Nikkei Business Daily February 23, 2019

Corporate LPs & Venture Capital Firms: Finding Alignment

Most global corporations that are headquartered outside of the San Francisco Bay Area are seeking to establish a persistent relationship with Silicon Valley. By virtue of their early venture investment decisions and ongoing governance roles, it is not surprising that many perceive Venture Capital (VC) firms as one of the best channels for insights and connections. And since many VC firms seek to raise larger funds every 2-3 years, a corporation investing as a Limited Partner (LP) in a venture funds appears to be a mutually beneficial method of forging a trusted, long-term relationship with Silicon Valley insiders and connectors.

Often, however, interests are quite misaligned.

In our decades of working with global corporates seeking an ongoing bridge to Silicon Valley start-up ecosystem, we hear a common set of strategic corporate objectives:

  • Information acccess: identify emerging business model innovations and disruptive technology that will significantly impact their core businesses
  • Technology access: forge partnerships with emerging start-ups in order to study and potentially leverage their technology products and services
  • Market defense: create early relationships with break-through technology companies, as a down payment towards potential future acquisition
  • Culture reengineering: absorb the entrepreneurial culture in an effort to learn how to become more innovative across their own companies, in their own industries

Perhaps surprising to the global corporate executives who is contemplating becoming an LP in venture funds, the typical General Partner (GP) in a venture fund has no real incentive to deliver against any of these corporate LP goals.

Instead, their incentives in order of priority:

  • Quality deal sourcing: gain ongoing access to as wide a funnel of high quality entrepreneurs, so as to have the best investment chances
  • Winning the deal: optimize entrepreneur relationships to ensure that, when they want to invest, their capital will be accepted and eventually protected by the entrepreneur
  • Optimizing portfolio exits: make capital re-investment and board governance decisions that lead to each portfolio company selling for a minimum of 3X capital or, ideally, 10X capital, or going public
  • Raising new capital: develop a financial return track record to ensure that existing and new potential LPs will invest in next fund

Given the first three GP priority objectives, the most important relationship for a GP to invest in is their entrepreneur network. Most of the best deals are either with successful serial founders in their network, or being sourced from the entrepreneur network. If GPs are not building their reputation as “value-add investors” with existing and future entrepreneurs, they are essentially “dead out of the water.” They might be able to raise money for a fund, but if they’re getting tertiary dealflow of founders who aren’t being referenced via the top tier VC network, their odds of success are low out of the gate.

When you understand the focus of a traditional VC GP, it is not surprising that helping LPs achieve their own strategic objectives beyond capital returns can only be an afterthought. The last thing they have time for is spending time educating corporate LPs on emerging technology trends, helping them forge productive partnerships, or curating target investment opportunities. And asking their portfolio executives to spend time in bureaucratic cycles with large enterprises would be detrimental to their “founder friendly” reputations. For start-up founders raising capital, financial investors top their list and corporate investors are most often lenders of last resort.  As as result, those junctures where a GP is eager to attract corporate co-investors or early acquisition offers, are usually when their portfolio companies are not doing well.

With this perspective one might argue that venture partner interests and corporate LPs are entirely misaligned. The exception in the venture capital world is those firms where a different business model shares strategic objectives.

Core Ventures Group, for example, has a operational support model that includes prioritizing and supporting a successful Japanese market entry for our highest potential start-ups. We believe that the best international launch market once tech companies have been successful in the U.S. is likely Japan. We see terrific market attributes that are more attractive than a European launch, for example: 3rd largest GDP, early technology adoption, price tolerant customers, highly referencable and loyal customers, geographical density and proximity to the Silicon Valley. Once we can get founders over their fear of language and cultural differences, we help them realize the ideal international market entry, with the support of our leading global corporate LPs. Because we have carefully constructed leading Japanese LP partners to help our portfolio companies be successful in Japan, we also have a strong interest in helping the same LPs be successful with their objectives in Silicon Valley.

Other venture firms that have business models to leverage corporate LP value beyond just capital, include the famous Andreessen Horowitz, and several similarly focused on Japan alliances for late stage start-ups like our friends at WiL (World Innovation Lab) and Geodesic. These firms have developed their own programming and engagement models to assist their corporate LPs engage with Silicon Valley.

Facing the typical venture capital firm, we remind global corporate executives to confirm business model alignment if they are pursuing any specific market objectives beyond generating financial returns. A lesson in “product market fit” for investors, not dissimilar for entrepreneurs.

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We place a high priority on meeting with start-ups that are referred by someone we know. If you aren’t already connected to our network, feel free to send us an email. Forgive us in advance for only responding to cold introductions that are absolutely fascinating.

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