Inside corporate venture capital

Mr. H is a good friend and frequent collaborator who works for the Silicon Valley-based corporate venture/strategy arm of a large Japanese company. He travels the world evaluating startups for investment and helps define the company's innovation strategy. He graciously agreed to uncover some of the secrets of corporate venture capital for us. Read on to get the scoop.

Eliot: Why do big companies invest in startups?

Mr. H: Several reasons:
  • Risk hedge: if the company's not sure if a technology will be successful, they might invest a little and see how it goes, it's much cheaper compared to allocating your own employees to work on it internally.
  • Speed: investing in a startup might be the fastest way to introduce a new technology (with a viable business model) into the larger parent company.
  • Innovation: if there is little momentum developing new technologies internally large companies will buy startups to fill the gap... if you can't make something new, buy it.
  • People: by investing they get access to both the technology and the experts who created it, killing two birds with one stone!
  • Trends: companies might make bets on a startup with a technology that might become important in the future, it gives them an inside track for monitoring trends.
Eliot: What makes corporate venture capital investors (CVCs) different from traditional VCs?

Mr. H: CVCs invest in things that make sense financially and strategically for the parent company in medium/long span whereas traditional VCs focus only on financial return. For example, if you are in the car business, maybe it would make sense to invest in a biofuels startup. It might make sense financially and it also might make sense to have some knowledge of complementary technologies in the future that are relevant to the car business. But it really depends on the nature of the individual CVC. Some may just want to get accrue capital gains without thinking too much about the strategic impact for the parent.

Eliot: How would a potential investee make your day?

Mr. H: Do their homework in advance and give us hints to a new "blue ocean"! They should also be explicit about "What's in it for us?" (i.e. the CVC) and "Why haven't people done it yet?"

Eliot: What will technology investing look like in ten years?

Mr. H: I think technology investing will become more and more distant from technology itself. People will start to invest more in people than in technology (i.e. investing based on founders, not product/market).

Eliot: What's the single biggest thing new entrepreneurs struggle with?

Mr. H: Many new entrepreneurs think their good idea is everything. But solid execution is far more valuable in terms of company building and technology commercialization. Good ideas help, but they're only the beginning.

Eliot: What kind of culture clashes have you experienced on the interface between Silicon Valley style startups and a large Japanese corporation?

Mr. H: Wow, there are a lot! I think the two most important ones are decision making and sense of urgency. Individuals are not given much authority to make decisions in large Japanese corporations and teams often must fall back to consensus based decision making. That can take a very long time... During that time, the startup may be bought by someone else or go out of business! Sense of urgency is also lacking in large Japanese corporations because we've had good market success within Japan and are generally complacent about exploring new global markets. By comparison, Korean companies have had a lot of success outside of their home turf. This is partly because the Korean market isn't that big and because they had foresight and were hungry to succeed internationally. They recruit a lot of talented international employees too. The comparative diversity of their workforce is a big asset in the current era of extreme uncertainty. Japanese companies are starting to change but becoming more global should NOT be the goal, the real end-game is accelerating the process of innovation.