US trade body sets the question

To paraphrase one venture capitalist at the US’s National Venture Capital Association (NVCA’s) board meeting at the start of the month: "What are corporate venturing groups doing here?"

As ever, understanding the questioner and why it was asked is more interesting than the answer that can be given to the question itself.

In this case, the question at the board meeting at law firm DLA Piper’s office in Palo Alto where corporate venturing was a topic for discussion for the first time was a reflection of ignorance.

Given the NVCA increased its corporate venturing membership by double-figures last year while its independent brethren shrank by a greater number it was only a matter of time before the other investor types became a valid topic at its main board rather than just within a sub-committee.

Mark Heesen, president of the NVCA, has talked himself until nearly blue in the face about the troubles facing VCs in raising new commitments by institutional (ie pension, life and other financial service intermediaries) limited partners and the enormous overall of poorly-performing portfolio companies that cannot be profitably exited.

That there are areas of venture investing that are growing and can be complementary and helpful to VCs should be seized upon by any right-thinking VC who is prepared to understand and work with the limitations and vested interests of corporate venturing units.

That so few VCs do seem to think about these issues is a reflection why backing a VC firm itself would probably make a poor investment: lifestyle business for the managers who face few normal corporate governance strictures once they have achieved partner level; non-scaleable operational model by assets under management and geography; and with few-to-zero barriers to entry beyond limited brand name recognition.

That a handful of VC firms are able to deliver the minimal levels of returns expected from them is primarily because they view the commitments by LPs as fragile votes of confidence requiring them to put in the hard work and examination of the new areas and testing of their own assumptions and preconceptions about topics and regions.

For an insightful piece about which looked at why one such Silicon Valley-based VC firm, Sequoia, remains so good please read Brian Halligan, co-founder at HubSpot – see footnote. As ex-journalist Michael Moritz, a partner at Sequoia, told news provider Financial Times after reinvesting in Sweden-based credit company Klarna last week: "There are very few private companies anywhere in the world that offer the opportunity of being great, standalone, enduring public companies and those really are the ones of greatest interest to us."

That Moritz is prepared to sit on Klarna’s board, having first invested last year, as well as Sequoia look to invest in UK-based Fizzback before its sale to Israel’s Nice, shows the VC firm’s realisation that if innovation can happen anywhere it should be able to invest anywhere too.

But if good ideas and entrepreneurs can happen anywhere then other factors that complement this raw material are required, such as the state of physical infrastructure, competitive pressures from other start-ups and the sophistication and experience of the investor base and service providers about the requirements of fast-growing, entrepreneurial businesses.

As LinkedIn founder Reid Hoffman, in his role as co-chairman of Silicon Valley Comes to the UK, said last month, the VC can prioritise the search by looking for "clusters of talent, such as London, Cambridge, Oxford, Berlin", …or Stockholm.

It could be argued that Silicon Valley’s model of venture capital is one of America’s most powerful exports – it took an expatriate from California to Sweden in Jane Walerud to be the seed/angel investor in Klarna after all having made a fortune in selling Bluetail to Alteon (subsequently Nortel) in 2000.

Silicon Valley in the US, however has retained its edge as the pre-eminent cluster for innovation because it draws in talent for start-ups, sits within the world’s largest economy and offers entrepreneurs the financial and other resources they need within a competitive environment where people are looking for the next $1bn success story and realize this is more likely to happen through talking to everyone and asking their advice, Hoffman added.

In that light, the NVCA should be asking itself whether its board is the best it can have or whether it needs to be refreshed with some better VCs on it.

Footnote: The blog post was so apparently so insightful its been taken off HubSpot’s website and only a cache on Facebook digs it back up.

What is also interesting about HubSpot is when it decided to take on Sequoia’s money for a large series D round it also took on two corporate venturing units as well, Google Ventures and SalesForce.com, to see if it could help it avoid or benefit from so-called "asteroid" competitors that could otherwise threaten its business. And for HubSpot early employee Brad Coffey’s great insights into what makes a great corporate backer see his guest comment on our website here.