Thoughts on Corporate Venture Capital

Was it almost a year ago that I wrote about Google getting into corporate VC? Well, here they come.

Reaction among the blogs I follow has been negative. Fred Wilson has the most cogent take, as usual.

I worked in corporate venture capital for years. I was skeptical when I was interviewing for the job so I looked into the academic literature on CVC performance. The research basically showed that corporate venture capital has historically underperformed institutional venture capital, but not in all cases. (Josh Lerner's and Paul Gomper's writings, for instance.) After some thought, I asked the corporate management two questions:

1. Would I be told to invest when the market was frothy and told to sell when the market was panicky? and
2. Could I invest in businesses that competed with or disrupted my employer's core business?
   

They answered No and Yes and I took the job.

Number one is the classic corporate "buy high, sell low." Corporations tend to set up venture capital arms when they see high returns from institutional VCs. But this means, of course, that the investments garnering such high returns were made years ago and that the corporation is late to the party. And then when times turn hard, like in 2001 - 2003, all the corporations shut down their venture arms and sell the investments at fire-sale prices. We see this every cycle. It's understandable, but just dumb.

Number two is harder. The potential edge a corporate venture capitalist has over an institutional venture capitalist is understanding the market and customer better. But the CVC only understands the market and customer better if they are investing in the business that the corporation is already in. CVCs need to invest in companies that disrupt their parent's business. This is the only way to get returns comparable to institional VCs. But the operational units of the corporation will kick and scream to prevent that. Convincing upper management that if you don't fund the disruptive technology, someone else will is always tough.

Corporate VCs have other advantages over institutional VCs: the partners don't have to spend half their time raising the next fund, they are not commited to investing a specific amount of money, they are not tied to a ten year fund life (and thus a three-five year investment holding period), there is large and immediate qualified deal flow (especially for post-revenue companies), etc. And they have some weaknesses: if the management is successful, they leave to start their own fund, the corporate parent has a different agenda than the managers, etc.

In general, though, I know that CVC can work if set up correctly. I also know (from watching my competitors back then) that it usually isn't.