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Jon Bradshaw & Peter Harris

Can corporate venture capital arms be of great value to your company?

Corporate Venture Arms: Are They Worth It?

Should you take money from a corporate venture arm?

Here are some quick Pros and Cons of doing so:

Pros:

  • They can be very strategic in making industry connections (especially with other companies they have invested in
  • They can often become a customer themselves
  • Bring technical expertise and resources unavailable to early-stage venture companies

Cons:

  • Often have conflicting mandates, invest for return and invest in finding acquisitions
  • Due to incentives many of the partners at CVC’s leave (which is your internal champion)
  • At times there are inferior terms (exclusivity on acquisitions, Right of first refusal, and in the worst case invest to stamp out competition).
  • While they could become customers, CVCs are often on an island and don’t speak for the company in becoming a customer
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Episode Transcript

Jon: All right. Let's talk about corporate venture capital funds and are they worth it? So our good buddy landed Angel from a sugar syndicate's, had a LinkedIn post that I thought was inspiring and it made its way to my heart. And so the question he was talking about on LinkedIn was, should you take capital from a corporate venture arm?
 
Jon: So we have clients who've taken capital from and because of ideas, I can't say from these venture arms and because I get a lot of visibility into these companies, I get to see like, is it good or is it not good? And to me, my understanding is that I think these companies are investing because they want areas of the business to grow.
 
Jon: But the challenge is that a typical venture arm doesn't give you the control to make that happen and eventually you become successful. I feel like they're almost turns into a tug of war between the Fortune 500 company and the startup. So let's go through his points. But what's your what's your first take?
 
Peter: I think corporate venture capital funds can be great parts of the table, the syndicate. But you really need to control kind of their position as investors in the company. And if you don't, it will be to your everlasting detriment that if you do and you navigate it well, it can be incredibly powerful.
 
Jon: How many of these corporate VCs nature There's there's always pros and cons. Sure. As a general rule, do they try to end up running the company?
 
Peter: In general, no, in my experience. But, you know, occasionally there will be some that try to I think the bigger issue is that it's not so much the risks that they come in and try to run the company as much as it is that they try to hamstring the company to their own advantage. Right. And unlike a venture, a traditional, like pure play financial first venture fund, you have a whole bunch of different incentives that could be occurring within that, that corporate that's investing.
 
Peter: And it's worth delineating as well between like a corporate venture arm and a company that is investing strategically in the company. Right. Okay. Because a venture arm in some ways is better because usually they're kind of at arm's length from the parent company.
 
Jon: Would this be like Google Ventures as one?
 
Peter: Yeah, like a Google Ventures is a good example of that. Like where like there's clearly like some strategic interest when they make investments, but they can kind of make their own investments, their own decisions, right? They're not beholden to corporate to, you know, make sure that every single thing that they do yields massive value back to tight quarters.
 
Peter: The downside is like land and mentions in his post is that corporate venture arms typically struggle to retain talent because they don't have the right incentive structures in place. That same talent goes in, they build up a track record, then they take that tracker and then they bounce to a venture fund where they can make more money. so you have a little bit of like mercenaries and, and you might lose kind of your cheerleader internally.
 
Peter: The other problem too, with corporate venture arms is they are arm's length, which also means they're arm's length. So you get that investment from the corporate venture arm. That doesn't necessarily mean it's going to translate into sales or partnerships or anything else. On the corporate side. Right on the headquarter side, it might it in might help. But I know many cases where the corporate venture arm invested and there was no benefit beyond the capital to that company.
 
Peter: They never got back to the parent as a customer or a partner or anything. so, you know, those can be challenges and then, you know, but the flip side is if you take money from the parent company, they're going to have their own set of, you know, incentives, right? Like we are an investor in this one company and corporate invested not through a venture arm, but but through the parent company into the into the startup.
 
Peter: And there were a whole bunch of issues. But I think one of the issues was that the people that were managing that business unit that invested in the company were trying to manage their PNL. And so they had very different incentives when it came to this company, like they didn't they don't want to look bad in front of their bosses.
 
Peter: They didn't want to lose money. They wanted to like basically control things. They wanted to show that their panel was like in the strongest, best position and very sharp minded thinking and ended up like basically killing the company because of it. Right.
 
Jon: Because they wanted to show that they had made profitable investments and they cared more about the balance, the current balance sheet than the trajectory.
 
Peter: Yes. Yeah. And they cared more about like their what their bosses thought of them in that time period. You know what I mean? They were just like all of these things that had nothing to do with the ultimate success of the company. Right. So why do you feel that they got, like, tied into that? You wouldn't see that at a traditional venture fund, or at least not to the same extent.
 
Jon: From your perspective, why are there corporate venture funds? Is it just this corporation has too much money? They're trying to figure out how to diversify or they're trying to find to anoint, you know, strategic partners, Like what's what's in it for them?
 
Peter: You know, like playing pop psychology. It's a little bit I think it's people in the corporate world, they see the returns. Right. That can be had in the space. And they're like, hey, we want some of that, too. And like, hey, we're really smart about, you know, Internet software or, you know, whatever, like consumer products or health, you know, so what devices like we should be able to invest here.
 
Jon: But is there a strong strategic reason why a Fortune 500 would have a venture arm besides, hey, we can we can make profit here.
 
Peter: Well, and that's where I think what I'm saying is and I think what's happening as people look at this and like, hey, I want some of that sexiness, too. And then the way they justify it is by saying, hey, look, there's all the strategic value we could get. Right. Like, you know, maybe we're going to we're going to identify the next great product line for our business that will keep us, you know?
 
Jon: Okay, so what? Let's say they do really.
 
Peter: Cool, right? Like Google Ventures, Like we're going to invest in Android and then, you know, we're going to help that grow and then we're going to buy Android, right? And it's going to be a huge strategic initiative and it's going to help us identify, like these new things that someday we could acquire, we could roll in.
 
Jon: Why not just wait to acquire them? What's your perspective on that? Why would Google Ventures not say, hey, here's this this Android team, let's see where their what they're doing? Hey, you made it.
 
Peter: Because maybe they want a front row seat. Right. They want to keep tabs on it. They want to know what's going on.
 
Jon: How many of them are investing in like the top ten potential winners? Hey, we want our own operating system. Let's see who wins. Put 10 million into ten companies and see what happens. Then gobble.
 
Peter: Up. I mean, that's that's a good question. I don't I don't know. I think more what happens is that you have companies like Salesforce that want to do things to boost their overall ecosystem and support companies that are growing and and coming up through that. And so they'll create funds to do that. and they may back a whole bunch of companies that are all competitors with.
 
Jon: Simplicity.
 
Peter: Like for simplicity.
 
Jon: And so that was one of your companies.
 
Peter: Yeah, yeah, yeah, yeah.
 
Jon: This is all public, right? Yeah. Okay.
 
Peter: But, you know, Salesforce is invested in a bunch of other systems integrators similar to simplicity to help their ecosystem. Yeah, software ecosystem.
 
Jon: Because in Salesforce's case, for those who don't know, they require a lot of technical skill to onboard clients. Aren't you the self-serve platform? And so they're investing in the services side of the revenue, something that's less sexy, and they've decided to outsource that part of their business versus bringing it all in-house.
 
Peter: Yeah, but they also have invested in, you know, different apps for their app ecosystem to work on their their platform as well. So, you know, in that case, like is Salesforce going to buy those companies? I don't know. Probably not. But they definitely have an interest in supporting them and helping them grow because that adds to the overall ecosystem.
 
Peter: Okay.
 
Jon: Do terms on venture deals on corporate venture capital firm deals? Yeah. How do they compare to regular VC terms?
 
Peter: In general, they're better in terms of like valuation, but they can come with if you're not careful as the entrepreneur, they can come with a lot of hooks that can cause you problems. So one of the most common is first rider refusal, especially for like an acquisition. And the problem with that is that like, let's say, you know, like Apple comes in and invests in your company and they require first refusal and then Google comes and looks at your company and says, Hey, we think what you're doing is really interesting.
 
Peter: But if they know that Apple's already an investor and especially if they have a first refusal like Google's never going to make an offer in your business because they don't want to be what's called a stalking horse where basically, like you put in Google puts in a bid and Apple looks at that bid and immediately offers a dollar more and wins it.
 
Peter: Right. In which case Google's like, why am I going to waste the time? Right. So then what ends up happening is Google never even starts conversations. They never put in an offer. And then the company is left in a tough position where Apple is the only buyer and Apple can buy it for a song. Right. And so, like, that's one of the challenges.
 
Peter: Like, I think working with corporate venture capital funds makes a ton of sense because I think it can add really strong signaling, right? Like if you're in your space, if you have like the £800 gorilla, come in and validate what you're doing and say like, Hey, we've seen all the tech that's out there. We know this problem inside and out and like you guys are solving it the right way.
 
Peter: I think that's a huge validation point. So I think there's value there. I think the ability to potentially sell to them as a customer is huge. Right. And if I were a corporate venture fund like this idea of coming in, investing in a company and immediately turning them into a customer like is really attractive because it's almost like I can like pick the winners, right?
 
Peter: If I come in and I say, okay, we're going to put $1,000,000 in. But more importantly than that, I'm going to become a $10 million annual contract write to you. And that company can go from effectively like 0 to 10 million in revenue annually. Like you just derisked a massive amount for that business. So I think that's interesting to the extent you can get that.
 
Peter: And then, you know, hopefully the corporate venture fund is also helping like open up doors to other partners and they bring a lot of confidence that bring in other funds. So like, I think there's a lot of value there. My advice to most founders is if you get offers from a corporate venture fund, take them. But do your homework on them.
 
Peter: Go talk to other entrepreneurs that have taken their money and have ideally exited the business and get a feel for how those entrepreneurs felt about that, that fund or that corporate as an investor. What were they like to work with when times are good, when times are bad? Just the same diligence you do with any venture fund. But I think it's even more important with a corporate venture fund because they can have so many different incentives and then really like limit their exposure to your to your company, Right?
 
Peter: Like, don't don't let them invest too much. Don't agree to like big, you know, onerous terms like first right refusal or other things you may even limit, like access to information about the company. Right. So they don't get a party. They don't get observers, see like they get just standard information packets that everybody gets so that they don't have an advantage there that causes you problems and then ideally get more than one to participate.
 
Peter: So that like, you know, you're not beholden to just one at any given time. And like that can be really hard if you're an entrepreneur to like basically cut back a lot of money, especially if the corporate venture funds like no, we will invest and we'll invest a bunch, but we need all these rights. In my opinion, it's better to forego those rights and forego, well, forego the cash and not have to give up those rights than it is to take the money.
 
Peter: Yeah, but that's an easy thing for me to say, right?
 
Jon: I mean, it's tricky how many of the corporate venture funds are leading deals? If they're not leading, then it's easier to let someone else set the terms.
 
Peter: I think most corporate venture funds don't like to lead.
 
Jon: Like.
 
Peter: They would rather co-invest.
 
Jon: Okay.
 
Peter: Most of the ones I know and I've talked to over the years, occasionally they're willing to lead, but they don't really want to.
 
Jon: Okay, then if they're not leading, then you should be safer.
 
Peter: Yeah, you should be.
 
Jon: Because they'd be fallen on with the terms. Yeah. Okay. Well, I think that was a very powerful podcast. Yeah. I'm going to stay away from Microsoft Ventures. I, by the way, I have a friend who used to work at Microsoft Ventures. It might be interesting, too, to have him on the podcast the next time he's in Utah.
 
Peter: Yeah, let's do it.
 
Jon: All right. Well, thanks for watching you guys. Go to venture capital law firm if you want to learn more, you can like subscribe to all of our links there. So however you want to consume the podcast, they're all right there.
 
Peter: All right. Thanks for joining us.
 
Jon: All right. Thanks, guys. He's a.