What College Football Can Teach us About Corporate Venture Capital
Anyone who knows us even a little bit knows that we are huge Michigan football fans. We know way too much about their third string linemen, we spend an inordinate amount of time on recruiting blogs, and we even scheduled our respective wedding dates to avoid football season. Somehow, our wives married us anyway.
After almost a decade of Michigan football that would be charitably described as mediocre, we were more than a little bit excited when Jim Harbaugh joined as head coach last year. He took over a team that had gone 5–7, leading the Wolverines to a 10–3 record and a 41–7 Orange Bowl win.
Michigan football’s resurrection is more than just a testament to Harbaugh’s immense skills as a teacher, motivator and strategist. He has energized the program and created buzz. Recruits are clamoring to attend (Michigan landed the nation’s top ranked prospect this year), alumni donations are up, and good times are back. While the same benefits have been achieved at other schools with other great coaches, for argument’s sake, let’s call it the Harbaugh Effect.
The Harbaugh Effect is a virtuous cycle. A school hires a great coach to jump start the process, which attracts top high school recruits, which leads to winning seasons, which generates more revenue to build state-of-the-art facilities, which further fuels better recruiting, more wins and higher revenues. This self-improving cycle is why the University of Michigan was willing to spend more than $5 million per year to lure Harbaugh away from the NFL.
Corporate venture capital creates a similar virtuous cycle. There are four key steps in the process after starting a program with the right managers: 1. generating deal flow, 2. making investments and executing commercial agreements with startups, 3. gaining intelligence into new trends, and 4. generating financial returns. Each aspect of the CVC process reinforces and fuels the other aspects of the process.
Starting a program with experienced venture capitalists is the equivalent to hiring the right coach. The parallels between coaching elite athletes and working with talented entrepreneurs are numerous, and probably the topic for another sports-themed blog post. Suffice to say, venture capital requires a specialized skill set and corporations should bring in the experts.
1. Deal Flow: Cultivating and managing targeted deal flow is the core of the CVC process. Increasing the volume and quality of deals reviewed means that the company is going to have a better pool of targets from which to select. Seeing hundreds of startups also helps the company further refine its areas of interest, which is a benefit by itself.
2. Investments & New Commercial Relationships: Among the many deals that the company is seeing, a subset should be synergistic with a business unit within the company. Some of these opportunities will become investments, some will become business development deals, and some will be both. These deals allow the company to enter innovative sectors where building capabilities internally would be too costly or time-consuming.
3. Intelligence Into New Trends: Deal flow, investments, and commercial transactions provide visibility into innovations, market trends, new business models, and changing customer preferences. These windows deliver insights into potential disruptions and opportunities for the corporation. By seeing large numbers of companies, insights into sweeping trends are available. By investing and working closely with start-ups, detailed insights about business models can be learned.
4. Successful Investments: By working closely with startups, corporate VCs can produce successful outcomes, and the numbers show this is true. While CVCs accounted for 24% of all VC deals in Q1 of 2016 (an all-time high), corporate VCs were investors in greater than 50% of all venture-backed IPOs during the last three years. The result of successful IPOs and M&A deals? A good reputation, of course.
This reputation really drives the virtuous cycle of the corporate VC program. Like the elite football program that has top recruits hoping for an offer, a company with a good reputation for its VC efforts will see higher quality deal flow. Entrepreneurs and earlier stage VCs will seek out the company. This improved deal flow will create better investments, better commercial deals and even more insights, which will in turn further improve the reputation of the VC arm.
And akin to the swell of support that a winning football team gets from the school — including resources and packed stadiums — internal support within the company will also increase as the VC arm builds its positive reputation. More stakeholders in the company will want to participate, making the intelligence more useful and providing more fertile ground for commercial deals.
The company also learns and gets better at each of these elements the more times it completes the cycle. Just as the top football coaches refine their recruiting, training and game tactics based on experience, the company improves at evaluating, learning from, partnering with, and investing in start-ups.
Ultimately the Harbaugh Effect provides disciplined CVCs an increase in deal flow quality and quantity, more strategic commercial deals, better investments, more valuable insights, and positive financial returns. What it hopefully means for Michigan is another national title heading to Ann Arbor.
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