There’s no doubt corporate venture investment was a game-changer for Sampler, a Toronto-based startup founded in 2013.
Sampler’s digital platform makes it easier for advertisers to target interested customers with their product samples. In only six years, the company has become a world leader in direct-to-consumer sampling, with hundreds of brands now using the platform in 17 countries around the world.
The funding and practical guidance they received from L’Oréal and Henkel were a big boost for the business and their international growth, said Sampler chief of staff Shonezi Noor. She was among six experts invited to debate the pros and cons of corporate venture capital (CVC) at a MaRS-hosted event that brought together global executives, prominent venture capitalists and entrepreneurs who have accepted CVC money and had an opinion about it.
From a corporate perspective, as Noor and others made clear, venture capital investment can be a strategic companion to internal innovation and digital transformation.
So, it’s easy to see why, in the past year, there’s been a spike in corporate venture investment. In 2018, this type of funding rose by 47 per cent globally, according to CB Insights, with more than $53 billion of corporate venture funds deployed in startups around the world.
No approach is without its pitfalls – to deepen understanding of this fast-growing trend, we’ve summarized some key points below.
Six corporate venture capital pitfalls — and how to avoid them.
The pitfall: Corporate venture capital “shouldn’t just be money,” said Dana Lowell, global director at Faurecia Ventures. “It should be … support with the market, the technology, the scaling, the legal, the supply chain, all the stuff that stands between a startup and success.”
How to avoid: Corporations should expect to help startups in practical and strategic ways. In advance of a deal, ensure alignment with chief executives and buy-in from business unit stakeholders relevant to the startup’s solution. Startups should ask questions about what interventions the corporate is prepared to make to help with market access. They should also confirm the success rate with other ventures before accepting a cheque.
The pitfall: Some corporations have formal groups dedicated to corporate capital investment, while others do it ad-hoc. Informal arrangements can lead to misaligned objectives and lack of accountability. For example, when a corporate development group is leading an investment, its goal is to buy a startup’s technology as cheaply as possible, explained Sherwin Prior, co-founder of Blue Victor Capital, and former managing partner of GM Ventures.
How to avoid: Corporate executives should organize an aligned structure for venture investment – with appropriate reporting lines, governance and metrics. Startups should look for established venture groups with clearly defined objectives and a ‘venturing mindset’ that can help navigate the inherent complexity of startup-to-corporate collaborations, emphasized Michelle McBane, managing partner at StandUp Ventures.
The pitfall: A corporate venture group may lack the mandate and organizational leverage to turn the corporation into a first adopter of the startup’s technology. Since startups need customers more than they need investment, the true benefit of corporate venture capital is missing. As Sampler’s story showcases, for every dollar of funding Sampler received from CVCs, they spent a minimum of $3 more buying Sampler’s solution.
How to avoid: Corporations should establish a mandate to become customers and create strong internal links between venture groups and core business units. Startups should look for corporations with a stated mandate to buy. Both parties should be prepared to sign a commercial agreement, such as “licensing deals, channel partnerships and distribution arrangements,” illustrates Whitney Rockley, co-founder at McRock Capital.
The pitfall: Some CVCs are founded in times of excess capital, but quickly become vulnerable in times of economic downturn; they may close up shop and stop providing support to startups. Additionally, corporate venture teams can be driven by the results expectations of the parent company, lacking resilience for the pivots of a startup journey and future returns a venture investment can offer.
How to avoid: Corporations should assume the inevitability of economic downturn and make a plan to endure. Additionally, they must recognize that venture investments yield downstream rather than quarterly returns. Startups should be prepared to prove their value to the corporation’s long-term and short-term goals every step of the way.
The pitfall: Corporate domain experts on a startup’s board can be valuable, specifically with strategy development, navigating complex sales opportunities and helping startups scale internationally. However, domain expertise alone won’t be helpful if the corporate investor lacks understanding of complex technologies and their application – they will fail to help the startup leverage its uniqueness to be successful.
How to avoid: Corporations should invest in sectors they know intimately. And they should build venture capital groups that live and breathe emerging technologies. Startups should look for niche expertise and deep networks that can help them scale.
The pitfall: “Just one corporate venture capital investment may not be the perfect thing,” said Hossein Rahnama, founder and CEO of Flybits, a venture that has eight CVC investors. Startups with only one corporate investor may find that the company seeks to prevent the startup from working with its competitors, or the corporation may put forward an uncompetitive offer, and seek aggressive terms that would constrain the growth of the startup in the future.
How to avoid: Corporations should be prepared to work alongside other CVCs and expect customers that may be traditional competitors to their core business. Startups should aim to work with a syndicate of investors.
Despite the debate structure, it’s not a black-and-white issue, and success depends on thorough due diligence and ongoing collaboration between all the parties involved. “There is good corporate venture capital, and there’s bad corporate venture capital,” said debate judge Salim Teja, managing partner at Radical Ventures. “Unless you can understand the incentives and what the corporate venture capital partner is looking for, there could be a lot of heartbreak.”
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