at several hundred venture capital firms. Otherwise, your corporation could pursue the venture capital activity effectively on its own, since you are basically starting from scratch.
An experienced external partner or internal hire will have a verifiable investment track record that can generate confidence internally at the corporation, as well as in the marketplace. Look for a team (or an individual, if you are building a team internally) that has compiled a track record with top quartile cash-on-cash returns. While some investors will focus on write-ups (i.e., paper gains), a genuine track record will include realized returns that have been achieved by completing numerous IPOs, secondary transactions, and M&A exits over multiple market cycles.
Scale can be achieved with a significant financial commitment to building an internal team in multiple geographies, or by partnering externally. External partners can avoid lengthy and expensive infrastructure building that could delay the benefits of your program.
Partnering presents an opportunity for immediate scale, while an in-house effort typically requires building a team of professionals one hire at a time. It can be very difficult to hire experienced venture capitalists into a corporate environment. Ask prospective external partners how each corporate relationship is staffed, and how large is the firm overall. Determine whether there is any scale benefit to working with multiple investment professionals across the firm that may give you the ability to start with a fully-formed team. If your corporation has the resources, relationships, and commitment to hire a full team of experienced venture capitalists at the beginning of the program, an external partner may be unnecessary.
While venture capital deal flow is concentrated in key markets, deals can come from any geography; an effective program provides access to multiple markets. Seek a partner that maintains a presence in dominant U.S. venture capital markets, with locations in places like San Francisco, Los Angeles, Boston, and New York. Especially if your corporation is located in a geography outside the mainstream of U.S. venture capital activity, a partner can provide access to meeting entrepreneurs efficiently. If your corporation already has offices — or can open them quickly— in multiple key venture capital markets, while ensuring communication and collaboration across these offices, it may be a good choice to build the program internally. Depending on the scope of your business, global coverage may also be important.
As mentioned, hiring experienced venture capitalists into a corporate environment can be difficult, so beginning a CVC program can often take years. But an external partner can accelerate the time to market for a new fund. When considering a corporate partner, inquire as to how quickly the group can implement (i.e., “stand up”) a new customer corporate venture capital effort. Some organizations prefer to focus on consulting, and the planning phase may take several quarters or even years. Some groups can implement a new program in 60–90 days, including all strategy work required to launch a venture capital effort.
Independence can potentially provide benefits to new corporate venture capital efforts, in the form of objectivity, alignment of interests, and even legal, fiduciary duty.
3a. Standard of Care
Look for outside partners that are registered investment advisors with a legal, fiduciary duty who serve the best interests of its clients, whether acting on a discretionary or non-discretionary basis. Registered investment advisors with the SEC are legally required to assess investment suitability and recommend only investments that are appropriate for the client’s stated objectives. If you are hiring for an internal position, try to assess whether your candidates will truly serve the strategic needs of the parent corporation or are simply using the venture capital program as a platform for career growth.
Ironically, employing an outside partner may avoid potential “moral hazard” issues that can plague internal teams, whose individuals may have ulterior motives. Sometimes, a newly-minted corporate venture capitalist may view the role as a stepping stone to leave the corporate nest and launch an external fund. It’s not uncommon for a new corporate fund to “die on the vine” when the founding team leaves for an external role with less corporate bureaucracy. When evaluating potential hires or external partners, screen for evidence of trustworthiness and incentive alignment. Again, this is something that can be provided by references. If you are evaluating a potential external partner, look for a group that has been trusted by numerous Fortune 1000 companies and has launched and run multiple corporate venture capital programs.
An external partner can bring an independent, objective perspective to strategic and financial decisions, avoiding bias that can adversely impact investment judgment. For this same reason, many corporations sometimes hire external consultants, lawyers, and accountants, to provide independent expertise. If you are evaluating an external partner, look for a group that possesses or develops domain expertise relevant to each corporate client, yet follows objective standards for successful investing based on industry norms. If you are hiring for an internal role, screen for candidates who are logical, independent thinkers, and willing to question the existing culture of the corporation: these professionals will have the greatest potential to spot disruptive trends and surface them for strategic investment.
An external partner can also serve as a buffer between the corporation and startups, translating between these very different cultures. This can improve communication and sometimes impact the outcome of commercial relationships. Whether you are evaluating an external team or potential internal hires, ask for a plan to maintain regular contact with the entrepreneurs in the portfolio, assist with the implementation of commercial deals, and coordinate with internal business unit executives.
Professionalism includes the implementation of best practices and rigorous process, to avoid the “gambling” approach that often challenges new CVCs.
Benchmarking is a popular approach in established corporations. A professional partner can implement corporate venture capital best practices, benchmark against industry leaders, and operate according to market standards. External partners that work with multiple corporations may have first-hand insight to benchmark against peers, both inside and outside of your industry sector. Whether you are evaluating an outside team or interviewing a candidate for an internal role, ensure your new venture capital arm will use best practices developed over decades at successful corporate and institutional funds, and has the resources to benchmark against your peers.
A partner whose business provides corporate venture capital managed services may be more likely to implement process, structure, and a disciplined approach to corporate investing. While venture capital deal selection certainly includes some amount of intuition, good investing is not the same as gunslinging. The application of venture capital expertise includes asking consistent questions, meeting many companies, performing comprehensive diligence, and analyzing financial statements. The goal is to understand the risk/reward ratio of an individual investment and compare this with alternatives for the corporate venture capital arm’s capital and time. External and internal candidates alike should demonstrate an affinity for process and rigor, or you may as well go to the local casino instead.
Finally, the single most important characteristic for your corporate venture capital team may be accountability. It stands to reason that programs delivering tangible results, as measured in financial and strategic returns, are less likely to be cancelled. Look for a team that can set goals aligned with the needs and timing of the parent corporation, and set realistic expectations for when results can be achieved. Then set quantified objectives for the program, measuring the results on a bi-weekly, monthly, quarterly, and annual basis. Regardless of whether they are internal or external, experienced venture capital professionals who are accustomed to delivering results are the most likely to be comfortable with a culture of accountability. Be sure to interview with this requirement in mind.
Corporations can be “out of the market” for a decade when shutting down venture capital programs too early. The right team can make a significant difference in the longevity and success of these vital innovation arms. If you know of additional considerations for staffing a corporate venture capital program, please join the discussion and leave comments below.
A version of 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. Touchdown’s Los Angeles-based Senior Associate Selina Troesch contributed to this article.
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