How to Collaborate with Corporate Venture Capital

Andrew Annacone, Managing Partner @ TechNexus Venture Collaborative

Startup Grad School Stage
Ascent Conference 2020

[00:00:01] Hey, everyone, my name is Andrew and I’m a managing partner at TechNexus. Tech Nexus is a kind of a different innovation and strategy firm or a hybrid venture capital firm and strategic innovation firm. We work uniquely right between corporations and startups, and we work with them to collaborate with each other, to transform industries and invent new ones. We tend to work deliberately with corporations to understand all the strategic pressures that they have around industry change, entering new businesses and expanding their business footprint, changing their business boundaries and startups to really help them understand what it is that they can bring to the table to help the corporations. And so what we find ourselves really is that right in the center of industry innovation and right between corporations and startups, which is why I’m talking today about how to collaborate with corporate venture capital. Venture capital has grown considerably over the last four years and startups really need to know how to tap into that. This presentation will take the point of view of the startup, but we’re going to spend a little bit of time talking about the perspective of the corporation because understanding the context of the corporations and why they see venture capital is important and how that is changing is really important to helping ventures understand how to best tap into that new innovation. We attack Nexus, work across a wide variety of industries, and we have, I think, a good perspective on all of this. Let me start by saying innovation is everywhere. This chart is depicting where is the greatest venture capital growth worldwide and where is that concentrated? As you can see, it’s not concentrated anywhere. It is literally all across the globe. There are incubators and accelerators now in virtually every city. I think the largest one right now is Station F in Paris. And we have some of our our team is stationed there permanently.

[00:02:21] This is all to say that innovation and in particular the venture ecosystem has grown considerably. And it’s something that is really, really important to corporations. They are. And they’re taking note there’s hardly a way for us to go a day without seeing the word disruption somewhere or digital transformation. Companies and corporations recognize the need there need to change and are really taking note. And it’s really it has changed the game for corporations quite considerably. And the way we think about this is in three big ways. Innovation is no longer just innovation and incremental product changes. It’s really about business transformation. And the way we think about that is that companies are really thinking about four different types of transformation. One we’ve all heard about is really just culture. How do we make the corporation more innovative and entrepreneurial at its heart? Second type is process. So are there ways that we can digitize accounting or digitize the supply chain or the way we interact with our customers? Those are clear and based, but the bigger ones involve business model transformation and what we call domain or transformation. And those are the ones that enable companies to really change their entire business and enter new markets and really create significant value. So this is what innovation is today, and it is because it needs to be start ups and changes in industry are pushing companies in this direction. Second, big changes. Companies have changed really the way they approach strategy all together, that the time was that companies would put together a strategic plan and then press go on that plan and see it play out over three, four or five, seven years. But as my friend Rita McGrath likes to say, we have reached the end of sustainable competitive advantage, those kinds of strategies and that approach the strategy doesn’t work anymore today. It needs to be continuous, adaptive option based. And companies are starting to really change. Corporations are changing the way they approach strategy altogether. In that sense, the last big that all of this innovation globally is changing the game for corporations is in sources of growth. And this and in fact, is the biggest one, the most important one and the most important one to startups, because corporations are now realizing that really the way to drive business model. Transformation, coming, transformation, even process transformation is becoming more and more, if not predominantly based on external sources of innovation, not internal. So once upon a time, if you go back to 1970 companies, it was Xerox PARC, Intel labs. That’s where all the great innovation was taking place. Today, the most impactful innovation that companies will need to really transform their businesses are all in the venture ecosystem and largely external, a machine learning Iot drones. All of these kinds of things are largely being invented in the startup ecosystem. And so corporations have begun to look externally. Now, M&A has always been a really big tool for corporations and since nineteen eighty five it has grown considerably and really has over the last 10 years, if you can see the chart on the on the left. But CVC corporate venture capital has grown significantly really over the last 10 years because companies are now realizing that this is an enormous tool that they need to tap into lest they get left behind.

[00:06:12] So today, entrepreneurial information has never been more important to a corporation, and that is really that creates significant value for the ventures here and the staff and the founders that are on this call, because if you are tapping into corporate venture capital, you’re probably missing out on something. We’ll talk a little bit more about what that means. Corporate venture capital, although it has grown significantly over the last 10 years, it’s not a new phenomenon. It was a thing even in the 70s. But for many years it’s really been it hasn’t had the best reputation. This is a famous quote, my friend, Wulsin. I think many of you have seen this before. I hate corporate investing and I think it’s dumb, dumb to do. And also, people have called it really dumb money, and there’s some good reasons for that. Historically, there have been some really bad habits in the part of corporations around corporate venture capital has been restrictive. So in many cases, the deal terms that corporations have written into term sheets, around purchase options, et cetera, have been very, very restrictive to corporations or to the venture. Corporations have been risk averse. And so they really haven’t gotten involved early with ventures. They’ve only gotten involved historically at later stages because they thought the venture was way too risky for their capital. Corporations have been unpredictable, so they might get some you might get some investment today, but then tomorrow, because the company had bad earnings quarter, all the capital, all the collaboration dries up. It’s been restricting to ventures because in many cases, the presence of a corporation on the terms or on the on the cap table means perhaps that venture doesn’t have as many options to to exit. It’s been bad signaling. And then the worst of all, corporations have basically been slow. But the world has changed and all of that essentially, as you can see, what went into this enormous is saying today is that all of that is ancient history. And there’s a reason for that because corporations now know how important this is. And as they’ve learned and as the opportunity to engage in venture has improved, the corporate ethos has changed considerably. And now there are new principles driving corporate venture capital today. The best, by the way, I’m not saying that every corporation has these principles in mind, but it’s changing rapidly. And the companies that we work with certainly adopt these kinds of principles and we see it pervading the economy even more and more. But first off, CVC today is far more strategic. It’s far more resolute and far more committed. And so that idea that the corporation might get excited today and then might might walk away tomorrow, that is drying up. So because companies recognize how important this tool is, they’ve adopted something called what we like to call enlightened optionality. So they recognize that this, in many ways engaging with ventures is a stand in for R&D and a stand in for product development and really a pathway to enable growth. And so because of that, they want to be able to keep those options open. And so there are far friendlier terms in terms of rates and in the relationship so that that allows them to move forward and they’re organizationally ready. So, again, in the past, companies are very, very slow. They weren’t very agile. It took forever to even get a meeting, let alone a decision to make an investment. But today, corporations really have all the emeny in greater numbers, the right kinds of processes in place and mechanisms to make swift investments, make them the right way and to stay with it. A lot of what makes collaborating with corporate venture capital valuable. We’ll talk about that in a moment. Is the ability to work with engineering teams and marketing teams, sales teams and all throughout and today organizations in a way they never had in the past, have the ability to bring those teams to bear and to collaborate productively with the venture. So all in all, corporate venture capital today is far more entrepreneur friendly. And as we said before, given the fact that the ventures are so important to corporations, this is something that US founders really need to tap into. Why buy the latest venture? Why does investment matter? There are lots of ways to collaborate with ventures between ventures and corporations, and it doesn’t have to involve investment by the corporation. And we’re not saying that needs to be the case either. I think there are many situations where arm’s length relationships, partnership, relationships with ventures and early stage companies can can drive a lot of shared value. But what we’ve learned in all of our work with corporations is that money talks, money really greases the wheel. It sets both organizations up for collaboration and it aligns their interests. And so when when and we’ll talk in a minute about why corporate venture can help and how it can help ventures. And oftentimes having that investment in place is really what unlocks all the opportunities to collaborate with corporations. And so here’s what we’re talking about. So what is the role of corporate venture capital and startup development versus just ordinary financial sponsorships? And what you can find this is from a startup perspective, what you find is a lot of the things on this on this page are emblematic of the kinds of services, so to speak, and value that a corporation can bring to a startup that in many ways traditional VC can’t or can’t as robustly. The first two around validation of technology and market is that it’s just pure access to engineering teams and marketing teams and understanding the customer needs in the broader market that your venture is going after. Corporations bring that insight to the table in a much more streamlined fashion than a venture oftentimes operating on its own. Could these create really broad and more accelerated paths to commercialization? We have a number of ventures in our portfolio have found new ways to drive collaboration and start commercialization that they wouldn’t have had otherwise. In fact, just yesterday we start negotiating a term sheet where venture in our portfolio got. Growth capital, up 18 million dollars of growth, cap growth capital out of a 20 million dollar round from a well-heeled D.C. and brought in our corporate partner as the remaining two million or so. And so and that corporate partner is the only other investor in that room. And why is that? Because the venture recognizes how valuable that corporate money is and that corporate collaboration is. Right. And so that’s really just a great, great example of that. These collaboration with corporations unlocks exit pathways. The one to one relationship you may have with corporation might be that a corporation might, in fact be the acquirer of you as a company. But it also signals, and this is the last one is also signals that the relevance and the value of the startup to the industry. And so taking money from one corporation in the beginning can also signal to other investors and others in the industry that this technology that your technology, your ventures technology is relevant and valuable, and then that allows you that opens up great opportunities going forward for additional investment, et cetera. In fact, on that point, we’ve had several opportunities where we, as representing the corporate interests in a venture investment, have had ventures who have already brought only financial capital to the table, reopened Rowlings to get the corporation in because those ventures are enlightened enough to recognize how valuable from signaling and commercialization and all the rest standpoint that that capital can be. So let’s talk about with all that in place, let’s talk about what we’ve seen in many, many years doing this, what are the guiding principles that allow strong collaborations between corporations and startups? And again, this is going to be a little bit of a share point of view from the corporation and the startup. But we’re trying to take more of a startup point of view here. And there are three big guiding principles. And the first is fit as partners and startups really need to find the right type of corporate partner to pair up with it. It’s not always the right path to have to seek corporate venture capital, but when you find the right one, it can really be valuable. So you need to start with that. The second is you really need to have a keen understanding of the shared value between your startup and the corporation and the final one, which is a tricky one. But there’s a lot of magic that can be opened up through this is through driving synchronized economics and use that synchronize that we’re synchronization deliberately because as we all know, is building startups over time. There is a time element that it’s staged and the ability to really synchronize the economics between the corporation, the startup over time is immensely valuable. So let’s start with what is the right fit? And what you see on the right hand side is a schematic that we’ve used to clarify and classify the different types of corporate venture capital groups that are out there. And this has evolved over time. I’ll get to some examples in a minute. But corporations approach corporate venture from different perspectives based on what their strategic objectives are. And so we’ll start at the lower right corporate exploration. So a lot of where corporations began their forays into corporate venture capital was really in the exploration part there. And that’s the lower right. And that’s where financial returns are a little bit more in more of a focus. But it’s also about potentially driving business development at some point down the road. But the whole focus there is more about learning. So we want to invest in startups and we’re going to watch. We’re going to learn and maybe we’ll take some insight from that. Maybe we won’t. But that’s what we’re doing. A cousin to that is ecosystem seeding where the corporation is really more designed to be. That strategy is more about driving an ecosystem around it. Now, explain what that means in a minute. The upper left hand side is more about ecosystem growth. I’ll talk about that in a minute. The right hand side is corporate growth, and corporate growth is where venture is deliberately deployed to drive, in fact, growth and where the startups are themselves sought after as building blocks and foundations for new growth opportunities. So a good example of an ecosystem partner focused strategy is and everything that they’re doing, and they’re more on the upper left. The corporate growth is something someone like Citigroup, Citigroup is doing a lot in venture around corporate growth and then Comcast sort of works across the board with a very broad set. So the reason this matters is as a venture, you need to have a strong point of view about who you’re going after and what what you were going what you’re going to get out of that kind of relationship. So I’ll move on to this. The shared value in this goes part and parcel with with the first point about fit, because what we think the most important thing an entrepreneur can do when engaging corporate venture capital is to clearly position your venture as a way for the corporation to realize its strategic objectives. And that’s something that we see not as many ventures doing as we would like. So it’s one thing it’s very interesting. Ventures come up with great products and great features and they’re really excited about selling those features. But we don’t often see them spending as much time as they need to putting themselves in the shoes of the corporation. How is a corporation looking at this venture? What does the corporation need out of this relationship and how is it that your startup can deliver on that? And we think about four big ways that a venture can serve corporate needs. One is to deliver tech capabilities that the corporation couldn’t have otherwise. We talked earlier about really advanced emerging transformative technologies in the corporation, probably doesn’t have and can’t do as well. Your venture might be delivering those. Your venture might be rounding out a product portfolio in ways the corporation couldn’t do on its own. There aren’t many business models and importantly, it might actually unlock entirely new business arenas that the corporation that can get into its. All based on your startup, right? And so what you what you should do as a startup is understand those roles that your startup can play and tailor your investment pitch to the corporation with those things in mind. This is, again, something we don’t see often, often happening. We see generic pitch, text the same ones, and we go to Silicon Valley, VCs going to corporations without enough really clear understanding of what the venture and the corporate relationship can look like. But when you do that and do the job for the corporation, right. Put those thoughts in their mind, explain to them how valuable you can be and that will unlock that will unlock financial investment. And importantly, it will unlock all of the collaboration that we talked about before. So it’s really, really important to put all that together and then also be able to know how this collaboration, assuming it’s in place and you have the relationship now with the corporate VC, how is that going to impact your broader growth plans? And as I mentioned before, oftentimes having that relationship in place will enable you to sell the fact that you have that relationship to win additional investment and get additional customers, et cetera. The final big way that companies are to drive really strong collaboration is to synchronize the economics. And I mentioned before how important that word is. It’s about staging a relationship over time. And so it begins, of course, with aligning with the corporate objectives. And not everything that you’re doing as a startup is is in service of the corporate objectives. Don’t get me wrong there. But where it is, you need to understand what that is and then you need to lead the corporation toward the right kind of actions. Right. So what type of relationship and what type of collaboration do you need as a pilots, as a commercial agreements? Is it access to customers? Have access to engineering? You need to help the corporation define what those are and bring those to bear. You need to deliberately stage the relationship to do so with optionality. So you’re going to get some investment and we believe earlier the better. Right. And so corporations now that are enlightened around all of this are now able to get involved much earlier than they were. And we believe even starting at the seed stage, let alone the series, is the right at the right time to get involved, but to do so at an arm’s length. Right. And start there and start there, learn, interact with each other. It’s an arm’s length environment. We’ve recognized earlier that the corporations aren’t going to dial onerous terms into that relationship. It’s going to be at a higher level. But let that relationship terminate over time. And really, as we’re saying, let the stages of venture funding drive the deeper relationship that you’re going to have with the corporation, but make sure that you have clear outcomes and objectives laid out along the way and then finally around financial and deal structures. What we’ve seen is, don’t worry, the best corporations are trying to lead at the earliest stages of the relationship that corporations leading at a series see or Series B might make sense. But it’s oftentimes a little bit harder for corporation and for a startup, for a corporation to lead at the earliest stage a seed. Let the let their relationship be an arm’s length relationship, as I mentioned before, leverage the ordinary venture funding progression to your advantage. Don’t recognize what you can do today and what you’ll do tomorrow and accept focus terms around that relationship with the corporation as they evolve. Right. And as the relationship evolves in the beginning, it will be much more of an arm’s length relationship. But as time goes on, you can start to accept more closer terms that might bespeak a path to acquisition or something, but you’ll do so only with the right knowledge and place. So I think this is about out of time right now. I’m happy again. My name, andI Annacone. I’m happy to connect with anyone live. You can find me on LinkedIn. I’ve written a lot on these subjects as well and happy to have you connect any time. Thanks so much.

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