The Devil We Know
An Open Letter to Fred Wilson of Union Square Ventures, Defending the Merits of Corporate Venture Capital
We have the utmost respect for you and your amazing track record speaks for itself. We aspire to generate the types of returns you have demonstrated in your career, and we recognize you as a key figure in our industry. It’s fair to say you are one of our VC heroes.
In fact, it is your role as a leader that drives us to respond to your most recent commentary against corporate venture capital, in which you said that corporate VCs are “the Devil” while on stage at a recent financial conference. We know you have a long-standing dislike for corporate venture capitalists (CVCs), and at Touchdown, where we partner with leading corporations to manage their venture capital programs, we actually use you as a warning: “Fred Wilson says that most corporate venture capitalists suck. Let’s build the kind of VC practice that Fred would respect.” No joke, we actually have a Fred Wilson slide in our pitch deck. Your criticisms of corporate venture capital helped inspire us to start Touchdown a little over two years ago, with a goal of conducting corporate venture capital activities professionally, and in a way that is aligned with traditional institutional VCs.
Because you are a recognized and vocal leader, your words have real impact; and it would be a disservice to impressionable entrepreneurs and other VCs if you were to dissuade them from working with quality corporate investors who can help them grow successful businesses. We agree with the occasional times you have gone on record saying that corporate VCs can bring something to the table with comments like “We like working with corporate investors in the right situations.”
CVC is not a joke, and it’s here to stay. While some of your criticisms of corporate venture are understandable, we believe there is a more balanced perspective. So we want to address each of your substantive objections to corporate venture, and we’ve lumped them into three buckets: (i) why corporate investing is bad for entrepreneurs and the venture ecosystem, (ii) why corporations shouldn’t want to make venture capital investments anyway, and (iii) theological speculation.
Let’s take them in order, using direct quotes from your interview:
(i) Corporate venture is a bad idea for entrepreneurs (and also for traditional VCs)
“The dumb money showed up.”—Is it dumb to pile into a new technology just because everybody else is doing it? We think so. That’s speculation, not investing, and this can especially be the case with blockchain or Bitcoin (which was the context in which you made this comment). Venture capital has been known for a “herd mentality” and a surprising lack of risk-taking for decades. So while we do agree this is a problem, the challenge is endemic to our entire industry, not just corporate investing. On the other hand, is it dumb to invest in something where you have deep industry expertise and can execute a commercial agreement to grow the revenues and profits of your portfolio companies? No, that’s actually pretty smart. And that’s what makes corporate venture capital extraordinarily attractive to entrepreneurs and traditional VCs.
This isn’t just fluff. We can point to many real-world examples where corporations helped start-ups that subsequently became very successful:
- Google Ventures helped Uber — Google featured an option in its Maps searches to transact with Uber, and this literally and figuratively helped put the startup on the map
- WPP helped Buddy Media — as one of the first social marketing platforms, Buddy received a critical investment from WPP, which brought its advertiser client relationships to grow revenue for the startup (Buddy Media was bought by Salesforce)
- Tribune helped AOL — Tribune was one of first investors in AOL and collaborated meaningfully with AOL to develop content and the Digital Cities local media product
These are just a few visible examples, but they illustrate that CVCs can execute and aren’t always making empty promises.
“If you’re the entrepreneur, do you want them in the room?”—It turns out the answer is, “yes, we do.” In our experience, more and more entrepreneurs and institutional VCs are choosing to include corporate investors. In fact, at Touchdown, we are finding that great startups are willing to re-open closed or over-subscribed rounds to make room for our corporate partners, because they perceive value in the kind of commercial relationships mentioned above. This also addresses your next objection:
“They [the entrepreneur] either can’t get money from anybody else…” — This is clearly not the case if a fully subscribed round is re-opened, but we also inferred that you believe taking money from a CVC is a signal of underlying weakness to the marketplace, and presumably the result is that these companies fail, or progress to inferior exits. You are likely aware that CVC participation hit an all-time high in Q1 of this year at only 25% of all deals. Did you also know that over the last few years, more than 50% of venture-backed IPOs had a corporate investor on the cap table? That’s quite an over-representation in the industry’s best deals. These CVC-backed startups are obviously not the dregs of the industry.
“…or the corporations have paid a higher price than I would pay.”— We’re pretty sure the entrepreneurs won’t complain about this one. Most of the CEOs we’ve met are always trying to get a higher valuation. So presumably the issue here is that the profligate corporate VCs are pricing disciplined, traditional VCs out of rounds that would otherwise be reasonable. Now Fred, we know you have been at this business a long time, so we need to ask, and please be honest: are you really trying to claim with a straight face that traditional institutional VCs are always disciplined investors, and never chase hot deals offering unreasonable valuations to win a deal from one another? We promise you, most corporate VCs are more than happy to work with high quality institutional investors like yourself, at fair prices.
(ii) Corporate venture is a bad idea for the corporations themselves
“Corporations should buy companies.”—Sure, sometimes. But that’s often a big commitment of financial and human resources and not all M&A works out. Sometimes it’s better to get to know a company with a minority investment and a commercial agreement before committing to an expensive M&A process. And sometimes another corporation is a more natural acquirer, or the startup may prefer to go public. What’s wrong with benefiting when a great startup goes public, especially if your corporation has helped drive the revenue and profit stream that enabled the IPO in the first place? If you believe corporates shouldn’t invest, does that also mean they should avoid incubating new technologies, or working with accelerators? Where would you draw the line on what types of innovation are acceptable for a corporation to pursue? It doesn’t sound like you are considering what creates benefit for the corporation, because the venture capital process does drives multiple sources of value. It isn’t just about financial return, it’s also about learning, strategy, and aligning with the entrepreneurial ecosystem to create a culture of adaptation. And when a corporation uses its resources to help grow a startup, regardless of whether it is the ultimate acquirer, that increases financial returns for everyone involved.
“When have corporations been great at making investments?”—It can take a while to get good at venture capital, as we think you would agree, and it’s true that there are extra challenges when it comes to being a good corporate investor. Layering on strategic objectives and corporate politics adds complexity to an already difficult task. Venture capital requires a specific skill-set, and many new corporate venture arms lack experienced professionals to help guide them through the process. But corporate VCs are becoming more sophisticated and are clearly getting better at the business, especially with the help of firms like ours. Not having been skilled historically is not a reason to stay off the playing field. It’s a reason to dig in and improve. That’s how we can all help entrepreneurs build the best businesses.
(iii) Religious stuff
“They’re doing business with the Devil.” — Well, okay, you got us on this one. Just kidding, corporate VCs are not actually bad guys. In fact, we have heard the term “vulture capitalists” used to refer to institutional VCs on occasion, and its our philosophy that the entire venture industry would benefit from sticking together.
The bottom line is that any VC who has been around this business long enough has been burned by bad co-investors. Corporates are certainly not the only culprits. We’ve seen angel investors block a good exit to extort a greater return at the expense of founders who had produced extraordinary results. We’ve seen institutional investors structure inappropriate “round trip” consulting fee arrangements and conduct the worst type of self-dealing at the expense of other shareholders. Unfortunately, misaligned behavior comes in all shapes and sizes. As our mommas taught us, there are rotten apples in every orchard.
And as you have previously admitted, there is nuance to this topic. In a great post you wrote in 2013, you apologized for insulting corporate investors as a whole and noted CVCs that “don’t suck” include “well established investment groups like Google Ventures, Intel Ventures, SAP Ventures, Comcast Ventures, and many many more.” We can probably all agree that it is better to work with professionals who do what they say they are going to do, and that the alternative is frustrating. So perhaps it is only the disorganized or unprofessional newcomers that really raise your ire. And we don’t disagree. As mentioned, we started our company to address this challenge.
So while we know you have had some challenging experiences with corporate venture firms, we believe it would still be worthwhile to remain open-minded. The world of corporate venture capital has evolved quite a bit in the past decade. The market doesn’t broadly view corporates as undesirable venture capital investors, and we’d truly rather work with you than against you (after all, venture capital is a business based on the premise of making friends). We hope to have the opportunity to work together on a co-investment and demonstrate what a reliable partner a corporate venture capital firm can be. Who knows? You may even decide you like the Devil if you take the time to get to know him better.
Thanks for reading!
-Scott Lenet, Touchdown Ventures
This article originally appeared in Global Corporate Venturing.
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