Hooli-con — Silicon Valley
“[Corporate investing] is dumb. I think corporations should BUY companies. Investing in companies makes no sense. Don’t waste your money being a minority investor in something you don’t control. You’re a corporation! You want the asset? Buy it.” — Fred Wilson
While I understand Fred Wilson’s strong reserves, I disagree that corporates venture initiatives are always evil or nonsensical. In fact, corporate venture capital is fast becoming a feature of emerging ecosystems, not a bug.
I have to admit that I’m biased. We’ve been lucky to have amazing corporate partners in some of our best portfolio companies. Coca-Cola Company helped weex create the fastest growing wallet in Mexico after seeding the company; Prudential expanded Alkanza’s cutting edge asset management from Brazil to South-East Asia; French energy giant Engie has been key to propel Enlight to dominate Mexican the residential and commercial solar energy sector; Walmart’s partnership in Chile accelerated Cornershop to record speed before Bentonville decided to buy Cornershop.
Steve Case argues in the Third Wave that in order to disrupt complex and highly regulated industries such as healthcare, education or manufacturing, startups will entail working with large stakeholder. While Facebook and Snapchat’s worldwide success could be started from a dorm room or a garage by leveraging people, products, and platforms, the next generation of impactful companies requires different resources and capabilities related to policies, partnerships, and perseverance. The third wave innovators will need to federate corporates to scale. And, nothing aligns incentives like capital.
Done right CVC can positively impact Latin America. Implemented poorly, corporates can hinder our emerging ecosystems. The following list can help large corporations make the most out of these new initiatives.
1- Do no harm
In the case of investing in startups, move fast, break things cannot apply to corporates. The young Latin American startups scene is still gaining confidence and density. New tech companies may be fast growing but are mostly frail organizations. Disrupters are looking for partners, not for a new boss. If you’re too big to be wrong and you can’t prevent your internal teams to copycat your allies, your compliance policies to torture startups, it’s better you stay in the sidelines.
2- If it’s not a priority, don’t bother
Resource allocation in venture capital responds to a different logic and needs a different speed. It often requires corporates to work against their nature and skip procedures. Therefore, any serious initiative will require a broad and unequivocal board or HQ sign off. Otherwise, it will be a frustrating journey.
It’s also important to manage expectations. Like any VC fund, you may co-invest with, this initiative needs a 10-year horizon. It’s expensive and it will take long before results are visible.
3- Get in for the strategic returns stay for the financial returns
Let’s face it, VC in Latin America is still an unproven asset class, full of potential but yet still unproven. Indeed, after almost a decade since their launch, the best VCs in the region have yet to realize their amazing on-paper returns. Don’t expect to do better. In fact, your first batch of investments will probably do badly.
While the pursuit of financial returns is a requirement to any VC investment, you should focus on strategic returns. Let your co-investor figure out how to make money.
4- It’s all about the team
While some of the capabilities needed to run a VC may be found within your organization, I’m afraid venture capital is not a mix of M&A, digital transformation and IT. It’s different. Your VPs will try to run this new sexy initiative. Don’t let them. You need to hire people with the correct mindset and by definition, it’s not you.
My ideal line up would be a combination of a serial entrepreneur, a former VC, and a credible well-respected core business insider that knows her way around corporate politics. You will probably need to bend your compensation rules to attract A-players.
5- Be specific and explicit about what you want
VC firms craft a basic plan to get to financial returns that contains their view of the future, their investment philosophy, and priorities. Build your roadmap to find strategic returns for your company. Once the team is in place, codify the company’s investment philosophy and priorities, and align long term strategies and expectations buy-in from the company. Your CVC arm should not work in silos but in tandem.
Consider setting up a rules-based fund that would for example only allow you to invest after a successful pilot or when certain objective conditions are met.
6- Set up an advising committee
Consider creating an advisory committee where a selected group of board members and VPs, joined by two to three independent members help the CVC team. Keep the committee small and highly engaged.
If you add strong independent members early, they may help you educate internal stakeholder and craft your investment thesis.
7- Learning should be your priority
Venture capital is hard and the learning curve will be steep. Learn like any other great emerging VC — with passion, curiosity, and humility. Learn as if your survival depended on it.
Consider investing as a Limited Partner in experienced VC firms that can accelerate your growth and expand your deal flow. The process of choosing the right fund alone will be illuminating.
8- Let others lead
While there are no set rules for the early stage game, best practices in venture capital exist and are mostly followed by established VC firms. I would suggest, you join rounds led by proven VCs and let them set the valuation and investment terms.
If you join the board as an observer or as a voting member, remember you are there to represent all shareholders, not only your employer. When in doubt, get out of the way.
9- Get the word out
Keeping the CVC efforts confidential is one of the biggest mistakes I’ve seen corporates make. Nothing shows the commitment like a public announcement. Moreover, you will need to kickstart deal flow as soon as possible to get to an investment selectivity below 1%, a given for any VC firm. You want to make sure your team takes a look at all on-thesis deals out there.
Getting the word out doesn’t mean you turn this into a PR tool to refresh your brand or hire millennials. If you need positive press coverage, do something else.
9 1/2 – Please don’t build a Gymboree
Nothing wows more than a tour of the new full floor co-working space with slides, videogame corner, and colorful floor living room. Some corporates have invested more in these bizarre middle-age crisis playrooms in Latin America than in any promising tech startup. Tech entrepreneurs are not kids. They mean business.
Whatever you planned to spend on the cool logo and the hip architect use it to support entrepreneurial communities. A small footprint in a WeWork will suffice. A fast internet connection is more than matters.
10- Do your homework
Go to accelerators demo days such as 500, Finnovista, Village Capital or MassChallenge. Get your team to the next VC101 by ALLVP, the VC Unlocked program by 500 or enroll in a Stanford University Go To Market certificate. Encourage the head of the CVC to apply to the Kauffman Fellows program, by far the most effective platform for new VCs.
To get you started here are some interesting articles from Harvard Business Review and some data curated by CBInights. Our own team onboarding process includes two essential books that you may want to buy — From Zero to One by Peter Thiel and Venture Deals by Brad Feld.The 2018 Global Corporate Venture Capital ReportA comprehensive, data-driven look at global corporate venture capital activity in 2018. REPORT HIGHLIGHTS: GLOBAL CVC…www.cbinsights.comInside the Minds of Corporate Venture CapitalistsA new survey reveals how the most active corporate VCs differ in their motivations, sources of capital, fund structure…www.cbinsights.comMaking Sense of Corporate Venture CapitalLarge companies have long sensed the potential value of investing in external start-ups. More often than not, though…hbr.orgCorporate VenturingWhen the genomics revolution was transforming the pharmaceutical industry, Eli Lilly realized that its survival might…hbr.orgCorporate VCs Are Forgetting Their PurposeMost people are familiar with the traditional approach to venture capital: An investment firm carefully parcels out…hbr.org