Corporate VCs need to bring more than capital to the table to be effective investors in tech startups.
Corporates have now wholesale outsourced R&D to the startup and venture community, says Dave McClure of 500 Startups, speaking at CB Insights’ Innovation Summit.
Corporates have participated in an increased number of technology investments as of late. Of the total number of tech acquisitions last year “around half were from non-tech buyers,” Matt Garratt of Salesforce noted, “a good sign for the investor and startup community.”
Jeff Pashalides of Sequoia Capital and Tom Frangione of Greylock Partners joined McClure and Garrett on a panel moderated by Paresh Dave of the LA Times to discuss corporate innovation and investment.
The panelists noted that there are challenges as corporates go after more investments and acquisitions of tech startups. “It’s an unfamiliar process dealing with startups. CVCs don’t realize they are VCs,” McClure said, pointing out that concepts like deal flow, diversifying bets, and portfolio company growth are typically weak points for a typical corporation.
There are also challenges around how a large organization operates compared to a growing startup. “If you’re a typical corporation and you make decisions on an annual schedule, startups live and die in that time-period,” McClure noted.
Most on the panel agreed that earning a reputation within a space can mean all the difference. In this regard, proximity to VC and tech hubs matters, as does participation.
The goal is to “be that bright and shiny object,” McClure said. “Corporations are not going to figure out how to deal with startups doing one billion dollar deal a year, but [rather] one fifty million deal per quarter.”
Frangione believes that corporates must bring more than capital to the table in order to be worthwhile investors. “Right now in the market there is plenty of capital. It’s not differentiated.”
For startups, investments by corporates have the potential to provide customers and distribution. But conducting honest due diligence between the startup and the corporate is crucial to understanding “what drives [the other] and what’s valuable in the relationship,” said Pashalides. “Too often people are looking at corporate capital as starting a thing, when really it should be supporting a relationship.”
Proximity, industry literacy, and strength of network are key. While some companies tour the Valley for ideas and investment opportunities, the serious players open up shop there.
“Tencent, Alibaba, Baidu aren’t in SV [Silicon Valley] for a one-week visit, but are there and are doing deals,” McClure said. “Get to know the people doing interesting technical work in your field, do deals, get on their radar. It’s all about being in the market when the fish are running.”
Paresh Dave, Tech Reporter, LA Times, Moderator: I think, last panel of the day. Hopefully, it’s the best. So, I figured we’d start on looking at what’s sort of the biggest thing that’s changed the last couple of years in corporate venture capital. And correct me if I’m wrong, but it seems like the biggest thing that’s changed is that there’s so many new buyers from non-tech, from other countries. So maybe, Dave, since you do, like, you’re always traveling it seems like. I mean, what are you seeing around the rest of the world? I mean, are there really a lot of new buyers? Is that the biggest thing that’s changed last couple of years?
Dave McClure, founding partner, 500 Startups: I think that’s definitely more people at the table. I don’t know if the buying is happening at scale, yet. But there’s certainly a lot of Chinese…I guess I would say potential acquirers who have other reasons to try and want to get money out of China. So, not just necessarily for strategic reasons, but also for currency and other reasons. But I think you’re seeing lots of non-tech acquirers, so, you know, some of the folks that Mark had mentioned earlier in the day.
GM, certainly, Unilever, all those folks are maybe not the traditional people that you’re gonna see buying companies from a private market perspective, but I think we’re gonna see more and more and more of that.
Paresh: And what’s the significance of that? I mean, what does that do?
Matt Garratt, VP, Salesforce Ventures: I mean, I think it opens up a whole new world of buyers, if you look at…I mean, I think there are about 1500 tech acquisitions last year, and roughly half and them were by non-tech companies, which is pretty phenomenal. And so, I think that this brings in, you know, more capital investment in the categories, and you’re also seeing now the entrance of a bunch of private equity buyers.
And so that’s fantastic as well. You know, I’m really excited about the entrance of a lot of non-tech buyers, and I think basically what this is signaling is a lot of these…many companies have become tech-enabled businesses, whether they’re tech businesses or not.
So, there were 1500 tech acquisitions last year, roughly half were by non-tech buyers. I think that’s incredibly exciting. We actually have one of our portfolio companies, Service Max, was acquired by GE. That was great, as well. And I think you’re also seeing this entrance of private equity coming in and paying…typically, you think of private equity as being inexpensive value buyers. They’re buying at multiples that are strategic. So, I think those are all great signs for investors in the startup community.
Paresh: So, if you are a company, I mean, a startup. I mean, where should you be thinking about these corporate VCs? I mean, should be thinking about them as soon as you form your company? Should be thinking about them at a series D? I mean, where does it set them? I see laughing.
Tom Frangione, COO, Greylock Partners: Yeah, look. I guess I would say, you know, you have to understand what you’re trying to get or accomplish from that relationship. And it’s not always the right answer that the time should be early or late. It really depends on what you’re trying to accomplish. So, we see folks that are trying to leverage that for things like product market fit, right? But, you know, you want, in our opinion, to get a successful company off the ground.
You want to see that product market fit dig back to multiple companies, not just one. So, a lot of those kinds of things, you know, I think we tend to make a blanket rule. You’d say, you know, kind of corporate or strategic investors probably makes a little more sense a little bit later. Like, once you’ve kind of gotten technology risk out of the product or some things like that. But, you know, that’s not a hard and fast rule.
Paresh: But, how do you…if you’re just starting out and you want to see, you know, if there’s interest in your product out there in the market, how do you find the right players? How do you get started talking with them? What’s worked? What hasn’t worked?
Tom: Look, I think there’s lots of different ways to do it. So, part of is, you know, as a young company, to think about all the different folks you need to partner with. So, for example, one of the things both Jeff and I spend a good amount of time on is trying to interact with CIOs, CTOs, you know, folks from large enterprises that have interest in understanding what young companies are doing to push either technical or innovative business systems, and how we can build the right relationships with those enterprises so that, you know, when we have interesting portfolio companies or other companies we see, we can introduce them.
But that’s only one way to do it. Look, another way is just think about advisors that have great customer contacts, right? You know, another way to do it is just, you know, seed stage investors. You know, Dave, I’m sure you and your team, you know, help connect with customers all the time. So, part of it is, in my opinion, when you’re starting a young company or starting to think about all the different players you want to assemble around yourself, that should be one of the vectors. How do I get, you know, that customer interaction? And it doesn’t always have to be in the way of an investment, at least in my opinion.
Dave: I would say primary advantage that corporate VC has over traditional VC is customers and distribution.
Dave: If they are able to structure that in a way that’s effective for startups, then they have a dramatic advantage. If they don’t have a way to structure that, then I think that isn’t always going to be a tool that they can use.
Paresh: But Jeff, how do you make sure that, you know, as a startup you actually get something out of, you know, a relationship or that you don’t get taken advantage of in some way?
Jeff Pashalides, Head of Business Development, Sequoia Capital: Yeah, I think a couple things. One, I think, is doing your diligence upfront. So, I think you shouldn’t be reinventing the wheel. When you do these types of things, you should find someone who’s been through it before with that particular corporate to figure out how they act in that circumstance. And I think past behavior is very indicative of future behavior.
Paresh: What questions or things should you be looking at?
Jeff: Oh, figure out, you know, what drives them? What really creates value out of their relationship? Who are the decision makers? Do they act quickly? Do they act slowly? How do you figure out when they’re real, when they’re not real? That type of thing. I think there’s a normal cadence, because a lot of this has organizational built into it, and so if it’s working well in one scenario, it’s like to work well again. And I think it’s reasonably predictable.
Paresh: So, flip side of the table, are you buying this?
Matt: I mean, I think it’s a lot of good points, and I think it depends on who the strategic is. I mean, for us, what we say is, “Look,” and we’re different than a lot of…as, you know, the presentation they were showing earlier, was they were…look, if you’re a platform company, you know…
Dave: You’re different in that you’re not evil, like Fred Wilson said.
Matt: That’s right. We’re not evil. No, but if you’re looking…it depends how you want to partner with someone. But what we always say is, “Look, if…” Basically, people often want access to our customer base and our ecosystem. And so what we advise companies is, you know, once you start bumping into our customers and you have an idea of how you want to work with us and how you integrate, you kind of have to tell the story, too. Because I think the mistake that a lot of startups make is, like, “Oh, you guys have a lot of customers. I have some cool stuff. Like, will you sell me to your customers?” And that’s the absolute wrong way to approach it.
Matt: You need to really come in and, like, bring something to the table and have thought out, like, why do you want to partner with this? And you have to be, I think, selective on who you’re trying to engage with. You can’t just go and blanket everybody. You need to be targeted.
Paresh: But why can’t you be that magic solution that gets me all the distribution I want?
Matt: Because, we have our own AEs that are selling, you know, our stuff. And we have a large partner ecosystem. And so they can’t think, you know, they have enough to think about of all the things that are in their bag. So, think about all the other things that all these partners are doing, it gets harder. But if you are, you know, doing something in a specific area and you’re making that sale easier, you’re derisking it, or, like, you’re a partner and you’re pulling us into accounts, you know, you start doing that, then you see a lot of reciprocity.
So, a lot of times you have to get the flywheel going before you can really see that, you know, acceleration. At least, that’s how we view it a lot of the times, and that’s how we advise companies when you’re working with us. It’s not just, like, “All right, here’s the money. We’re gonna turn the switch on.”
Jeff: I think, too often, people are looking at corporate capital as a way to start a thing, when really it should be supporting a commercial relationship.
Matt: That’s right.
Jeff: And so, if Salesforce is gonna be bringing one of our startups into their customer base, it’s because those two things are very complementary and they’ve got a proper commercial reason to be doing business. Oftentimes, the venture relationship can help support that and accelerate it. But it really should be driving it.
Tom: I think the other thing that to know, and you saw that from some of Mark’s stuff, is right now, in the market, there is plenty of capital, right? So, corporate investing is great, but it’s not massively differentiated, right? So, there’s plenty of capital.
Dave: It’s incredibly undifferentiated.
Tom: That’s right. That’s right. And so, you know, from the perspective of both a young company who needs to bring something to the corporate, but the corporate needs to bring more than capital, because, you know, there’s a lot of capital sloshing around.
Paresh: So, what are the options for big companies or medium-sized companies, whatever size company that wants to invest in startup? I mean, we’ve seen accelerators pop up like crazy the last three years. I think, Dave, you said really nothing comes out of that, maybe. Is that true?
Dave: I think there’s PR that comes out of it. I would say that, you know, the yield on accelerators is small and long-term. And so, unless you’re doing accelerators at scale and willing to be patient, I don’t think that matters.
Paresh: Scale means what? Like, a new class every month, or?
Dave: I would say, if your expectations are getting more than 5% to 10% interest in companies out of an accelerator program, you’re kidding yourself unless you’re talking to just talent yield. And I think you’re probably talking about a three to five year time scale, at least, to see real impact. So, you know, let’s just say the average corporate that probably is thinking about doing something like that is probably a multi-billion dollar company. I think it’s sort of a waste of time to think about, you know, accelerators having an impact in the near-term for that company in any measurable scale.
Tom: From a financial perspective.
Paresh: So, what’s wrong about looking at the five-year horizon and doing that?
Dave: I don’t think most corporates plan for that long. Certainly, most people running corporate accelerator programs, if you look at the trajectory on those, they often aren’t renewed for more than one or two years.
Dave: I think that’s wrong, but I’m just being practical and realistic about that.
Tom: But I actually think there can be a role for, you know, a corporate that is, I’ll say, trying to learn about an entrepreneurial ecosystem to find ways to partner with existing accelerators as a way to kind of, frankly, accelerate their own learning curve. And once again, I don’t think it’s a financial return, but, you know, part of the notion, I think, behind accelerators, if you were gonna partner with one, is to engage quickly to see many, many young companies and watch them go through the process, and start forming your own types of filters about what’s important and what’s not.
Dave: I would agree with that. I mean, we’re doing a partnership with GM right now where that’s kind of the idea on discovery. I’m just saying that scale is important in that.
Tom: Agreed, agreed.
Dave: And so, if you’re only doing 5 to 10 companies…
Tom: Is it about 500-ish startups? Is that the right number?
Dave: That’s a great name, yeah. I think we might use that.
Dave: But I think sometimes the corporates have different activities that they’re doing that are not at all coordinated. So, they might have an accelerator program, they might have an innovation program, they might have a direct investment program, they might have a VC arm, and they might have acquisition, right? And I think all those should probably be coordinated.
Tom: That’s a good point.
Dave: I think the big change that you’re asking about, that I see, is that there’s tons of corporates coming into the VC business that don’t realize they’re VCs. And if you think about, like, what to do, I don’t think you figure out the startup world by, again, sort of doing a big billion dollar acquisition once every two or three years. I think you have to get to know the people who are doing interesting technical work in your field. I think you need to either be doing partnerships, be doing investments, doing acquisitions so that you’re on their radar and they have some trust that you are doing deals, not just, like, this is your first time. Yeah, I think being in the market when the fish are running is probably a big part of it.
Paresh: Well, I appreciate you guys sharing your thoughts, and thank you, everyone, for joining us. I think that’s it for us.