Aug 14, 2015 ยท 9 minutes

Corporate venture capital has a difficult relationship with Silicon Valley.

They’re in, then they’re out. Sometimes they invest for return, other times they just invest to get a quick peek under the competition’s covers.

And the worst: When right of first refusal M&A clauses can hinder a startup’s future options. Other would-be acquirers can be loathe to even kick the tires lest they be little more than a stalking horse in a deal that’s already a fait accompli.

Corporate VCs move slower than a typical VC can, which is annoying to time-pressed founders. And frequently “the partners” aren’t great or even operating in a partner structure.

Think about it: Why would a top VC be at a corporate? With rare exceptions, they will never give the same partner economics of a venture firm, because politically you can’t have the corporate VC guy making more than all the other management. Some of the best and most lasting corporate VC departments have had to get used to the idea that they are a revolving door of talent. A place to prove you can be a VC, and then go and be a real VC.

VCs obsess about aligned incentives. This was the justification for partial liquidations -- when founders cash out stock early-- becoming the norm in an industry that historically insisted every dollar invested go towards building the business. The thinking is, if founders cash out a little they’ll be more willing to go long with a promising potential unicorn, rather than sell prematurely.

It’s hard to imagine how incentives can ever truly align with a corporate VC and a startup, unless the mutually-shared incentive is for one to acquire the other. Sure, there’s lots of talk about synergy -- but it rarely happens. Ultimately, the big corporation is looking out for itself and, in theory at least, startups exist to disrupt big corporations. Think about Uber and Google: As both get closer to rewiring our self-driving car future, that could easily put Google Ventures in an awkward spot.

Even more timely: This week Comcast doubled down on Vox, investing $200m into the company. For those paying attention, the company already owned a reported 14% of Vox through Comcast Ventures and had also already invested in Re/Code -- through actual Comcast, not the independent venture arm. The deal set off a buzzsaw of paranoia over Comcast’s intentions, with many pundits (not to mention anyone else with a functioning brain) worried that Comcast might be trying to control access not only to the pipes, but also what’s written about the pipes. As if deliberately trying to fuel that worry, or perhaps not caring one way or another, “sources” at Comcast even leaked the news of the deal to Re/Code. That’s all well and friendly now, but it’s not hard to imagine a cozy relationship going sour if Vox Media’s journalistic activities start to harm their corporate investors.  

During our 2013 PandoMonthly, Fred Wilson even said on the topic of co-investing with corporate VCs that he was "never, ever, ever, ever, ever going to do that again." He later caveated the remarks and apologized for them on his blog, clarifying that he meant just the kinds that “suck:”

..when a company sees a business they want to get closer to, they take a big stake, a board seat, and they make a ton of promises about how much they are going to help the company. These type of investments and relationships have almost universally "sucked" for our portfolio companies. The corporate strategic investor's objectives are generally at odds with the objectives of the entrepreneur, the company, and the financial investors. I strongly advise against entering into these kinds of relationships.

Strategic BS aside, in the past there’s been really one reason-- cycle after cycle-- that entrepreneurs love corporate VCs: They’ll generally pay a higher price. Ah, the so-called dumb money.

To wit: Visa has been the corporate investor in the peak mega deal for both Square and Stripe. We’ll see in the future how wise the bet was, but reports are Square is having a difficult time going public for a whole host of reasons. (Not least because potential investors are wondering why the CEO is suddenly spending his time as interim CEO of Twitter too…. with troubling results.)

So is it a shock that corporate VCs are in some 20% of all venture deals in the US but a whopping 50% of all deals where companies are valued at more than $1 billion? That data comes from CB Insights who has been tracking this closely, and reports that in general the activity is up from just 15% of deals during the first half of 2013. Corporate VCs have invested some $13 billion over the last four quarters-- a number which will no doubt increase based on the numbers so far this year.

It’s not uncommon that corporate VC surges in boom times. There’s a lot of money and a lot of startups who seem to be growing at a scarily fast speed. (Read: Threats to said large public companies.)  But after the last bust, many of them-- save holdouts like Intel Capital who are always among the most active corporates-- evaporated.

What about this time? I have a hunch that we might be seeing a structural change not a cyclical one. That this kind of corporate investing may be here to stay.

Here’s my thinking:

There’s so much money in big tech, and it has to go somewhere.
And big money to a startup is small money to a huge tech company. Literally one of the biggest problems facing companies like Google and Apple is how much cash they have and how best to spend it. In earlier cycles, a lot of the corporates were old economy companies who didn’t really understand Silicon Valley trying to be relevant-- see the granddaddy of all corporate deals, in a sense, Fairchild Camera and Equipment. There’s still a lot of that with companies like Scripps and Visa investing.

But one of the most compelling new entrants this time around has been Google Ventures. The change in who is backing the startups, how long-term strategic they are, and just how much cash they have could be a different factor even in a correction. After all-- the froth is mostly limited to the private markets right now, not the public markets. Companies are investing this much without hugely inflated valuations, for the most part. That’s very different than the late 1990s.

Intelligence is a bargain.
Here’s a question I’ve been asking sources recently: We keep saying “public investors” like mutual funds and hedge funds are doing all these mega-late stage rounds. And yet, there’s a huge discrepancy between what these same groups are willing to pay in the private markets and the public markets….that’s weird right?

Well, not according to several folks I’ve spoken to in the hedge fund world, who say the comparative pittance they invest in private companies is well worth it to understand the competitive pressures coming down the pike for their large cap public bets. (ie Google’s self-driving cars vs. Uber; Facebook vs. Snapchat) If it’s worth it to a hedge fund to toss a comparatively paltry few hundred million at a startup, how do you think a corporation that literally has more money than it knows how to spend views it?

Public tech companies are sick of the “has been” cycle and the best are getting way smarter.
Companies like Google and Facebook viscerally get how quickly platforms and trends in the consumer Internet can change, because in many ways they were some of the first mega-disrupters to the original late-1990s gang. Google doesn’t want to become someone’s Yahoo; Facebook doesn’t want to become someone’s MySpace. This is why both have been willing to buy companies for seemingly insane acquisition prices. The math isn’t "what is YouTube or Whatsapp worth"; it’s "what could they be worth in five to ten years and what could that do to us?"

Now that the structure of Google has changed to “Alphabet," Google will be freed up to be even more aggressive with investments than it was before. There’s already speculation that other tech companies like Facebook could eventually follow this corporate model.

If US corporates won’t invest, Asian corporates will.
In China, the consumer Internet developed differently. Companies started in entertainment and games and virtual goods versus communication and news and ecommerce. And no shock, venture capital is developing differently too. Asia-- particularly China but Japan and others also-- is the only other place in the world that has birthed multiple consumer Internet super-unicorns. These companies developed at Internet speed in the last fifteen years, whereas the Valley took fifty years to build its venture capital ecosystem. So it’s no massive shock that the corporates in Asia are an even bigger force of capital, proportionately speaking, than in the rest of the world. In Asia one-third of all “venture” deals are corporate money.

Consider the big global Uber challengers: Almost all backed by Softbank. Even Travis Kalanick-- who has raised some $7 billion so far-- can’t compete with the fundraising ability of its Chinese competitor Didi Kauidi which has Alibaba, Tencent, and Softbank behind it.

And that Asian money is stretching around the globe. Again, let’s look at ride sharing: Alibaba and Rakutan have invested in Lyft. Alibaba has invested in other hot startups like Snapchat too. As Asian mega-giants take larger and larger stakes of these companies-- and given global ambitions and challenges investing in early stages, why wouldn’t they?-- it’s Yuri Milner all over again. The Russian billionaire waltzed into the Valley and started doing late stage pre-IPO deals, suddenly creating a whole market of competitive activity.

Are we to believe American Internet giants with more cash than they can spend are gonna step back as Asians continue to step up?

So if the change is structural, what does that mean for startups? For starters, more cash at high prices in the short term (woo hoo!). But startups need to be asking serious questions about what the bet means and how much an inflated burn rate might depend on these kind of deals.