Tuesday, November 14, 2006

Corporate Venture Capital: Are they really VCs?

So I did my internship at Intel Capital, which is probably the world's largest and most influential corporate Venture Capital shop. I have been working for the last year and a half at University Venture Fund, which is probably the largest student-run Venture Capital shop. Does this mean the time cometh for me to work at the world's largest traditional Venture Capital firm? I do not know but I do know that I have an opinion on the differences between these different models of capital deployment.
So today let me give you my two cents on Corporate VCs. In the past, questions have been raised on whether Corporate VC investments actually increase firm value. I contend that you can love them or hate them, you can't ignore them. After all, in the second quarter of 2006, Corporate VCs participated in ~20% of all VC deals.

Corporate Venture Capital
Corporate Venture Capital arms of large technology firms (or any firm for that matter) probably started from the corporate development divisions of these companies. They owe their genesis to the tendency of large technology firms to shore up their growth through inorganic means (M&A). At some point, many of these made the transistion from acquiring startups to investing in startups (to acquire them), to investing in startups for their strategic benefits. In that sense, Intel Capital is probably more traditional than most because it tends to invest for IRR reasons as much as strategic ones.

Some of the prominent Corporate Investors are:
1. Intel Capital
2. Cisco
3. Siemens Venture Capital
4. Comcast Interactive Group
5. Motorola Ventures

Specifically Corporate Venture Funds have multiple objectives when they invest:
1. Create a potential window for scanning the market for novel technologies
2. Create an ecosytem for their core products
3. Invest in inorganic growth by building up startups for future acquisitions
4. Pre-empt competition by investing in strategic technology
5. Create returns for their parents through traditional investing strategies

Depending on the firm one is looking at, there is a different order of priority between the four objectives. Intel Capital for example is very much focused on 1, 2, 3 and 4, but is largely driven by 5. Hence, it ensures that it remain a top quartile fund inspite of its strategic objectives.

Key Observations
1. It is these, sometimes conflicting aims, that makes the job of a Corporate VC incredibly difficult. And exciting. But the glass is half empty or full depending on how one looks at it. The same job can be exciting or frustrating depending on one's investment ideology. Corporate VCs juggle these often contrarion aims on a daily basis.

2. On the boards of their portfolio companies, they remain representatives of their parent firms and are sometimes silent observers (due to liability issues).

3. Corporate VCs often work way harder than their traditional counterparts. Their investments (especially in firms like Intel Capital) span across the globe and can be incredibly difficult to navigate through. There are whole host of regulatory, multi-national, macro-economic, and political issues that creep into an investment decision. This makes their work quite complicated.

4. Yet, many Corporate VCs do not get carry. They have immensely important jobs and sit on boards. But corporations (so as to not misalign incentives) shy away from putting together a carry compensation structure. This lack of power-compensation structures has always been an issue in Corporate VC.

5. There are inherent information asymmetries associated with dealing with large Corporate funds and their parent companies. This can create some apprehension among potential startups and other co-investors.

All these issues create a unique Venture Capital model that has significantly altered the investment landscape and been responsible for some very large investments in recent times (Intel Capital's $600M investment in Clearwire).
Finally, this is by no means an exhaustive list or an expostulation of the pros and cons of Corporate Venture Capital. It is more of a 10000 feet view of this model of VC. After all, I owe a lot of what I learnt to people like Ron, Rohini and others from Intel Capital who mentored me during my internship there. And hence, probably owe my budding career to Intel Capital.

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