The Long View
Corporate venture capital requires vision & patience
Corporate venture capital (“CVC”) can be an excellent tool for corporations to access external innovation. CVC allows the development of relationships with entrepreneurs and the financial upside of investing in start-ups. However, this process takes time and corporations should recognize these programs are long term efforts. I believe that CVC programs require a minimum horizon of five years.
Unfortunately, most venture programs do not make it to year five. According to INSEAD, the average lifespan of a corporate venture program is only four years. The report notes:
“firms need to assess their willingness and ability to commit” and “a high level of investment in start-ups created a buffer against…[program abandonment].”
In other words, the INSEAD report recommends patience, commitment, and a long term mindset to sustain a corporate venture program.
Many corporations express a desire to crawl, walk, and then run in their corporate venture journey. Corporations may start to “dabble” by making a few one off investments and assessing the progress of the venture program after the first year. In my experience, this strategy will not yield great results and is more likely to lead to program abandonment.
In my opinion, there are three primary reasons why the architects of a corporate VC program should take a longer term view of at least five years:
- Attracting start-up deal flow
- Attracting quality co-investors
- Attracting corporate venture capital talent
1. Attracting start-up deal flow
Sourcing and identifying start-up opportunities is the lifeblood of any successful corporate venture program. The first job of the corporate venture capital team is to identify the best start-up companies in the corporate’s particular sectors of focus. Without deal flow, it is literally impossible to run a CVC program.
For context, 2021 was a record year for venture capital financings. According to Pitchbook, records were set not only for the amount of funding in venture backed start-up companies, but also fund raising by venture capitalists: over $100B was committed to new venture capital funds. This “dry powder” will be deployed over the next 5+ years. There is currently more money in the venture capital system than at any time in the history of the industry.
With this abundance of capital in the market, the best start-up companies will have many options to finance their businesses. Sophisticated start-up CEOs will likely, “What is the fund life of my prospective investor?” Founder may also ask, “What reserves have you allocated to continue to support my company over the next several years?” The average duration of a venture backed investment is more than five years (source: Statista), so from the perspective of the startup, accepting an investment is the beginning of a long-term relationships. The start-up CEO will likely reject corporate investors who answer those two questions by saying “we are doing venture investing on an annual basis” or “we have not budgeted capital for follow-on investments.” These signals show lack of commitment and are likely to be viewed as a red flag by entrepreneurs.
As a result, the best start-up companies will likely reject short-term corporate venture investors.
2. Attracting quality co-investors
Institutional venture capitalists are accustomed to an industry standard 10-year fund life for their limited partnerships. For most VCs, this is the time horizon of a venture capital fund, not one year at a time.
The best venture capitalists perform diligence on their co-investors in addition to potential portfolio companies. Co-investors are important because they will not only provide additional capital to the start-up, but can help de-risk the effort by providing additional value beyond capital. Such examples include sales or business development introductions, fundraising, and recruiting for open positions. All things being equal, institutional venture capitalists typically prefer investors who can bring more than capital to the table, and this is potentially an attractive aspect of a corporate VC.
Experienced institutional venture capital investors are well aware of the fickle nature of corporate venture programs and their short shelf life. Venture capitalists who have been practicing for decades can share stories of corporate venture programs that “abandoned ship” during the start-up journey and were not reliable co-investors.
As a result, financially focused venture capital investors will tend to ask the corporation the same questions as start-up founders: (1) How long is your corporate venture fund life? (2) How much capital have you reserved for follow-on investments? (3) What assurances can you provide me that you are going to stick around for the next 5 years?
Ultimately, institutional venture capitalists want corporate venture capital funds that will act in alignment with their own interests. This requires sticking around in good times and bad.
3. Attracting corporate venture capital talent
The INSEAD report cited above drew an interesting conclusion: “hiring at least one team member with prior venture capital experience makes firms less likely to abandon their CVC unit.” Unfortunately, hiring an experienced and dedicated venture capital team can be a difficult process.
Harvard professor Josh Lerner has been studying corporate venture capital for over 20 years. In a past article from Harvard Business Review, Lerner wrote how compensation models are critical in attracting and retaining the best talent.
“For recruitment and retention, compensation levels in a corporate venture initiative should match those offered by independent venture groups. At the same time, pay should be linked to corporate goals as well as start-ups’ long-term performance.”
Lerner goes on to state:
“if a parent company is seen as a fickle investor, professionals will be wary of joining its venture unit, entrepreneurs will be reluctant to accept its funds, and independent VCs will be hesitant to join in, setting off a death spiral.”
Much like the best start-ups will avoid uncommitted CVCs, the best talent is unlikely to take the risk of joining a corporate venture program that isn’t built for the long term.
To attract start-up deal flow, quality co-investors, and corporate venture talent, corporations should adopt a long term perspective, with a runway of at least five years before assessing whether to expand, maintain, contract, or wind up the program. This will provide enough time to assess both the strategic and financial results that corporate venture can potentially deliver.
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