Three out of four start-ups fail to return investors’ capital. Yet, big companies are increasingly investing shareholder funds in small companies that live outside their own walls. Last year alone, corporate venture funds participated in one quarter of all deals—collectively investing more than thirty billion (US) dollars in start-ups.
Here are some things to bear in mind when it comes to your corporate venturing aspirations:
1. Get strategic. Given the abysmal stats on startup success, it seems foolish for large corporates to think they can beat independent venture capital funds at their own game. But there is more to corporate venturing than financial gain; first and foremost, the focus should be on investing strategically. In a study of more than 30,000 investments in startups, those that were well-aligned with the stated focus of the corporate parent yielded higher returns.
2. Create an failure-tolerant mindset. When your corporate venture arm tells you that no firms in the portfolio have been shuttered, raise the alarm, not the champagne flute. Failure is part and parcel of the VC game, so that perfect track record may be a signal that the team is playing it too safe, investing in companies with an eye towards avoiding failure. Don’t let corporate risk aversion contaminate your venture fund.
3. Don’t smother the babies, nor the babysitter for that matter. Your role as a strategic cornerstone investor is to help the start-up succeed, not to run the show. So give it what strategic advice it needs and let it go. And you must realise that the VC game is a fast one—at least faster than most corporate approval processes. Setting very clear, aligned goals for your fund and then streamlining the approvals process can help you avoid getting tied up in internal reviews. This is about more than missing the boat on a promising deal, it is about showing external investors and startups that you know how to run an effective fund.