Fred Wilson of Union Square Ventures criticizes corporate venture capital investment and riffs on why startups shouldn't jump at it.

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Union Square Ventures Managing Partner Fred Wilson fired a shot across the bow of corporate venture capital on stage at the CB Insights Future of Fintech Conference: “[Corporate investing] is dumb. I think corporations should BUY companies. Investing in companies makes no sense. Don’t waste your money being a minority investor in something you don’t control. You’re a corporation! You want the asset? Buy it.”

He took corporate investing to task as being mostly for show: “Making a minority investment in something? What does that do? Make you look smart in front of your boss?”

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Moderator Nathaniel Popper of The New York Times offered up the idea that smaller investments like these could give corporations access to startups, especially in the fintech space and “get them in the room” to hear what the startup is working on and see if it applies to their company.

“If you’re the startup, do you want them in the room?” Wilson countered.

Popper argued that apparently some startups were willing to entertain the notion, but Wilson was unconvinced, saying startups were using flawed logic and that either they couldn’t get money from anyone else or that the corporations were willing to shell out more money than a traditional VC would. Either way, he said it was a losing proposition for startups:

“They’re doing business with the devil.”

  • Brendan DUNPHY

    Two points. Firstly, CVC’s are unwanted competition to VC’s that can only inflate prices and reduce deal flow. Secondly, CVC’s are a distraction for corporates as it is a financial play rather than a business play. They should be focusing on finding ways to work with start-ups to grow their business, not ‘me too’ smart money short-term financial returns. They are gambling their way to the future and stockholders should be sounding the alarm.

  • http://tbjinvestments.typepad.com/ Timothy Bernard Jones

    Every time the mkt gets inflated VC’s start hating on CVC’s b/c they push up valuations and give entrepreneurs more choices and leverage.

  • J. Rogers

    Could not agree more.
    The only thing dumb about CVC funding is that it makes billion-dollar exits for tech VCs… Never heard any VC claim that corporate money was dumb for inflating a deal they were already in ahead of them…. then it was the strategic or scaling genius of the VC that negotiated the corporate liquidity.

  • cgboyle

    Corp VC does not really make sense, except for very select examples, regardless of how a VC may not want competition, etc. I might argue that Salesforce Ventures makes sense b/c what they are doing is seeding their own ecosystem which creates more demand for their core products. But investing to “have a seat at the table” or to gain insight is not worth the price, if it works at all. If a start-up is a real strategic interest to a corporate, but is not yet for sale and the corporate can enter into a meaningful commercial relationship that benefits both sides, then an investment to go along with this commercial deal can help to create alignment between the parties. This is a narrow case, but the only one in my experience that makes much sense.

  • http://www.schibstedgrowth.com Marc Brandsma

    Big words but always the same self-serving reasoning.

  • Andrew

    These are options for both the CVCs and the start-ups. The CVCs have an option on a technology which at one end of the scale, can be an improvement on their current business model / core process / etc. and at the other end of the scale, can be an industry disrupter. So, it’s a very sensible strategic stake. For the start-ups, they get the money often without the more “extreme” or “biased” terms and conditions associated with many VC investments, as well as potential access to management talent, distribution, customers and prospect bases, IT systems, and so on. I’ve seen this work well many, many times first hand, and it ought to be realised that this is extremely common in pharmaceuticals, where no single pharma co. can cover all the possible bases, no matter how big their R&D budget.

  • Kevin Johansen

    One other way to look at this is that if a Corporate entity acquired the company too early vs. investing as a CVC, then it loses all the entrepreneurial spirit that drives growth of early stage companies. More corporate acquirers who acquire too early will end up killing companies rather than acquiring great technologies or significantly growing their markets.

    If a CVC invests in ten deals and acquires two of those three to five years down the road, they’re probably going to be more likely to achieve their strategic objectives than if they just acquired two companies earlier and didn’t have the other eight companies on their radar.

    Corporations who are in CVC to power a part of their innovation strategy will limit themselves by acquiring just a few companies vs. being involved in a larger number of companies with a more diverse set of technologies from which they can choose to invest later once they have achieved sufficient traction, or when the technology proves to be relevant to their innovation strategy. Focusing on just acquiring the company assumes more straight-line innovation pathways, but innovation is not always that predictable.