Corporate Venture Capital: The Best Option When You Can’t Decide on Your Specific Exit Opportunity?
Do you have trouble making decisions?
If so, you are not alone.
Most bankers and financiers have trouble deciding on “the best” exit opportunity, which explains why private equity has become the default.
But it doesn’t have to be like that.
One solid option is to pick an exit opportunity that combines different fields, such as corporate venture capital.
It’s a mix of corporate development and traditional venture capital, and it might just offer the best of both worlds – as our reader today found out:
Breaking into Corporate Venture Capital
Q: Can you summarize your story for us?
A: Sure. I started as an actuarial science major in undergrad but quickly transitioned into finance with an accounting minor.
I did a few internships in investment management and economic consulting and accepted an economic consulting role at a Big 4 firm after graduation.
I wanted to work on transactions, so I switched to a corporate finance / corporate development role a few months into the job.
Then, I won an off-cycle full-time role at a middle-market private equity firm, but I decided that the lifestyle (i.e., very long hours) and investment focus weren’t for me.
So, I started searching for corporate development and venture capital roles, interviewed with a few teams, and settled on a corporate venture capital role at a technology company.
Q: How common is that experience? Where do most people in corporate VC come from?
A: Most of my team comes from investment banking or consulting, and some come from other buy-side roles such as private equity, venture capital, and growth equity.
Almost no one has hedge fund experience since it’s not relevant for this job.
We’ve also made a few direct hires at the MBA and undergraduate levels.
We’ve interviewed candidates with integration/consulting experience in our industry, but the ones who make it to the final rounds tend to have IB or consulting backgrounds.
Q: And how does the recruiting process work?
A: It’s not that much different from normal VC interviews; the main difference is that they focus a bit more on traditional accounting and finance questions since corporate VC roles are in between corporate development and venture capital.
They won’t necessarily give you formal case studies, but a Director on the M&A side might say, “Here are three companies we’re considering acquiring. Which one should we acquire, and why?”
And then a Director on the VC side might do the same thing, but with potential investments rather than acquisitions.
My two biggest tips are:
- Don’t overanalyze things! These questions are mostly about identifying whether or not a smaller company fits in with a bigger company’s strategy.
- Know your company’s market very well. For example, if you’re interviewing at an insurance software company focused on brokers, don’t pitch a startup that develops apps for claims representatives.
That app may still be “insurance software,” but if you pitch it, you’ll demonstrate that you haven’t done enough homework on the company.
The Corporate VC Landscape: Google, Apple, and…?
Q: You mentioned that corporate VC roles are “in between” corporate development and venture capital.
Is that the best way to think of this industry?
A: Sort of, but it’s a big generalization.
On one extreme are corporate VC funds with Limited Partners, such as Intel Capital and Comcast Ventures; they act more like institutional VC firms.
On the other extreme are companies like Apple, where the VC division is more of a corporate development team that does a few venture deals on the side.
The closer to corporate development the team is, the more they’ll invest according to the company’s overall strategy.
You can assess the team by checking:
- The Limited Partners – If there are multiple LPs, it’s more like a traditional VC firm; if there’s just a single LP, it’s closer to corporate development.
- The Track Record of Portfolio Companies Becoming Acquisition Targets – The more this happens, the more like corporate development the team is.
We structure our investments the same way institutional VCs do: Mostly preferred equity, with some convertible notes for earlier-stage, pre-Series-A companies.
We never do Silicon Valley Bank-style venture debt deals.
One difference is that we often insert terms such as the right of first refusal or right of first notice in investment agreements, which sometimes attract scrutiny.
Q: OK – so the deal-making is similar aside from those terms.
What does that mean for your time on the job?
A: I spend around 50% of my time on sourcing – researching industries, contacting companies, creating industry landscapes, and speaking with bankers to find interesting companies.
The remaining 50% depends on whether or not we have a live deal.
If we do, I’ll focus completely on that deal, including the due diligence, term sheets, data room, lending documents, and financial review.
If there are no live deals, I’ll spend that time monitoring portfolio companies, attending Board meetings, and reviewing business plans.
Q: How do you interact with the rest of the company?
A: We work closely with the strategy team to come up with themes for partnerships and investments.
Often, we sit down with them to plan out 1-year, 3-year, and 10-year strategy, and then invest accordingly.
We invest according to two criteria:
- New Market Opportunities – For example, we might target new geographies, customer segments, or technologies.
- Product Acceleration – We also look for companies that could help us build our planned products more quickly, according to our internal roadmap. Institutional VCs don’t do this at all.
I never have to get “approval” for my sourcing work; we don’t ask executives for permission to speak with specific companies.
But we do focus on industries based on the direction set by the strategy team.
We start by identifying a market, creating a giant landscape of everything in it, and then scheduling meetings with the most promising companies.
We assess each company’s market traction and how well it fits into our strategy – either new markets we want to enter, or existing ones where the other company might help us.
Corporate development does the larger M&A deals, but we might handle a few smaller acquisitions (“acqui-hires”).
Q: Let’s say that you’re about to make an early-stage investment.
Who at the company would need to approve it?
A: It would rarely go up to the Board or C-level executives, especially at companies with large, well-defined teams.
So, the Group VP would likely cast the deciding vote.
In that way, it’s similar to institutional VC funds where Associates work closely with the Principals, and then the MDs or Partners make the final investment decisions.
Q: You also mentioned that you might include different terms in investment agreements.
Do those terms ever create conflicts of interest, such as when competitors attempt to acquire your portfolio companies?
A: Yes, these issues come up all the time.
With most larger investments, we take a Board seat or Board approval role, and we’ll recuse ourselves from meetings with conflicts of interest.
If a portfolio company receives an acquisition offer, they usually have to disclose that they received an offer, but they don’t have to disclose the buyer or price (this is known as “the right of first notice”).
That way, we can at least run a valuation and see if we want to submit a competitive offer for the company.
Q: Don’t those terms annoy founders?
A: Not really; they see it as a way to get a higher price. Other investors don’t mind these terms for the same reason.
Third-party acquirers sometimes have major issues with these terms, as you would expect, which makes them less likely to acquire our portfolio companies.
The Hierarchy, the Money, and the Long-Term Plan
Q: Thanks for explaining that.
What is the hierarchy in your group like?
A: It’s more like corporate development than venture capital: Associates are at the bottom, and then there are Managers, Senior Managers, Directors, VPs, and the Chief Product Officer at the top.
The Associates, Managers, and Senior Managers are responsible for most of the deal work.
Q: And what about compensation?
That’s close to what Associates in venture capital earn, so it’s still solid compensation, but it is a discount to pay at banks, PE firms, and growth equity firms.
Also, the bonus is probably a smaller percentage of total compensation.
As with corporate development, the hours are fairly good as well: The average might be around 50-60 per week.
Q: I see. Are you going to stay in this industry for the long term?
A: I plan to stick with this role for at least 2-3 years since I like the mix of early-stage investing, M&A, and corporate strategy.
But in the long term, I might get an MBA and then move into an institutional VC or corporate development role – which is what most people at the Associate and Manager levels do (moving to other corporate VC teams is also common).
Some also attend MBA programs or go into corporate strategy or product management at the company.
Q: Great. Do you want to add anything else at this point?
A: Corporate VC is a great path if you want to keep your options open and learn about product and strategy in addition to M&A deals and investing.
Joining an institutional venture capital firm right after banking, or right out of undergrad, can limit your options, but corporate VC lets you explore a few different industries at once.
Think about it!
Q: It does seem like a great way to keep your options open.
Thanks for your time!
A: My pleasure.
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