It’s not hard to understand why a company sends in their finance or strategy person to lead a new corporate VC team. Who else is going to do it? The requisite skill set doesn’t generally exist in corporate circles. This is near enough. The cracks emerge as we overestimate ourselves. We don’t do the hard yards to identify what we know and what we don’t. As a result, we blow it.
Corporate finance or M&A experience is useful, but it can become baggage too.
Part of our accountability in receiving a posting to head up a new Corporate VC team is to acknowledge our capability gaps. Our role is to acknowledge them and close them down. Truly, we don’t serve anyone by pretending to be something we’re not.
Upon entering a corporate VC for the first time, I had a big advantage over many colleagues. Knowing nothing (as a marketing guy who’d never done it) meant being free of baggage and able to take it on face value. Accordingly, learning engines are easily fired up. It meant watching every video, reading every book, pulling-out my MBA finance books. No potential mentor escaped my grasp. Clueless, yes. But aware of it? You bet.
Broadly left to our own devices to build knowledge, two types of personalities subsequently emerged. Firstly, there were those who acknowledged gaps and were committed to closing them (whether they did or not is another story). Secondly, there were those who assumed they got it, masqueraded as if they did, or chose to learn by live-fire.
In spite of my knowledge gaps, I ascertained fairly early on that M&A and VC were not alike. As much as I admired the financial callisthenics being performed by those with finance degrees, it didn’t really mean a great deal. On the whole, corporate finance or strategy skills were pretty clearly not VC skills.
Notwithstanding, this is too often misunderstood until teams are knee-deep in it. Indeed, in this world, knee-deep unfortunately means that many startups have been drawn in. Further, the organisation’s resources and capital have too. Mistakes made in this area aren’t ones easily backed-out of. Think about it.
Getting Venture Decisions wrong
Let’s consider for a moment corporate VC some decisions, and their effects.
- Take a controlling stake in a company we shouldn’t have. Now stuck with operations and reporting accountabilities.
- Acquire an unvalidated business early when we should have taken a convertible note or minority stake.
- Invest capital when we should have formed a distribution agreement or earned equity for services instead.
- Don’t agree on a path to control and are creating disproportionate value for other investors.
- Forget to leave enough capital in the fund to follow-on. We didn’t understand how it looks when we don’t follow-on.
- Appoint a corporate executive on the board of a startup without training them how to be a good board member.
Getting it wrong creates problems that aren’t easy to brush away.
So what really are the root differences? What do we need to deeply consider as corporate strategists, financiers or M&A legends?
Here are three pieces of low-hanging-fruit I observed as the marketing guy playing venture capitalist.
Venture Capital aims to place many bets on many ventures. It assumes that just a couple of those bets will pay off and return the fund. Failure is built-in to the model. In M&A, greater certainty of success is the objective. It’s de-risked as much as possible and every dollar of value creation is road mapped. Management consultants lean in to support the extraction of it.
An acquisition isn’t going to be made with the assumption that it’s a 90% chance of failure. However, that’s exactly what happens in VC. Corporate decisions geared ensuring nothing fails. They’ll first invest too much of their own time, then the time of others, then company resources. Good capital will follow, to avoid failure and reputational risk. VC’s know how to drop and run.
This one is obvious to me as an operator. VC is about avoiding operational control and burden. M&A is about taking operational control and burden. Corporates naturally seek control with a view to extracting maximum value.
However, a CVC fund that’s complicated with wholly owned, controlled or minority enterprises is a dog’s breakfast. They have vastly different demands and accountabilities, support structures and so on. Much of this comes back to the investment thesis, which is often not thought through upfront.
As most VC’s will acknowledge, this is a game of people and long-term relationships. Deal-making and transactions are part of it but are dramatically over-prioritised by corporates. Meeting hundreds of founders, building empathy, understanding their stories. It’s about long term partnerships and commitments to one another. It’s about building advanced level institutional knowledge of their areas, building ecosystems and investor partnerships.
Serving them. As the marketing person, in the very least, this was the part of it all I seemed to excel most in.
These are material observations. And they’re not about accounting and finance skills. The ability to knock out an NPV or IRR without an Excel formula is not the be-all and end-all. Our enemy is the belief that we can jump from camp to camp and perform, with skill, the vocations of others. If we fail to bring in adequate diversity and counsel to our teams, we fail ourselves and our organisations.
At best it’s naïve, at worst ego-led ignorance. Unfortunately, when start-ups are drawn in, the ‘learning journey’ we’re are going through affects real humans. It affects people who are building their dreams and pinning their hopes on us. So let’s just remind ourselves of that as we bumble through the early stages of corporate venturing.