Trust The Process
Guiding a corporate venture capital group through the early years can be challenging
With the Philadelphia Sixers up by 20 points late in a game I attended recently, Joel Embiid went to the line to shoot free throws. The sell-out crowd, almost none of whom had left early to beat the traffic (for a game against the last place team) chanted in unison “TRUST. THE. PROCESS” as Embiid raised his arms to goad them on further. It felt more like an old fashioned revival meeting than an NBA game.
Some context: the Sixers had been mired in the basement of the NBA’s standings, averaging fewer than 19 wins a year (out of an 82 game season) over the prior four years, including the third worst NBA record of all time just two years ago. But their fans had stuck with them, paying full price for tickets that essentially were for a development league team. Philly sports fans are not noted for their patience, so what led them to show this loyalty?
Sam Hinkie had been hired as the Sixers general manager during the 2013 off-season. He took over a team that had just missed the playoffs the previous year. His PowerPoint-driven pitch was not simply that he would improve the team, but that he would bring Philadelphia its first hoops championship in 30 years. The twist to his plan? Before they got great, they had to get really bad.
The NBA rewards its worst teams with the highest draft picks to get new players out of college, and the draft is the primary means to get future superstars. Teams that are average get “stuck” there — the Sixers had won over 50 games only once in the previous two plus decades. Just good enough to make the playoffs sometimes, but not bad enough to draft superstars, who then become magnets for other stars on winning teams to join via trades or free agency. So Hinkie’s plan was to trade away good players, accrue top draft picks and stockpile the assets to build a juggernaut. This plan became known as “The Process.”
Some of the key elements of Hinkie’s process are very similar to what it takes to start a successful corporate venture capital (“CVC”) fund. Building a CVC takes time, and many of the benefits take years to materialize. The key elements to setting up a first time corporate venture fund process are:
- Have very clear goals that determine your plan
- Develop KPIs to track progress
- Ensure key stakeholders buy-in
- Execute on the plan, in a disciplined way
Clear Goals and a Plan
The Sixers established the goal of being a championship team, rather than just a playoff team. Companies starting a CVC unit need to be clear about their goals. At Touchdown, we believe that investment programs should generate financial returns and provide strategic value. Strategic value will vary from company to company, and may include augmenting the product roadmap, creating new businesses, seeding an ecosystem, or being a feeder for M&A (see our article “Many Happy Returns” for more on the non-financial benefits of CVC).
A CVC should define what kind of investment program will help achieve the company’s goals, build a model portfolio, and establish clear processes for how to source, evaluate, and work commercially with startups. These processes are often different than those of the company’s corporate development or M&A teams, so employing experienced corporate VCs is critical.
KPIs
Despite enduring many, many losses, Sixers fans were able to see the team accumulate a wealth of future draft picks through trades, and track the performance of some of the young players. For a CVC, in the years before the financial returns begin to be realized, there must be key performance indicators (“KPIs”) that measure strategic value.
A typical CVC fund will likely not have any exits for the first few years, and even longer if its strategy emphasizes seed or early stage investing. There will certainly be KPIs to track interim financial performance of these investments pre-exit (e.g., valuations on subsequent financings), but it is important that the fund also have non-financial KPIs. These KPIs may measure the deal flow itself, or market intelligence gathered, or the number of commercial deals consummated, or even revenues from these deals. What is important is that the KPIs are objective, quantifiable, and measurable, and that some of them can illuminate progress early in the process.
Stakeholder Buy-In
Hinkie was able to win over the fans and ownership for his plan. For a CVC to be successful, it must have the strong support of its CEO and CFO, and often the Board. This support is vital both at the start and through the period before exits begin. Unfortunately, among the easiest cuts during a company’s budget process is a venture fund that has not yet shown progress. So progress against KPIs is a critical way to show that the CVC is providing value.
At a recent Global Corporate Venturing conference, Tim Lafferty of GCV presented the growth of CVC funds over the past decade. He noted that while corporate fund creation is relatively easy to track, the closing of CVC units usually aren’t heralded by a press release. It turns out the average corporate venture fund lasts less than four years, and some of the reasons why include not having clear goals or the perception of not providing value.
This buy-in isn’t just important at the onset in formulating the strategy and the KPIs. The investment strategy should be revisited periodically and there should be a formal ongoing process for reviewing the KPIs and overall CVC performance with the key stakeholders.
Execution
Ultimately, winners need to deliver on a plan. It took five years for the Sixers to field a team with winning percentage above .500, and now a playoff appearance. Unfortunately, the architect of The Process, Sam Hinkie, is no longer part of the Sixers organization, as his bosses lost patience and fired him last season. The fans, however, did not lose faith — some of them can be seen at games wearing “Hinkie Died for Your Sins” shirts.
A CVC fund must deliver value from its investments. So the first few investments require even more care, as they serve as signals to the market. Many CVCs start with guns blazing (skipping the “aim” phase), making numerous, often scattershot, investments in the first few quarters. They often then lose interest, nerve and/or future funding, hurting not only the companies’ longer term interests, but those of their portfolio companies. A strong CVC investment strategy includes a model portfolio, which lays out the timing, mix of stages, size of investments, and projected reserves for future rounds for a prototypical portfolio of investments over the life of the fund. A model portfolio should fit the size and strategy of a given fund, and facilitates a measured approach to investing.
Showing patience and discipline early on can help ensure senior leadership stays interested, that business units are truly engaged, and that the CVC starts to build a credible reputation with entrepreneurs and other VCs. These early years should also provide value to the company through commercial relationships and with market intelligence.
Following a “process” can enable new corporate venture units to thrive through the early years and deliver on measurable goals. And hopefully the Sixers will serve as an even better analogy for budding CVCs, by delivering on the team’s goal of a championship.
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Eric Budin is a Director at Touchdown Ventures, a Registered Investment Adviser that provides “Venture Capital as a Service” to help leading corporations launch and manage their investment programs. He also attended Billy Cunningham’s last game and Charles Barkley’s first start, and once tried to chase Julius Erving down Montgomery Avenue to get his autograph (Dr. J had a Maserati, so it was a short chase).
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