What Can Go Wrong with Corporate Venture Capital Initiatives

By Scott Kirsner |  November 29, 2019

Hunter Ashmore is co-founder of IndustrialML, a Boston-based enterprise software company. He was previously an investment principal at Boeing’s HorizonX Ventures and a venture investment consultant to GE Ventures. Prior to those roles, he was director of business development at a venture-backed startup.

In an interview with InnoLead, he laid out nine things that can go wrong when companies decide to set up a corporate venture capital group. We spoke a few weeks after GE Ventures announced that it was looking to sell its entire portfolio of more than 100 startup investments. 

1. If you’re going to create a venture fund, you need to go all in. You need to put the time in upfront to figure out what the plan is. Don’t figure it out after you launch the venture arm. 

2. A corporate investor is typically at a company with a name that people know. It was incredible being at GE or Boeing making investments, because anyone would pick up the phone. The moment you make a few notable investments, your inbox blows up. At Boeing, for instance, any startup that has something that flies called you for investment. But you end up with a lot more noise on the inbound side than you would as a traditional venture capitalist. You need to be prepared to filter through it intelligently. 

3. But you do want to be somewhat visible. You want to have a website that can be found when someone is searching. You want contact info on it, and you want to have a few profiles on LinkedIn explaining who’s involved. …Doing corporate venture in an under-the-radar way makes it harder. 

4. It’s easy to step on everyone’s toes and irritate the company’s subject matter experts by leaving them out of an investment that is in their domain. That said, there is a difference between being inclusive versus appeasing everyone. The latter is unrealistic to attain. There’s a trade-off you have to make between autonomy and corporate politics. You need a clear understanding of how the organization works, and who the right people are to have involved in screening investments. 

5. That doesn’t mean that you want the business units driving the investments. Yes, it can be good when a business unit brings you a startup that they’re already working with, and it’s relevant to what they’re doing. The best investments, often, are startups [whose product is] going to end up in one of your products, or influencing a product or market. But you can end up with the tail wagging the dog—you have to be careful to avoid thinking something is a good deal just because the business unit people wanted to do it. A deal may look strategic, but that doesn’t necessarily mean it’s going to be beneficial. … 

6. You need the right mix of talent for a successful corporate venture team. Some companies have gotten it right, more by accident than by planning. You don’t want 90 percent company insiders, or 90 percent outsiders. You don’t want one voice or the other to be crushed. You need people with an understanding of how the organization works, and who the right people are to be engaging with. But you need enough external people who have done venture investments before. …

7. Speed of action is often an issue. Traditional and corporate VCs often take longer to respond than startups would prefer. I will say that corporate VCs take longer when they need to determine strategic fit. The time required for this process is almost always underestimated by startups. It can take months, while financial VCs do not need this before they will issue a term sheet. The “soft no” and the closely related “death by a thousand follow-up questions” are the most frustrating things founders encounter when they are dealing with corporate VCs. 

8. There is a tension between the corporate VC as an investor and the interests of the parent company. By that, I meant the corporate VC may have the best intentions when working with a startup, but they are still representatives of the company. One way this manifests is in the deal terms negotiation. Many corporate VCs have legal teams that push for conservative or protective terms. This is not because they are being predatory, but because it is their responsibility to protect the parent company. For the traditional VC firm, these terms can range from insignificant to, at worst, in conflict with their interests. The classic example is the right-of-first-refusal, a term that VCs dislike because it could present a hurdle to a potential exit through acquisition. To the corporate, they are often asking for this out of concern that a competitor would be able to snatch a strategic capability from under their noses. Even if an amicable agreement is reached on terms like these, it can drive up legal costs for everyone involved… Getting corporate legal and internal risk management teams on the same page early with what are considered common VC deal terms in the market will help avoid these headaches.

9. Whatever a company considers its core product, the company is going to protect that. It’s a little like an avocado. The moment it’s overripe, everything outside the core is subject to change, but the core remains. It’s not just corporate management changing, or the CEO leaving. It’s the nature of innovation cycles in corporates. Maybe you realize that working with the types of startups you were investing in wasn’t working, so you de-prioritize it. The investments may have mixed results, and people start questioning where it’s going to go. 

Corporates come at venture capital with a lot of hubris: “We’re an innovative company. We ought to be able to do this.” And you might end up with a very strong portfolio of investments, a cool list of companies—buy they’re still going to have eight to 10 years before an exit occurs. That’s a long time inside most organizations.