Careful what you wish for: The danger in corporate VCs leading deals
Earlier this week, I spoke at a UBS Research conference in San Francisco. Speaking just before me was a senior eBay executive who was asked about the company’s recent divesting of its massive stake in MercadoLibre. He was asked what this meant for eBay’s investment in other countries in general.
The answer? eBay will do what it needs to. If there isn’t a path to acquisition or there’s a better use of capital, they’ll divest the shares.
That doesn’t sound hugely controversial. Until you consider how much Corporate Venture Capital has been propping up the capital markets of late.
From one of many stories we’ve written on the topic:
That’s right: Corporate VCs invested nearly 60% of the capital in the second quarter. As we’ve written: The rise of corporate VCs and the rise of international cash are the two biggest reasons this unicorn frenzy hasn’t really corrected the way most traditional VCs had hoped. A lot of hedge funds and mutual funds have pulled back.
But international cash and corporate VCs haven’t. And that was never on more display than in the second quarter of 2016 when Apple made a very uncharacteristic $1 billion investment into Didi Chuxing and Uber raised a record breaking $3.5 billion from the Saudi Government.
The most extreme vertical may be content where old media corporates like Comcast have absolutely run the table on new media deals, particularly the hot ones like Vice, Vox, Buzzfeed, Refinery29 and more.
Corporates like Qualcomm and Intel Capital have kept categories like the Internet of Things afloat, and today Intel pledged a whopping $250 million to be invested in self-driving cars over the next two years.
On one hand, it’s a good thing that corporates are putting cash behind areas like content and hardware that VCs can quickly sour on. You could argue far more companies would have died if they hadn’t, not to mention technologies. On the other hand, if you are an entrepreneur in those areas, you are putting a lot of faith in the companies you should be disrupting.
To be clear, I do not fault eBay at all here: But startups, pay attention. No matter what their venture arms tell you, corporations will do what’s best for them. Consider even the group that is considered the gold standard of “no we are not conflicted!” corporate venture capital, Google/Alphabet Ventures. Their biggest hit -- on paper-- is Uber. And now Google is one of Uber’s biggest competitive threats. Dave Drummond had to awkwardly leave the board.
Buy, hey, Uber is gonna be fine. And these things happen. Eric Schmidt after all had to leave Apple’s board once the two became smart phone competitors.
Not everything works out so well when you don’t have the power of Uber. This past month, I have spoken to two startups that full on had to close their doors because a corporate venture fund pulled out of a deal last minute. Sometimes it wasn’t for nefarious reasons: An executive gets fired, priorities change and budgets change. Consider, again, Google Ventures which has had a revolving door of partners, and eBay’s statements above.
Pitchbook recently wrote a piece on Corporate VCs suggesting if they wanted to be taken more seriously, they need to lead more details.
The general feeling is that 2001 will repeat itself and corporate bosses will pull the plug the moment numbers stop being up and to the right. The ice is slowly thawing as venture capital firms warm to CVCs on a company-by-company basis, but when viewing CVCs as a whole, a very large dose of skepticism remains. At this point, I don’t think VCs are wrong.
The data indicates that corporates in the US are rarely leading rounds—only 8% of venture rounds so far in 2016, and just 6% if you exclude the top 10 CVCs. Since January 1, 2006, CVCs have invested in 6,123 US companies through 8,956 venture rounds; they have been a lead investor in 1,996. Yet, leading rounds is a very important aspect of being a venture investor and key in showing commitment to the ecosystem and portfolio companies.
I don’t disagree with the logic, but I guess my plea to corporations would be the exact opposite: Please don’t lead more deals. Corporate venture capital serves a role. Sometimes strategic relationships can help companies with invitations, business deals, and even potential acquisitions. And let’s not be snobs about cash: Sometimes you take what you can get as a startup. I won’t pretend that Corporate VCs don’t play a role or can’t be useful for companies, when eyes are wide open.
But we are already getting dangerously comfortable on an investor class that simply doesn’t have aligned objectives with founders.