I get a question periodically from emerging growth technology companies that are raising venture capital regarding corporate venture capital. Specifically, is corporate venture capital a good idea for their business? My answer, as it is with a lot of questions I get, is “it depends.”
There are several areas that I suggest companies explore in order to determine if a particular corporate venture capital group is right for them:
- Corporate venture capital in general does not have the same ultimate goal as a venture capital fund. While venture capital funds are ultimately measured by their financial returns to their venture capital investors, corporate venture capital groups generally have additional goals that are more aligned with their corporate parents (which seem to vary pretty dramatically from corporation to corporation). This is not necessarily a bad thing, but in general the differences in goals could cause issues, particularly with company exit strategies (i.e., will the corporate venture capital group consent to a sale to a competitor?). The key for expansion stage companies is to make sure that you fully understand the goals of the corporate venture capital group and make sure that you run through various scenarios with them (and with your legal advisers) to make sure that you will not be disadvantaged by their corporate goals (and, hopefully, will benefit from them!)
- The corporate venture capital groups have the potential to utilize the resources and relationships of their corporate parent to help the company. My sense is that all of the groups push this as a competitive advantage. There are specific instances of really significant help to expansion stage companies from their corporate venture capital investors and many instances of false promises. The key for expansion stage companies is that you know the details of what the corporation and the corporate venture capital group are committing to do for you and you make sure that it is valuable (as with any investor you take on, you will also want to diligence them and make sure that they have a history of meeting their commitments).
- The number of corporate venture capital groups seem to grow at certain points in the cycle (mostly the highly innovative points) and go away at other points in the cycle. The key for expansion stage companies is to get comfortable that this group and the individuals that you will be working with will be around for a long time…nothing is worse than to have new investors in a private equity investment that treat you and your company like a “step child.” A few groups, such as Intel Capital, have been around for a long time through many economic cycles and have a proven track record that you can diligence.
I tell expansion stage companies that getting an active venture capital investor is like getting married. It is a really important long term relationship and you need to make sure you have the right fit. Overall, some corporate venture capital groups are great investors for expansion stage companies and others are not good fits (venture capital companies that invest out of venture capital funds have similar variability). If you do your diligence, you will find the best fit, whether you end up with corporate venture capital, independent venture capital, or some combination of the two.