Not every VC believes in corporate venture capital. Well-known detractor Fred Wilson, co-founder of Union Square Ventures, recently said that startups that take money from CVCs are "doing business with the devil" and that corporates that invest in startups are wasting capital.
Despite Wilson's track record, which includes backing Etsy, Tumblr, and Twitter in their early days, his peers at VC firms aren't paying much heed — top-tier venture firms are co-investing with CVCs at a brisk pace.
Take Andreessen Horowitz. Ranked fifth among VC firms by competing venture capitalists, a16z, as it's known, ranks third among firms that co-invest with corporates with 21 percent of its deals from 2010-2015 syndicated through corporate VC outfits. Kleiner Perkins Caulfield & Byers (KPCB) sourced 29 percent of its deals this way over the same period, CB Insights reports.
Signs point to the bond between VCs and CVCs growing tighter—good news for corporate innovation teams looking to start funds of their own.
Different Agendas, Shared Outcome
If you're looking to be a corporate investor, there are plenty of partners to choose from. KPCB and a16z are just two of the private VC firms investing alongside CVCs. New Enterprise Associates, SV Angel, First Round Capital, and Khosla Ventures round out the top six most-engaged private venture firms that engage with corporates, according to CB Insights data. All of them can credit to CVC syndicates at least 18 percent of their deal flow from 2010-2015.
Overall CVC activity is also on the rise. According to CB Insights's 2015 Global Corporate Venture Capital Year In Review report, corporate venture firms participated in 19.3 percent of the 6,743 venture-backed financing rounds in 2015, compared to a participation rate of just 16.5 percent in 2013. CVC's share of venture-backed financings has remained at 18 percent or above since the first quarter of 2014.
Former Intel Capital executive Lisa Lambert says the increasing sense of shared destiny that's reflected in the numbers is no accident; VCs and CVCs have always had a symbiotic need for each other.
"At Intel, our expectation was that our VC partners would look at our deals and participate when it made sense for them. Their expectation was that we would do our part to help scale the commercial aspect of the companies we'd co-invest in. We would be strategic for them," says Lambert, now a Managing Partner at The Westly Group, which specializes in cleantech investments.
She also sits on the board of the National Venture Capital Association (NVCA) and will chair a conference on best practices in CVC-VC partnerships on October 28, put on by the trade group in association with the publishers of Global Corporate Venturing.
Lambert says the goal "is to facilitate more collaboration and cooperation" between corporates and outside VC firms for the benefit of all, especially now that unicorn valuations are attracting an unprecedented number of new entrants to the CVC game.
CVCs and the Rise of the Unicorns
Salesforce Ventures leads the list of corporate unicorn hunters, followed by GV (formerly Google Ventures), Comcast Ventures, Intel Capital, and In-Q-Tel, a private firm that invests on behalf of the U.S. Central Intelligence Agency (CIA). To look at the numbers is to see a lot of deep-pocketed hopefuls with dreams of joining this elite list. In 2015, 85 new CVC units made their first investment.
Twitter Ventures made three investments last year, including a contribution to the Series A round for VenueNext, a RocketSpace member. Workday Ventures has made six investments since its May 2015 debut, including seed-stage bets on Unbabel and Scoop Technologies. Next comes the hard part: Helping these upstarts mature their operations enough to warrant the follow-on funding needed to grow and reach a private-market unicorn valuation or an IPO—or both. (Uber, king of the unicorns, has raised nearly $9 billion over 12 funding rounds.)
"You can't really expect a company to scale if you can't get sequential funding," Lambert says. "That means you really do have to have relationships with other venture capital firms—corporate or private—so that founders can be sure that the money spigot isn't turned off just as growth is getting underway."
Intel Capital provides a model for all CVC firms in this respect with its syndicate of more than 30 dealmakers worldwide. Each one represents a potential co-investor for new deals. "We sought out fellow travelers," Lambert says, "so that if we had a Big Data deal we had contracts in place that would allow us to co-invest and share due diligence."
Many private VC firms have similar syndicates. Union Square Ventures counts a16z as a syndicate partner. Accel Partners, KPCB, and Intel Capital are often found co-investing alongside Sequoia Capital. Lambert says that corporates serious about competing for deals need to copy these leaders and develop syndicates of their own.
An Expert's View of How to Approach CVC
CVCs that take the time to build a big network can be hugely successful and deliver a lot of value to founders, Lambert says.
For example, at the time of its creation, Google Ventures already had relationships with plenty of young companies that were using its apps to get work done. Those relationships became a feeder for the firm, which has since become one of the industry standards for corporate VC.
Most companies won't have access to that kind of deal flow on day one. For them, Lambert says partnering is a better option.
How to do that? Instead of committing hundreds of millions to set up a fund, hire investors, and source deal flow, corporates can instead allocate some of their long-term capital to venture funds that specialize in the markets in which they're most interested.
Lamber says smart dealmakers will sometimes commit more funds to get access to partners, deal flow, or to get an early look at disruptive breakthroughs in the making.
Think of it like a Hollywood first-look arrangement whereby a studio purchases the right to have first crack at acquiring scripts from a hot writer—the difference here being that the "deal" buys intelligence about what's happening in the market, and at a fraction of the cost of setting up a CVC fund.
"The easiest way to learn the art of corporate venture capital is to invest with a good VC," Lambert says. "It is the path that is least difficult, least costly, and it gets you access to returns that you'd otherwise have to earn on your own. To me, it's a no-brainer."
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