Corporate investors have a more complicated role to navigate than financial VCs. But these 5 strategies can help smooth the job.
People in corporate venturing will overwhelmingly say that they have the harder job compared to their peers in financial venture capital.
Recent GCV polls back up this sentiment, with more than 70% saying CVC teams have the harder role (though the results may be biased because our audience are mainly people working in CVC).
There are, however, a number of good reasons for this. Where financial VCs just need to manage their limited partners, corporate investors typically have to handle multiple internal stakeholders at their parent corporation — from the chief executive and chief finance officer through to heads of individual business units. And where financial VCs have one single goal — to invest in startups that end up creating great returns — their corporate counterparts have to balance multiple goals with their investment strategy, finding investment targets that not only perform well, but which are also a strategic fit with the parent company.
How can CVC professionals navigate this successfully? In our webinar: Who has the harder job – VC or CVC? we shared tips from two investors who have been in both financial and corporate VC roles: Heriberto Diarte, founder of SE Ventures, Schneider Electric’s corporate investment arm, who recently moved to become partner at financial VC Quantum Innovation Fund, and Lisa Suennen, who led the healthcare fund at GE Ventures, before going on to found the investment fund for the American Heart Association before returning to work in and advise a number of financial VC firms.
Here are five takeaways:
1. Expect to spend a lot of time managing corporate stakeholders and their expectations.
It can be a big time-suck communicating with all the different stakeholders in a corporate setting, so you should prepare for that. Diarte says that in the past few years a SE Ventures, he spent 50% of his time managing internal stakeholders.
The more successful the unit became at making money, the more attention it received from the corporate parent and the more questions Diarte had to field from internal stakeholders. Now that he is managing a financial VC, he says he feels “liberated” as he can spend most of his time working with startups, a role he enjoys the most.
2. A change of CEO can kill your investment unit no matter what you do. But don’t give them extra ammunition.
Working at a CVC is a tenuous position because of the risk the unit will be dissolved as a result of a CEO change. This is what happened to GE Ventures, the corporate venture arm of General Electric. Suennen says the venture arm was “killed by a management change and change of financial fortunes of the company” despite the unit performing well.
There is little that CVC teams can do about CEO changes. But they can “give it a little more life” by structuring it as a separate independent fund with legally binding commitments, says Suennen.
CVCs can also make sure to manage corporate expectations of their returns and deliver on those, to dampen any potential cull. “You cannot lose money,” says Diarte. “If you start losing money, if you’re in that 50% that returns less than capital, eventually they’re going to shut you off.”
This is the reason that it is important to set expectations when results don’t turn out so well. Diarte says you need to be honest with managers about the portion of failures you will have and how long it will take for a successful investment. “For the first four or five years, I’m going to give you only bad news, because we invest in 100 companies in year one,” says Diarte of his strategy. “And then by year three, you know, half of them have died. And then only in year five, seven, you start getting the good news of the winners.”
3. Paying carried interest is important but may be overrated.
It can be hard for CVCs to attract the best talent because they don’t tend to pay carried interest – a share of the profits paid to general partners – as financial venture capital funds do. Structuring CVCs as independent units can enable them to pay carry. “All CVC should have carry,” says Diarte, adding it is the best way to attract experienced investors who will make the best investments.
But carry is also difficult to achieve even at financial VCs where it is a common practice of compensation, making it overrated in some people’s eyes. “The ability of most financial venture funds to deliver meaningful carry to their partners and people is less than people may realise most of the time,” says Suennen.
4. Keep the CFO away from the investment committee.
Having an investment committee to approve the investments a CVC unit wants to make is standard practice — and it is important to get the right people in this group. Diarte advises choosing corporate leaders who are willing to take risks and can communicate their decisions well. Avoid having people on the committee who do not understand venture, or who are financial folks who question every single cheque, especially for early-stage companies. “Don’t choose financial people, choose the CTO [chief technology officer] or somebody that is more technology driven,” says Diarte.
It is also important to have an investment committee that has autonomy to make decisions. Otherwise, it can take too long to make investments because CVCs are constantly coming into conflict with operations at the corporate parent level, says Suennen. She also advises bringing an outsider onto the investment committee who is not affiliated with the fund or the parent but who understands venture capital. They can help “moderate the discussion” by taking a pragmatic approach to investment decisions.
5. Be clear with startups on what you can deliver as a CVC.
Corporate venturing units can find it harder to attract startups because of their affiliation with the corporate parent. Diarte says SE Ventures often missed out on early-stage investments because the startups didn’t want to be prevented from selling to the parent’s competitors. “We lost some deals because they didn’t want the SE Ventures name,” he says.
Other times, however, a corporate investor can sell their strategic value. Diarte says that he was able to use the corporate brand at SE Ventures to persuade startups that the unit could help them grow by working with them to bring in revenue.
But it is important to be clear with startups on what the corporate can and can’t offer. Not every CVC unit is seeking to invest in companies that they will immediately partner with. GE Ventures didn’t do this when Suennen was with the unit — investments were in startups working on technologies far ahead of anything that GE would be able to immediately use. If startups had come into this relationship expecting a commercial deal, they would have been disappointed. It is important to communicate that.
Diarte says that, in the long term, it is harder to work in financial venture capital because it is more difficult to deliver financial returns that are better than peers. And today’s economic downturn is making conditions even harder. “I have intelligence in the market that even VC firms are going to be laying off people,” he says.
In the end, choosing to work at a VC or CVC should depend on what kind of roles you enjoy the most. “Neither type of venture fund is stable and secure. They both have their risks, they both have their dramas, and they both have their greatness,” says Suennen.