Corporate venture capital has a rotten reputation. And some of that is well-earned.
Corporate VC arms come and go, based on the CEO’s or CFO’s whims. The teams often lack experience making investments, and they typically aren’t compensated the same way “real” VCs are. They may promise entrepreneurs that they will help make introductions to customers, or initiate collaborations with divisions of their company, that don’t come together.
And at times when the enthusiasm about startups is high (remember 1999?), more companies jump into venture investing. We seem to be at one of those moments: in Q2 of 2013, the number of active corporate VC investors was up 40 percent from Q3 of 2011, according to CB Insights.
Nagraj Kashyap, managing director of Qualcomm Ventures, an arm of the San Diego wireless communications company, says that 2013 feels very different than 2000, when his company began making investments. “Balance sheets are healthier for corporates,” he says, “and I think today they’re not expecting to flip companies in a year and make lots of money. The main motivation for us is that investing in startups is one avenue for increasing our innovation lens, and that it will be a long-term good for the company.”
So how do you do corporate venture capital right? We talked to current and former investors at three of the most active corporate venture capital arms — Google, Intel, and Qualcomm — to understand where companies go off the rails, and how they set things up for success. We also spoke with a former investor at Motorola’s venture capital group, Kurt Estes, who now works with companies to set up venture arms at Sikich Investment Banking, and Dave Balter, who is running a new venture team that is part of Tesco, the world’s second-largest retailer. (See Balter’s video, above, where he talks about the company’s motivation.)
Their guidance falls into ten categories:
1. Reasons for doing it
“I think there’s an assumption that you can use startups as an extension of your own R&D,” says Lucy McQuilken, left, who spent nine years as a strategic investment manager at Intel Capital. “That’s a false premise. Corporate investors need to think of it more as an ecosystem play: if this set of companies I’m interested in fostering existed, would that create more markets for my products? Are these companies building something my customers demand that I can’t make?”
But Kurt Estes, who spent five years at Motorola Ventures, says that making investments in technologies or businesses that the company isn’t current pursuing internally can give it a window into how those areas are developing. “You may not want to invest in something internally, but this is a way to hedge your bets,” he says.
At Qualcomm Ventures, Kashyap seconds that: “You obviously do internal research, but you want to balance that with young entrepreneurs who are thinking about where the next innovations are coming from. Meeting with startups is probably the best way to learn about what’s going to come in the next three to five years. They’re the ones innovating the most and the fastest.”
Corporate VC can sometimes give the investor “preferential treatment on licensing their product, early access to it, or maybe the portfolio company is modifying the product in a way that benefits you, because you’re working together to get their product to the market through your channels,” Estes says. It can also be an early look at companies that might be future acquisition targets, of course.
Access to talent is another solid reason to invest, McQuilken says. “A lot of talent is leaving MBA programs and engineering programs and gravitating to startups, not to big companies. So if you’re going to be in the global talent market, you need to pay attention to startups. These are your future employees,” she says, perhaps via an acquisition.
Google Ventures is unique in that most of its motivation is financial return, rather than a strategic fit with any of the company’s current businesses. Its portfolio includes coffee roasters, drug development firms, and makers of biofuels — along with many software and Internet companies.
At Tesco’s dunnhumby division, which began making investments this year, Balter says that “We believe we’re doing this to strategically evolve the business, to help open our eyes to new opportunities.”
2. Composition of the team — and compensation
It’s hard to transform line-of-business executives into venture capitalists overnight; the business takes years to learn. “Having some people who’ve raised money as entrepreneurs, or who have been part of a VC firm in the past is pretty important,” says McQuilken. And, says Estes, “You can’t take your M&A folks and expect them to do venture investing. They’re two different things.”
“Doing well in venture depends on how many good deals you see, and you don’t get that without connections, and people who have really broad networks,” he adds. That isn’t typically the case with long-time company employees who suddenly get assigned to the venture group.
At Qualcomm, a few of the team members had prior venture capital experience, says Kashyap, left, but he says that the majority are newcomers to Qualcomm. “All of them have technical degrees, and they come from a variety of industries,” including management consulting, investment banking, and tech. His group, created in 2000, has almost 30 employees.
Rich Miner of Google Ventures says that people on the venture team need to get some financial upside if their investments do well, as opposed to just being paid a salary. Otherwise, it’s hard to attract top talent. “I do get a salary, but all of the upside is based on the success of our portfolio,” he says, noting that his incentives aren’t pegged to the ups or downs of Google’s own stock. “Most strategic investment arms are investing for strategic reasons, to help the parent company,” Miner says. But the problem there is “they worry, does this investment impact or threaten an existing business we have. They wind up thinking more about the parent company than building a great portfolio.”
But giving corporate investors the same kind of profit potential that outside VCs have, Estes says, may be politically difficult. “No way a company wants to have a managing partner of their VC group who might make more than the CEO,” he says.
3. Sourcing potential deals
Traditional venture capital firms build networks of entrepreneurs and “friends of the firm” who help alert them to promising new companies. Large companies, Balter believes, can use employees to create that same kind of radar system. “We’re getting about one pointer every day to interesting startups from our employees,” he says. “These are 2000 people around the world who have their ears to the ground.”
Balter also says that he is creating connections to “every accelerator program and incubator, creating relationships with venture capital firms and angel investors, and letting them know that we want to share deals with them that relate to commerce and the future of retail.”
Qualcomm casts a wide net in looking for potential deals, says Kashyap. “We operate in seven different geographies: the US, Europe, China, India, Israel, Korea, and Brazil. We have investment professionals on the ground in all of those regions, because they’re strategically important to us. They’re either big markets, or they’re where our customers are, or they are technology hubs. And one thing we can do in those regions when we see innovations that are interesting is we can pass them along to Qualcomm headquarters,” serving as a sort of supplemental radar, he says.
4. Due diligence
Venture capital, says Estes, “is fairly lemming-like. When the big name VCs come in, everyone else jumps in, without doing as much due diligence as they should. But that doesn’t mean it is a blockbuster idea. You really have to do your own evaluation in a vacuum.”
5. Creating exposure and opportunities to learn
Swapping intelligence about markets, customer needs, and emerging technologies can benefit both company employees and startup teams. But it’s “an incredibly challenging problem” to figure out the best ways to connect portfolio companies to the right people and divisions of a large company, says McQuilken. Not to mention get time and attention from busy line executives. Intel created quarterly events where ten startups would offer demos and answer questions for company executives. “Someone would say, ‘Hey, I could really use that.’ Then, you get more engagement from groups within the company. But you want to do those kinds of events when there’s some sense of what the product is going to be, how it’s going to work and be priced, as opposed to at the earliest stage of the startup’s life.”
Qualcomm Ventures hosts an annual CEO Summit, which brings together founders of its portfolio companies, Qualcomm senior executives, and Qualcomm business partners. “We do some matchmaking there,” Kashyap says. The company’s internal IT department also helps to support pilot tests of new enterprise-focused technologies with small groups Qualcomm employees.
Balter says his plan is to bring startup founders into dunnhumby, a customer and data analytics business, for “lunch and learns.” “We’re putting constructs in place where individual dunnhumby managers meet one-on-one with the founder, and start a dialogue. You want to engage first, and then find ways to work together.”
6. Acknowledging the politics
In big companies, “there is never an absence of politics,” Estes says, which can sometimes make it tough to invest in startups that seem as if they will compete with an existing offering, or something new being developed internally. “You always have cases where a business unit is worried about something that they think would undercut them in some way,” he says. “Most of the time, we’d position it as a hedging bet” — the startup might be using a different technology, or might be further along than Motorola — “but in some cases, it might be a third-rail kind of issue, and you had to avoid it.”
7. How the corporation can help portfolio companies
Promising startups often have the option of taking money from numerous investors. So corporate VC groups need to offer clear and concrete things that can help companies build momentum in their market. It could be access to expensive infrastructure, introductions to prospective customers, or help getting press.
Google Ventures, founded in 2009, may be the most aggressive in trying to demonstrate how it can help portfolio companies. There’s a seven-person design studio that can assist with the design of websites or mobile apps. “They work with our companies to whiteboard ideas, debug problems, create great user interfaces,” says Miner, left. There’s also a public relations group that helps companies get ink. “These are people from Twitter and Google who have helped launch new products and brought companies public,” he says. A team of sourcers help startups fill key roles. And every week, Google Ventures’ Startup Lab runs live events for its companies, on topics like workspace design and goal-setting. There’s also a core technical team that both helps Google Ventures conduct due diligence on prospective investments, but can also advise companies on “issues of scaling and security and up-time,” Miner says.
Global corporations can help startups think about entering non-US markets in ways that traditional VC firms can’t, says McQuilken. “Multi-national companies are uniquely positioned to help startups understand foreign markets, and establish relationships there.”
As a major advertiser, Intel made an introduction to its ad agency for several startups working on new online advertising technologies. “The agency helped get them in front of Coca-Cola and these other huge brands,” McQuilken says.
8. Financial returns matter
While learning about new markets or helping create an ecosystem are nice reasons to invest, positive financial returns are a political necessity for the long-term survival of a VC initiative. “If you lose money doing it, it won’t last long,” says McQuilken. “There’s always some part of the organization that will say, ‘What are we doing that for?'”
Balter acknowledges that “in five years, someone will come with a sharp pencil and want to know what came out of this.”
9. Using the right yardstick
In the world of traditional venture capital, the limited partners who supply the money to VC firms “know that there are business cycles,” says McQuilken. “They look at the funds they have invested in and compare them based on the year the money was put to work. For a given year, four percent might be a good return. Corporates need to do that, too — have a way of measuring themselves against other investors in that same timeframe. You can’t beat yourself up if you’re just in a down business cycle.”
10. Sticking with it
Traditional venture investors know it can take a decade or more for some investments to pay off, and many corporate investing arms get evaluated — and sometimes killed — well before that point. Investors who get in and out with up markets and down markets don’t tend to do well financially, Miner says, “and the entrepreneurs need someone who is there for the distance. A lot of corporate VCs don’t have the stamina [to support a startup over the long haul], and that’s where they get a bad reputation.”
Many corporations will write a couple checks to startups when they see an obvious strategic benefit, or the chance to learn about an interesting emerging market. But very few will create enduring corporate venture capital groups that can help the enterprise learn about, adjust to, and profit from big shifts in their industries. “You need senior management that is committed to building a top-tier venture fund, and focused on hiring and retaining the best people,” says Miner.
Today, the most active corporate venture groups represent companies in tech, life sciences, healthcare, media, and financial services. Could that change over time? “I think other industries will step up their pace of investing once they see more change,” says Kashyap. “When you have innovation at a very fast pace in your industry, that creates a good opportunity for venture investing.”
More: Here’s an on-stage interview I conducted at a July 2013 conference with Miner. We cover his career; how Google Ventures is set up (it has a staggering budget of $300 million a year); and what kinds of investments he looks for.