In this interview, he says,
It’s unsurprising that Silicon Valley’s version of the multidivisional firm is to say we’re going to run a venture capital firm inside.
. . .Venture capital does a great job, and it’s a competitive market. So the idea of trying to replicate venture capital inside the company is usually misguided.
A tech firm may have an upside to funding failed start-ups that a venture capital fund does not have. That is, the tech firm probably can retain the best employees from the start-up.
It is probably a common strategy for a company with a meat-n-potatoes business to use the revenue to fund a “startup” in a related business area. Tech businesses often start as high-margin, but within half a decade they get main-streamed or worse. Funding a “startup” can be the least-worst option.
I work in this industry. My firm has a portfolio of almost 1000 startups.
I don’t think I’ve ever seen a case of a large firm retaining employees from a failed startup they invested in, unless they acquire the assets, which is actually pretty rare. On the other hand, I see large firms “acqui-hire” startups funded by external angels and micro-VCs all the time. So I would be surprised if there were much difference in the rate of hiring based on their investment.
The issue is that most corporate VCs do not own a majority stake or even a controlling position (via Board seats) in the startups they invest in. And they typically don’t make much effort to extract inside information from the startups from what I’ve seen. So there’s not much leverage in hiring from startup they’ve funded.
My theory on corporate VCs is that a randomly selected VC portfolio has a higher return than all but the most productive large corporations’ return on equity, so there’s no real financial penalty to having a VC arm that’s mediocre compared to the industry as a whole. Then, there are all sort of external and internal signalling benefits to having a VC arm that’s perceived as investing in at least some “good deals”.
It depends what the purpose of the venture arm is. I have been on both sides of this at one point or the other.
Roughly speaking, there are two ways to think about the proper role of an in-house VC. First is to make money, largely like any other “pure” VC. The venture arm invests in companies that will likely give a positive portfolio return, assisted by either the knowledge/channel that the company can give to a startup (expertise in chip design or access to a large salesforce) or by the company itself being a large customer, which gives the startup a leg up.
The other is to serve purely strategic interests. A trivial example (and as far as I know, fictitious) would be Amazon investing a company with growth prospects that is entirely built on AWS; the success of the startup would drive continued growth of their AWS platform and could continue to contribute via network effects…and keeps them off of Azure. A more grounded example is the concept of Cisco “spin-ins” where the company invests in startups that are developing the technology that they may want to acquire in the future and it keeps the startup close (and often working on the thing that Cisco wants).
In reality, and one reason these arms often don’t perform well* is that the mission is somewhere in between, and they’re constantly in tension. Making real money in VC takes a lot of things, one of which is being pretty ruthless in selection, operating, and cutting bait on your investments. When strategic priorities get layered on, the ROI part of the equation gets muddled, and vice-versa. So the venture arm tends to always be trying to track a middle ground and often doesn’t do either well.
But I do see one place where corporate VC serves its purpose, contra Kevin. Namely, having an inside line on the technology the startup is developing. Not necessarily by leveraging inside information or control but by being the most familiar with the technology because they’ve a) been around for its development and b) had a chance to bounce it around internally. Now this can be done with any random startup but having an investment is a good way to focus minds in the IT/sales/marketing/whatever team that may want to use the technology (this is surprisingly hard at any but the most progressive large companies).
So one can look as the investment as an ROFR option – the company can get first (and more knowledgable) dibs on the technology through an acquisition, licensing deal, etc. And if the startup succeeds and the company makes money, so much the better.
*Another is talent – if you’re good, why make $300k/year at a corporate when you could make millions at a pure-play?
VCs can only provide cash, operating companies can also provide an exit.
In my experience, operating companies (including, perhaps most commonly *not* tech companies) will often make strategic investments in little companies that are showing some traction in an area where the BigCo has struggled. The cash and imprimatur gives the LittleCo a better chance of scaling to the size at which an acquisition makes sense for BigCo, while also closing LittleCo off to other bigcos, and reducing the purchase price if LittleCo starts turning into a viable M&A target.
I don’t feel free to name names, but I have worked in big companies since 1980 and during that time I have seen several purchases of small companies with innovative tech. The employees of those small companies usually leave in a few years, as they don’t like the very different culture of a big company. Often the innovative tech is discarded by the acquiring big company as well, as it doesn’t fit or isn’t supported by existing structures (the “Not Invented Here” syndrome).