Globally, corporate involvement in startups is on the rise, especially in the form of corporate venture capital (CVC). However, for many years, CVC has been in the bad books of a very highly-regarded venture capitalist. Why is this so? In addition, besides investment, are there any other ways that startups and corporates can work together, before both parties are ready for an acquisition deal?
Fred Wilson’s investment success has been very much admired, and his thinking process and opinions are closely followed by many industry players across the world. In 2008, when Google announced its intention to set up a VC arm, Wilson, in his blog, pointed out a few things:
- Corporations do not have the best talents when it comes to startup investment
- Corporate investors do not share the same financial objective with entrepreneurs, because corporate are already rich and gain from successful startup investment would not add much value.
- Corporate venture investment is not always healthy because corporations may have other motives for doing venture capital, and those motives are usually at odds with the vision of founders, managers and financial investors.
In 2013, Wilson appeared on PandoDaily’s Fireside Chat and expressed that “he would never ever, ever, ever, ever going work with CVC”. Later in his blog, Wilson explained further that there are two kinds of corporate investments in startups; passive corporate VC arms and active strategic investments. He wrote:
“The former is made by well established investment groups like Google Ventures, Intel Ventures, SAP Ventures, Comcast Ventures, and many many more. For the most part, they don’t “suck”. They can be a good source of capital for your company, they can be supportive investors who follow on when the rest of the syndicate does, and they generally have good reputations, including with me.
The latter is when a company sees a business they want to get closer to, they take a big stake, a board seat, and they make a ton of promises about how much they are going to help the company. These type of investments and relationships have almost universally “sucked” for our portfolio companies. The corporate strategic investor’s objectives are generally at odds with the objectives of the entrepreneur, the company, and the financial investors. I strongly advise against entering into these kinds of relationships.”
In 2016, at the CB Insights Future of Fintech Conference, Wilson told the crowd that corporate investment in startups makes no sense, and that if corporation desires the asset, they should buy them, not investing in them. He even went on to say that for startups working with corporates is like “they are doing business with the devil”.
It is Inevitable. Corporations and Startups are Working Together
Wilson’s strong opinions on CVC has received several rebuttals over the years for the fact that CVC’s share in deals is steadily increasing, especially in Asia (34% of total deals in Q2’ 2016).
In 2013, James Riney (@james_riney), a principal at DeNA Venture Capital Group then, wrote a piece titled “Corporate Venture Capital is King in Japan”. It was published by TechCrunch. Riney is now the Head of 500 Startups’s US$30 million Japan fund, and recently listed on Forbes’ 30 Under 30 Asia.
In a nutshell, a big part of the debates has been centred around CVC, otherwise it is about acquisition. However, there are more ways corporations and startups can work together — and win together.
One of Wilson’s biggest concern is that corporate investors’ objectives are generally at odds with the objectives of the entrepreneurs, thus causing tension and unhealthy working relationships. Perhaps, we have not considered all options.
Clearing Corporations’ “Motives”
Nesta, an innovation charity in the United Kingdom, in collaboration with Founders Intelligence and Startup Europe Partnership, released a comprehensive guide to successful corporate startup collaborations themed “Winning Together”.
In the report, it says that corporate-startup collaboration can be a win-win deal because:
“…working with startups allows corporates to develop and test new technologies and service solutions with less costs and risk to their core operations. Startups are also a source of fresh talent and ideas that can help rejuvenate corporate cultures. Likewise, large firms have numerous advantages for startups: market knowledge and experience, economies of scale, established networks and brand power along with other considerable resources.”
Brent Hoberman, co–founder of lastminute.com and made.com, CEO Founders Forum wrote in his foreword that “many corporates immediately think of investment and acquisition when they think of engaging with startups, but the case studies below show the wealth of options available.”
The report outlines a clear guide for corporate executives and managers while approaching corporate-startup collaboration, from designing your programmes to measuring your programmes and finally implementing your programme.
Step one, like starting any projects, is about defining objectives. “What is the objective to work with startups and what do the company hope to achieve?” The four common reasons for corporates to set up startup programmes stated in the report are: rejuvenating corporate culture, innovating big brands, solving business problems and expanding into future markets.
Next is about choosing your programme. The report summarised the most common programme types and developed a framework (see below) that indicates which programmes tend to be most suitable to achieve the four key objectives.
Note that apart from investment and acquisition, there are four other possible ways that corporates can work with entrepreneurs, depending on the companies’ objectives.
Once the programme is selected, then corporations and startups can decide what kind of resources to be shared. Resources include a wide range of things, but the most common are:
- Cash – to pay for events, programme costs, investments etc.
- Employee time – from the executive level to employees who make engagement decisions,provide mentoring in programmes and product feedback, or attend events
- Products – including technologies or services that are provided for free or at a reduced price through programmes
- Intangible assets – specific strengths such as market access, customer networks
The report went on to provide more insights and some useful case studies. You may read the report here.
To sum it all, CVC may not at all be a bad thing if the objectives are set right from the very beginning, and there are certainly other more effective and efficient ways that startups and corporates can consider. However, each business deal and working relationship is unique, thus it require special attention. There is no straight answer, but only a general guide.