Corporate Venture Capital, revisited…

The startup world has changed dramatically over recent years, as have both venture capitalists and business angels. We’re now surrounded by latent angels, passenger angels, lead angels, angel syndicates (both overt and covert), super angels, and (saddest of all) fallen angels: while VCs now often collaborate with angel groups on seed rounds, and compete with  new mid-range “micro-VCs” (which of course might actually be super angels or upscale angel syndicates). Really, all this finely-nuanced jargon of, errrm, ‘angelicity‘ is enough to spin anyone’s head to the point of dizziness.

However, there’s another player in the startup finance field to which entrepreneurs rarely pay much attention: corporate venture capital (‘CVC’). You see, a typical corporation doesn’t really have a mandate for high-risk early stage tech company acquisitions, no matter how good the technology and strategic fit may be. In practice, the way the world works is that a corporation board would rather greenlight a $30m acquisition than a $1m punt: M&A has to have a certain scale in order to generate a business fit. Which is therefore why angels and VC funds exist – broadly speaking, a Series A investment is designed to make a $1m punt on a $3m valuation to build the investee company rapidly into a $30m acquisition target for corporations who don’t have a remit for making that $1m punt.

What has happened, though, is that a single bad meme has ravaged the financial supply side: that software (and specifically Internet) plays are able to scale so well that they alone have the capacity for bridging this gap. This excessive focus on software (and I’m a software engineer with an MBA, so I feel qualified to give an opinion) has led to the overall field of tech investments being pretty much stripped down to Internet software tech investments, healthcare tech, and energy tech. Everything else is a no-go, basically (or “we’ll come in second if you can find a fund to lead”, AKA “passenger funds”).

From where I’m sitting, it seems to me that the open mindedness to high concepts that made the original wave of VC funds so profitable has long been lost, in the barrage of tech analysts contemporary VCs hire and devote to ever narrower investment fields. Risk is a good thing, it’s part of the whole asset class – it’s what stops corporations from making worthwhile punts while offering substantial returns. Hence to me, a VC that shuns risk is like a pizza company that shuns tomato sauce… yet this is basically what we now see.

Part of the reason for this is undoubtedly the overwhelming amount of gaming that goes on: it can be a lot of work to tell a genuine (but possibly slightly flawed) opportunity from the thousands of hopeful-but-essentially-fake proposals put forward by business school students, who have just devoted 2-3 years of their life to learning how to construct a killer business plan. But all the same, we have seen a systemic VC shift from seed to later stage investments – in fact, I’ve seen it recently suggested that a more accurate name for VCs might in fact be “expansion capitalists”.

It’s not hard to see from all this that there is an ongoing supply/demand mismatch between the kind of (software-scalable) Internet companies that angels and VCs build and the kind of (market profitable) technology company hardware corporations want to acquire. Which is really where corporate venture capital fits in: these are the seed stage / early stage investment arms of corporate giants, that are set up to put money into areas of strategic importance to the corporation – to make the kind of physical market-building investments that VCs apparently can’t.

So, if the current crop of VCs aren’t a natural fit for Nanodome, should it instead look to CVCs in the security industry (such as Robert Bosch Venture Capital, Siemens Venture Capital, Schneider Electric Ventures & Aster Capital, Panasonic Ventures, Samsung Ventures Investment Corporation, etc) or in industries with overlapping supply interests (such as Intel Capital)? Very probably…

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