Corporate venture investment hit a 15 year high in 2015, both in terms of deal participation and dollars deployed. CVCs deployed over $7.7B into 930 deals– participating in 1 of every 5 VC deals. With this dynamic environment, we know it’s critical for corporates and traditional VCs to connect and communicate to foster a collaborative environment. (View our latest corporate venture data.)
As corporate venture investors increasingly lead rounds that influence the development of next-gen industries from the blockchain to cognitive computing, how can CVCs find new and better ways measure the strategic value they bring to startups?
This week, NVCA hosted one of our quarterly Corporate Venture Strategy Sessions to bring together industry leaders to tackle the issues that matter most to corporate and traditional VCs. We had a great group of speakers to discuss how corporate VCs measure and communicate strategic value. Led by experienced corporate venture investor Vic Pascucci, Thejo Kote CEO of Automatic Labs, Marc Weiser of RPM Ventures, Mary-Kay James of DuPont Ventures and Tony Chao of Applied Ventures, led this interactive Strategy Session focused on measuring strategic value.
Why is it important for corporate investors to define strategic value?
Tony Chao of Applied Ventures began the discussion by highlighting that strategic value does not remain static, but is continually changing, making it difficult to pin down a definition.
“Every fund started for some strategic reason, but strategic definition changes over time with different management.“
According to Marc Weiser of RPM Ventures, the importance of defining strategic value includes showing what you are trying to accomplish and sending the right signals to the market.
“When you take money from strategics, the first thing you need to understand is what the commercial relationship looks like. Capital without a commercial relationship makes no sense for a startup because without that relationship [the capital] looks like a financial investment. The challenge startups face is defending why they took that strategic money. “
“If [corporate venture firms] aren’t getting in the market to buy a company when it could be acquired, does that send a bad signal to the market? What we always council our companies to do is to find corporate investors who aren’t looking to be a buyer, but instead to looking for a corporate investor whose business will be enhanced by the partnership.”
Who are the different audiences CVCs need to think about?
Corporate venture investors should consider implementing proactive communications strategies to their investment committees, syndicate partners, internal finance teams, C-suite, and the startup’s management team.
Mary-Kay James of DuPont Ventures pointed out, “I look at venture groups within a corporation like they are their startups themselves. There are the stakeholders, which in this case are financial backers; the customers, which are individual businesses looking for technology access; and finally the VC community at large, which is a big stakeholder in corporate venturing. Each group is critical and requires customized attention.”
And, communication across these audiences is a key component for success.
“Be proactive about communications. Get on their calendars. By the time your CEO is asking what value you bring, it’s often too late,” advised Tony Chao of Applied Ventures.
What are qualitative and quantitative ways to measure strategic value?
“At DuPont, we started measuring by deal flow per person. We wanted each person in the group to review at least 100 deals per year. With this strategy, we saw a lot of deals but didn’t do any investing. We shifted toward measuring the number of investments. Each member of the team had to do at least one deal per year. We now use a metric we call the “open innovation option,” where each individual is responsible for bringing at least three relevant and viable open innovation option proposals to the business unit per year. We feel good about it now, but we may change this metric in the future,” said Mary-Kay.
What are the advantages of corporate VCs?
Thejo Kote, CEO and Founder of Automatic has worked with both corporate and institutional VCs. Thejo said when entrepreneurs are evaluating investors, it is important to assess the alignment of the strategic goals of each party.
“For an entrepreneur, the value of the corporate VC commercial relationship is critically important. In addition, [the element] I always look for when working with corporate VCs is their ability to provide distribution. The opportunity to align the funding strategy of a company with its distribution strategy, is always a very attractive option. This relationship results in capital, built in with distribution and growth over time. That is a good justification for using corporate VC,” said Thejo.
Marc Weiser followed up to offer his perspective on three main advantages of partnering with corporate venture group.
“Market validation from a customer perspective is one advantage. Having large corporate investors [signal to] customers that you have gone through some sort of diligence that an enterprise would expect out of a company they would work with. Corporate VC also provides competitive market validation. When a large company is investing in small start-up it will have a positive effect on the way the rest of market views the startup with respect to competition.
“Second is distribution. From our perspective, leveraging distribution is when a corporate venture fund invests in a company and helps that company distribute their product to other customers. Leveraging distribution is one of most powerful things you can do as startup, because it allows you quickly bring down the cost of acquisition. When your corporate investor can provide that advantage it is of huge value.
“Finally there is great value in the market perspective that corporate venture can provide. [Corporate VC’s] often have different insights than traditional investors, because they know the customers and suppliers.”
2015 saw a rise in CVC investing, we’ve seen similar levels of activity in 2008 and 2000. What are the key differences in CVCs from now and past years?
Corporate venture has evolved to include greater dialogue and collaboration between startup and corporate venture firms.
Vic Pascucci shared, “Corporate venture involves understanding how to bridge the startup world with the corporate world. Helping both sides navigate and understand the market is a key value add.”
For more valuable insight from leaders across the entrepreneurial ecosystem and to listen to the recorded Strategy Session, visit our Corporate Venture Connection website.