Corporate venturing is when corporations create relationships with single or multiple venture funds. There are different ways to do it:
- Arms-Length Approach - like a handshake agreement with a venture fund where they understand you can help monetize the companies in their portfolio. First, they introduce the companies to us, what the company does, and why it's distinct in the market. Then if we are interested, we meet with the portfolio company, and maybe we can start working together.
- Sponsorship Approach - You're not an equity investor, but you've made a financial commitment to sponsor or work with the fund. You've also put aside money to develop the relationship. You'd still go through the same socialization process as you look into their portfolio of companies. But in this case, if you're putting up sponsorship money, they'd dedicate resources for you, and you'd get more attention than you might find from an arms-length agreement.
- Investment Venture - You can just invest in a venture fund. Another alternative is to set up a venture capital fund within your company. We've chosen not to do that. If you're going to have a venture capital fund, you'll have to manage it just like the venture capitalists manage their separate funds.
It means staffing it with professionals that know how to do venture capital investing, work with portfolio companies, work with investors, and find investors. First of all, you got to raise money to do this, find the right companies to invest in, and then help grow and scale those companies.
That's a special skill set. That's not a common skill set at a large consulting or accounting firm. And we've chosen not to develop our own dedicated fund.
I'd rather piggyback the deal flow of multiple venture funds I work with than have to find my own deals. Because for us, the return on investments is probably the least important reason to involve ourselves in venture funds if we're investors.
We're using our balance sheet to make investments, but there's not a dedicated pool of money that is only earmarked for venture fund investing. We have enough cash flow to afford to venture and do it on an ad-hoc basis.
We are very selective with it because of strategic alignment with the venture fund. If we have specific areas of our organization that we deem high-growth and high-investment areas, then a venture fund is focused in those same areas or market segments. Then we have an alignment, and it makes sense for us to consider a relationship with the fund.
Benefits of the Corporate Venture Strategy
- Market sensing - to be able to look at the market through the eyes of venture capitalists. They see things early on; they generally look at early-stage disruptive or novel technologies. In some cases, even before the products themselves have even been built. And that's not what we would normally see in the market.
- Alignment with venture funds - allows us to build some eminence with the cool kids by doing joint research on advanced technologies.
- Relationships with the portfolio companies - Sometimes, those companies offer up technologies that can help us build offerings or solutions that solve big problems for our clients in a disruptive way. It's a great way for us to bring a new and different approach to some of the problem-solving that we get to do everyday.
- Potential M&A - As we look at these companies to build a relationship with, we're also considering them for potential acquisition if it fits our M&A criteria and strategy.
- Potential ROI - No one wants to lose money, but ROI is less important than other strategic things I mentioned earlier.
- Potential Ecosystem - Some of these portfolio companies also have other relationships that we can leverage. So instead of having a one-to-one relationship with one of these portfolio companies, we may do something like a three-way or four-way activity.
It depends on what kind of problem we're trying to solve.
Keys to Success
One of the things we ensure is that the portfolio companies we're working with must be mature enough. Not just in terms of their product but in terms of their organization. Are they able to work with a large and complex organization? Because it's not as fast as some companies would think.
We're not designed just to find early-stage technology companies and resell their stuff. Our business is to solve complex problems for our clients. So if their technology is applicable, they get brought into the equation.
Maturity lies in both the management team and the technology itself. We want to ensure their responsiveness is up to the level we require because our clients are big enterprises and expect quick responses when there's an issue.
Choosing a Strategy Venture
We look at venture funds aligned with our firm's strategic growth areas. It depends on the firm's thrust because we're looking at newer venture funds rather than traditional areas. We're always looking for something new to augment. And that requires a fair amount of research to validate.
Then, we'll decide which ones we want to invest in. If they want to work with us as much as we want to work with them, we figure out a way to do it.
Some of the more established funds have their own business development team. Those are the people we will work with because it's their mission to help their portfolio companies gain traction in the market. They also represent those companies and help us work with them.
Having the venture capital fund involved in brokering relationships is also helpful. Sometimes, we'll ask for things the portfolio company doesn't understand or isn't willing to share, and the venture capital fund steps in and helps.
Technically, we are passive investors in the venture fund we invest in. The general partners or the people who manage the fund are sometimes called managing directors. They run the fund and have an investment committee making investment decisions.
They could come to us and ask our opinion on a company. Or, they might ask our opinion on the marketplace dynamics because we have many practitioners in the market every day. We'll compare notes that inform an investment decision, but we do not make investment decisions for the fund, they make their own.
Benefits to the Venture Fund
On the portfolio company side, affiliating with a large professional services firm does provide some brand benefit or some validation in the market. It's us professing how good they are, which certainly adds to their credibility in the market with bigger companies that may not know about them otherwise.
There's also an opportunity for their technology to be used in our very large enterprise clients, which could get them quickly exposed to the right people that they probably have a hard time finding on their own.
Another thing is we have practitioners in the space, and we see other companies that are competitors of theirs. So we can give them feedback on their products and on their strategy.
Interacting with us and understanding why we ask questions and doing comparisons with other players in the market, helps them understand and think about their particular technology.
In some cases, we're completing their solution. Their technology might not be complete, but the combination of their technology and our market knowledge, and professional services could possibly win the day.
Corporations are trying to solve different kinds of problems. Technology companies are providing different kinds of technology. Somewhere there has to be a bridge, and we often represent that bridge. We help them get their technology into big clients by presenting it as a solution to something even larger than what they are.
On the VC side, there's the economic driver because they'd want us to take their client to market. They also enjoy the dialog that we have in terms of what we see in the market versus what they see.
There can also be a dialogue at the deal flow level where they're starting to look at a company and they like a different perspective on it. We can offer that different perspective because we have practice leaders in most segments of the market, and we have a lot of subject matter expertise that we can bring to the table.
The dialogue can be very strategic, and sometimes it can be highly technical. It depends upon what they want to talk about. It's a win-win.
Another area is on federal and state government practice. Selling anything to them is a very different process than the commercial side of the house and we have been doing that for many years now. We can help them through that process.
Sometimes, we can just provide some good old-fashioned consulting, too. It could be a strategic consultation. It could be tax advice or it could be product advice. Some of these services we're charging for. But, some of it, they get gratis just by working with us.
We're always looking for a kind of two-way relationship.
VC vs Strategic Investors
Venture funds are good for a lot of things. One of which is they understand the technology generally better than you would think, and they have great connections in their marketplaces.
They're also going to provide a fair amount of guidance, strategic guidance, board level guidance. They might help you with filling out your management suite. They're very well connected in knowing people that can come into an early-stage company and help scale that company. And that's a great investment.
Now, if you think about a corporation investing in an early-stage company, they're what we call strategic investors. They're putting money in because they believe they can utilize the technology.
I've seen large industrial companies invest in early-stage technology companies because they know they can be a very large client for that particular company. They represent an endorsement of that technology in their market space.
Strategic investors generally are less price sensitive than VCs. The VCs will push for a better price. Strategic investors have other reasons to be investing besides ROI.
How it affects exit strategy
It affects a little bit. Most venture funds usually invest in the first five to six years of their life, then liquidate everything in their portfolio by year 10. Strategic investors may not have any particular time clock. Although, freezing up money for a long time generally gets the attention of the CFO and the board, so it's not money for life.
However, it depends on the investment structure. Some corporations want exclusivity, and if you agree, you will limit your options to potential buyers. So be careful when you take their money.
Advice for Companies looking for VC
If you're going to take venture capital money, choose your venture capital as well. Make sure the terms are not too restrictive regarding your ability to operate the business. If you can get it from well-established venture funds, the better because they are the ones who know what they're doing.
They have the right talent working for them and a reputation where they attract interesting opportunities that corporations pay attention to.
Some dedicated venture funds are only looking for companies where they can utilize the technology. Others take more of a more general approach; they're looking to make a good ROI at the same time. So it depends upon why they invest.
Advice for the Corporations Looking to Venture
Invest in a venture fund and don't try to be a venture capitalist unless you're going to hire a team of VCs to run the fund for you. You will be disappointed. It's not easy to be a venture capitalist. It just sounds simple but it's not. They look at a lot of companies before they make an investment decision. They also have a lot of experience on how to grow a company.