What CVCs should do
The one thing that makes the most sense for corporate VCs to do is to M&A – buy startups. Technically this is not a VC job but today many CVCs also run this part of the company's business naturally.
Buying startups is a form of outsourcing R&D, except that it's done at a stage when results are already out and risks are much lower.
Buying startups gives the corporates full control of the technologies and products. They also get access, albeit usually only for 1 year or so, to the talent of the founding team.
The next best thing CVCs can do is to do VC fund investments. This gives the CVCs an overall view of the specific sectors they're looking into. It also relieves them from the onerous deal sourcing activities.
More than anything, it gives them an early picture for potential targets for M&A.
What CVCs should NOT do
Direct investments. The reasons are:
- CVCs do not have deal flows as the independent VCs, for whom deal flows (both in quantity and quality) are their lifelines.
- If anything, CVCs might get reverse deal flows – they might only get those that could not raise from independent VCs and those that want to rely on the mother companies for business, i.e. lazy ones
- CVCs often give too high a valuation since financial return is not their mandate. If startups don't need follow-on rounds, it's fine. If they do, they're screwed by taking a high valuation from CVCs, which basically kills the hope of future funding from independent VCs.
- CVC managers come and go, unlike independent fund managers who are bound by key person terms. Startups need years to scale to dominance. This inherent mismatch is a big problem in accountability.
- Conflicts of interest abound