A new approach to innovation

In February, Spanish bank BBVA took a step that says a lot about the current up swing in corporate venture investing.

The bank spun out its internal investment unit into an independent firm called Propel Venture Partners, with a $250 million fund to enhance its long-term viability and BBVA’s nearly 5-year-old portfolio.

With the assets came a broadened mandate to back fintech companies in the United States and Europe not just with later and expansion-stage rounds, but earlier ones now that the bank freed itself from regulatory 5 percent ownership restrictions.

So what does this say about the maturity of corporate venture programs? A great deal, actually. Maturity varies from program to program, but overall the trend is clear. Corporations are re-thinking their strategies for the startup ecosystem with new determination and know how. This includes giving units more independence, hiring seasoned veterans from the ranks of financial venture capitalists, more readily joining follow-on rounds and employing new tools, such as incubators.

Sustainability won’t be tested until the next downturn, but so far this cycle looks different.

Thomas Whiteaker
Thomas Whiteaker, partner, Propel Venture Partners

“Now corporations are doing venture for the right reasons, most of the time,” said Propel Partner Thomas Whiteaker. “They have woken up to the fact that they can’t stop innovating and they can’t keep up with the pace of external innovation.”

BBVA’s new interest and prowess for venture is not an isolated case. Citigroup’s venture unit not just survived a change in the bank’s leadership, a positive sign of longevity, but stopped talking a couple years ago about innovation and started talking about growth, said Citi Ventures CEO Deborah Hopkins recently at the GCVI Summit.

“Innovation not at scale is nothing but a hobby,” she said. “The interest and demand for what we do has gone up so much.”

In February, Lewis & Clark Ventures welcomed a corporate backer for the first time into its new $104 million fund, offering Express Scripts a window into its early-stage investing. And when Index Ventures split off its healthcare operations into Medicxi Ventures, the new firm held onto Johnson & Johnson and GlaxoSmithKline as LPs.

At Intel Capital, one of the longest running corporate programs, new President Wendell Brooks identified tuning his operations as one of his first tasks. He vowed to speed decision-making, lead more deals and increase the focus on bringing added value to portfolio companies. The new goal is to lead between 50 percent and 60 percent of deals, compared with about 40 percent in the past, and to take more board seats.

“I think we can learn more when we do that,” Brooks said recently.

At nearly the same time, the organization took a step back in a different area, showing that maturity is not always a straight line forward. Intel Capital eliminated shortly before Brooks arrived a carry-like compensation scheme that rewarded partners for the profitability of their deals. The scheme attempted to help close the pay gap with financial VCs and provide an extra incentive for investors to shepherd their deals. Its elimination helped push several partners to depart.

In interviews with more than 15 corporate and financial VCs and market experts, the raft of new corporate priorities toward venture seems real and significant this time. And it has already begun to impact the structure of corporate venture, as a recent study from J. Thelander Consulting points out. The work found a steady uptick in organizations operating as separate, independent entities and a small corresponding reduction in those obtaining funds on a deal-by-deal basis. Now 16 percent of units are separate entities.

Claudia Fan Munce, IBM Venture Capital Group
Claudia Fan Munce, venture advisor, NEA

Today “corporate venture is a very highly regarded professional skill inside corporations,” said Claudia Fan Munce, now a venture advisor at New Enterprise Associates and a former managing director at IBM’s venture capital group. “There is a career path” that wasn’t there that many years ago.

Sue Siegel
Sue Siegel, GE Ventures

This has brought more seasoned staff into programs. Two key examples are the additions of Sue Siegel at GE Ventures and Jim Lussier at Dell Ventures.

The picture also looks brighter on syndicate participation. Corporates seem more willing to back follow-on rounds.

They can’t just turn off their participation the way they did in 2001, said Paul Straub, a director at Claremont Creek Ventures. They need the innovation.

“Frequently we’re seeing groups that understand how venture capital works and, if things go as you hope, probably will be in future rounds,” Straub said. “You just have to have the conversation upfront.”

This is not to say every hurdle has been cleared. Over the years, the rap against corporate VC programs has been that they are slow, as many programs still can’t decide quickly enough to make a deal’s first close, and that their money has two masters: the good of the portfolio company and the goals of the corporation.

The perception is reinforced in many instances when corporates take cash off the balance sheet to fund deals and fail to link it to an individual investor’s bonus, or benchmark it with IRR-like returns. This creates the concern that corporate motives aren’t entirely aligned with the rest of the syndicate.

Longevity is another issue. Financial VCs still have a bad taste in their mouths from the dotcom collapse, when numerous corporate programs closed up and startups were left without backers and board meetings went unattended.

The reality is that maturity and sustainability go hand in hand, said Robert Ackerman, a managing director at Allegis Capital. Venture is a relationship business and corporate programs have learned they can’t swap out staff every couple years and expect the relationships to continue.

“Corporations are getting better at understanding they can’t be just point investors,” writing one check and then backing away, Ackerman said. “I view all that as a sign of maturity.”