We named our firm Touchdown Ventures and we always enjoy a good sports debate. With the NFL draft approaching, Selina Troesch and I recently argued about which of our favorite college football players would fare better in the NFL. We championed the merits of players from our respective schools: Adoree’ Jackson of USC and Jabrill Peppers from Michigan. I pointed to Peppers’ versatility (he played 11 different positions last year) and Heisman finalist status. Selina noted Jackson’s world class speed and his ability to put points on the scoreboard so many different ways.
Amazingly, Jackson scored touchdowns on offense, defense, returning punts, and returning kick-offs for the Trojans. While he didn’t lead the nation in touchdowns, his ability to score in all phases of the game is a perfect illustration of the range of ways a corporate venture capital arm (“CVC”) can provide value to its parent company.
Traditional institutional venture capital is a great business with one way to “score”: by generating a financial return on investment when a portfolio company is sold or goes public. On the other hand, corporate venture capital investors, just like Jackson, can score in several different ways.
1. Financial Returns
Just as offensive touchdowns are the primary scoring plays in football, the financial returns generated by increases in equity value are the clear metric for success in venture capital. This applies to institutional VCs and corporate investors alike. There are two ways to generate a touchdown on offense in football: running plays and passing plays. And in venture capital, there are two ways to generate a return on an equity investment: selling the company or taking it public. In venture capital, the “number of points” generated by the score is measured as a multiple on investment or by an annualized rate of return.
When setting goals for investment returns, venture capitalists attempt to adjust the potential reward against the risk profile of the startup. The earlier the stage and the riskier the company, the bigger the potential payoff should be. Benchmark holds an unrealized gain of over 1,000x its money in Uber for having invested when the company was completely unproven in its attempts to disrupt an entire industry that is beset with regulatory challenges. Not an easy task, but the potential return justified the risk. Similarly, an investor in an established company planning an IPO may be perfectly happy with a quick 2x return, because most of the risk has already been removed from the business.
While achieving top quartile returns is usually equally important to institutional and corporate investors (after all, we are named Touchdown Ventures, not Field Goal Ventures), this type of return is only one measure of success for corporate VCs.
2. Commercial Deals
Business development deals and strategic partnerships are examples of commercial relationships that provide another way for corporate investors to put points on the board. As Touchdown co-founder Scott Lenet notes in the blog “Bending Bullets,” these deals can include technology licensing, supply chain collaborations, distribution or reseller agreements, co-marketing arrangements, and even straightforward vendor relationships. Most corporations have dedicated teams focused on building relationships with startups, but the venture capital team can potentially help because we meet so many startups. Importantly, the corporate venture capital process can produce these commercial deals whether or not an investment occurs. Sometimes, a successful business development deal can lead to an investment later.
When measuring how these deals produce returns, it’s important to note that commercial relationships should be mutually beneficial. Especially if there is an investment, it is critical for the corporation to focus on how it can deliver value for the startup, and not just serve its own interests by extracting concessions from a smaller entity. In terms of quantifying the returns from commercial deals, corporations should focus on objective, measurable results like revenue, cost savings, and EBITDA. If the corporation is willing to try experimental “pilot” deals with startups, it may be acceptable to set the goal for the initial transaction to assess the potential quantifiable value in a full roll out. The potential payoff for the corporation can be very small, in the event of a pilot, or reach billions of dollars in the event a new business effort is launched at scale.
Mergers and acquisitions present yet another way for corporate investors to generate a return from venture capital. As is the case with business development, most corporations have dedicated teams focused on acquiring startups. The venture capital team can augment this group’s capabilities as well.
The venture capital team can potentially provide additional deal flow to the M&A team because of the volume of deals reviewed. A successful venture investment can also turn into an acquisition later. In these cases, the company can make more informed decisions as it has information about the start-up, its leadership and its fit that could not be discerned via normal due diligence. And the start-up gets a more intimate perspective of a potential acquirer as well.
4. Market Intelligence
Good corporate VCs review hundreds or thousands of investment opportunities per year, talk with key business unit leaders frequently, and share updates on key market trends. These trends may apply directly to the core business or illuminate future opportunities or existential threats. The company can potentially refine its strategies based on this intelligence.
While it’s often challenging to quantify the benefit of this intelligence, it’s easy to imagine the usefulness of spotting disruptive trends years in advance. When I worked at Comcast and explored entering the home security market, the Comcast Ventures team provided invaluable assistance helping me understand startup trends in connected home security. Eventually we launched our business with one of the start-ups that the Ventures team had brought to us and the Ventures arm also invested concurrently. In this case, market intelligence led to a new internal business unit, a business development relationship with a startup, and an investment.
There are other opportunities for corporate VCs to provide returns to their parent companies. Some of these are rare, like missed field goals returned for touchdowns, but they do matter. These innovation scoring analogies include helping establish ecosystems of startups, as Salesforce and Amazon have done so well, in addition to assisting with incubation and acceleration efforts.
Selina and I ultimately couldn’t agree on which player will be a better pro, but Jackson’s ability to score any time he touches the ball makes him “most like a corporate venture investor” among the 2017 NFL draft class. We make no representations about how either will perform if drafted by your favorite team.
Eric Budin is a Venture Partner at Touchdown Ventures, a Registered Investment Adviser that provides “Venture Capital as a Service” to help leading corporations launch and manage their investment programs.
Touchdown co-founder Scott Lenet (who couldn’t find an NFL draft candidate from Princeton) contributed greatly to this article.
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