Here’s an excerpt from this week’s CIO newsletter. To get it in your inbox, register here.
To kick off this week’s issue, I invited my old friend Mike Edelhart to share some insights from the front lines of venture capital. Mike is the managing partner of Ataraxia, an early stage fund focused on helping people live longer and live better, along with leading venture capital partnerships Joyance Partners and Social Starts. Some of you may know him as the original executive editor of PC Magazine or as the CEO at several startups, including Olive Software, Inman News and Zinio. Here is Mike:
“Before I got into venture capital, when I was still working with large companies, the worlds of entrepreneurship and corporate management stood well apart. That’s no longer the case. Most large companies now invest in start-ups, often through their in-house corporate venture capital (CVC) arm.
If you’ve worked with CVCs—on the corporate side, as a partner, or as a venture that has received such funding—you probably already know the record is mixed. There are many reasons for this. Early-generation CVCs stayed close to their company’s headquarters and strategy, often missing market fundamentals and using a dated scenario to measure a startup’s potential. Their metrics can be confused by other priorities. Some treat CVCs as a backdoor way to do M&A. Others use it as a way to break into a new area or connect with the cool kids’ new companies. It is the challenge of the big partnership with the small one. Unlike traditional venture capitalists, CVCs rarely risk their own money. Some are not even pressured to make money. In other words, they are not really venture capitalists.
I want to propose an approach that I think would yield better results for companies: Get in early and think more creatively about your role. Full disclosure here or, rather, a reminder: As an early-stage venture capitalist, this is what I do. This means I can tell you why I’m seeing an increasing number of CVCs doing this as well.
We recently raised two Series A rounds with Pepsi Ventures and Leaps by Bayer, a US-based fund backed by its European parent. In Pepsi’s case, an operating group (Gatorade) helped launch a startup, and the venture arm then led a multi-investor round. Meanwhile, it skips deals that Bayer’s CVC arm would never consider. That’s because its mandate is to invest in paradigm-shifting advances in the life sciences that can change the world.
This might sound like philanthropy or R&D or some unicorn spotting exercise. Its not. Bayer is using the VC model to invest significant and sustainable capital in people and technologies that can change the world. Think how the Medici family supported and supported masters like Da Vinci, Michelangelo and Botticelli in Renaissance Italy. Consider how filmmakers like Martin Scorsese or Greta Gerwig know how to use the right talent to build collaborative teams that deliver outstanding results. And then think about the advances needed to address crop loss, inequality, pandemics, polarization, and all the other challenges that have put us in this “polycrisis,” as many now call it.
No one company is likely to own the solution. We need to invest in creating an ecosystem for risky but promising new technologies to have a chance to be transformative – and to collectively benefit from the results.
Moving forward, my corporate brethren, I believe this is how you will grow. Gary Dushnitsky, a professor at London Business School who is also an adviser to our funds, agrees. He argues that financing corporate ventures can become a key driver in determining future pockets of growth. In fact, Dushnitsky believes that CVCs are more likely to influence VC investment trends than the other way around.
Follow it, in part, at cutoff speed. But other factors are also at play. Many of the “weaknesses” used to slow CVCs are increasingly being recognized as potential strengths: scale, relationships, capital and expertise. Polarized politics adds to a growing belief that, to innovate in areas like ESG, the private sector will have to lead the way.
If you’re waiting for a later round, where a risky bet feels more like a safe bet and potential M&A target, you may find that opportunity never comes. It will be too late.
Success is always about much more than making money. Our fund Joyance Partners is 100% backed by a Japanese company. Along with potential returns, our corporate backer is getting knowledge and a chance to build relationships in an area that could define the future of their enterprise.
Think of it as an investment in curiosity. I’ve reviewed hundreds of business plans – I’d say thousands – over the years. While I may only invest in 2% of what I see, I always learn from the other 98.
I enjoyed my days working in large corporations – planning, team building, resources and infrastructure, not to mention opportunities to collaborate across functions and cultures to make an impact. I enjoy working with CVCs for similar reasons – the opportunities to collaborate on areas of mutual interest and the willingness to partner in creative ways. While I have successfully partnered with many traditional venture funds over the years, I have found that they tend to have tighter partnerships and want to be in the position to grow.
But my message to C-Suite executives is not to look at me, but to look at themselves. If your company has a corporate venture arm, I think now is the time to open up and use those resources more broadly on behalf of your organization. You will discover and build relationships with potentially valuable companies. You can gain insight into transformative trends and technologies. Better yet, you can help shape them. Dare to stray a little from your areas of expertise. If you’re deeply invested in, say, renewable energy, explore who’s innovating in an area like consumer behavior.
If your organization does not have a CVC, now is a good time to consider one. With global venture funding down by more than a third in the past year, there is likely to be less competition in major deals. Recession-wary governments are also increasingly recognizing the need to provide seed capital to drive sustainable and inclusive growth. (New York Gov. Kathy Hochul announced a $30 million upfront program and seed matching fund earlier this month.)
Personally, I’m excited to see the worlds of corporate long-term planning and early-stage venture capital begin to converge. Both reward a focus on building meaningful value over making a quick buck. Both require new tools, partners and approaches to succeed. The stakes are too high and the speed of change too fast to go it alone.”
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