Choosing Between Independent And Corporation-Based Venture Capital

Sunday, March 12, 2006

Prof. Markku Maula, Prof. Erkko Autio, and Prof. Gordon Murray, International Journal of Entrepreneurial Finance, http://

Better Business Management & Planning Practices

Abstracted from: Corporate Venture Capitalists And Independent Venture Capitalists: What Do They Know, Who Do They Know, And Should Entrepreneurs Care?

Institute of Strategy and International Business, Helsinki University of Technology, Finland (MM); Ecole des HEC, University of Lausanne, Switzerland (EA); University of Exeter, England (GM)

Venture Capital: International Journal of Entrepreneurial Finance - Vol. 7, No. 1, Pgs. 3-21

Two breeds of capital.
Venture capitalists typically are individuals who work for independent VC firms funding younger, smaller new companies. In recent years, a new branch of the industry has emerged: venture capitalists who work for a corporation offer unique strategies and capabilities. Through a study of 91 US technology startups assisted by venture capitalists, business scholars Markku Maula, Erkko Autio, and Gordon Murray find that the skill sets and expertise of the traditional independent venture capitalist and the newer, corporation-based venture capitalist can differ dramatically. CFOs and entrepreneurs seeking venture capital should understand the distinctions.

Strengths and experiences differ.
Bringing different experiences and skills to the table than their corporate VC counterparts, independent venture capitalists hold the advantage in several key areas. Their experiences as lead investors responsible for structuring deals and assessing valuations make them more valuable, the authors believe, when helping young, privately held companies obtain financing. Given their typically extensive network of contacts, they are also better able to help portfolio companies find new employees than the corporation-based financier, whose contacts and experiences center around the corporation. That limited corporate perspective also makes the corporate venture capitalist less adept at helping young companies organize for early growth. Traditional VC investors guide growing young companies more effectively because they have done so in the past and have learned to support entrepreneurs at various stages.

Friends in high places.
Corporate venture capitalists, on the other side of the coin, are better at attracting new domestic customers to portfolio companies. No company can gain a track record until it sells to large or important customers, and most early-stage VC specialists lack the contacts and resources to help portfolio companies accomplish those goals. By contrast, the authors theorize, corporate venture capitalists can provide portfolio companies with access to worldwide sales and marketing channels and other global resources. They also are better at attracting foreign customers than independent venture capitalists are, whose contacts extend locally. Most VC firms invest in broad industry or technology sectors and depend on outsiders to provide more specialized knowledge, but corporate capitalists can provide invaluable information on customer trends and needs because they have the advantage of deep specialist knowledge and resources across a broad swath of related sectors. They also give portfolio companies better information about new technologies, since many are from tech-related industries themselves.

Implications for entrepreneurs.
Considering the differences in expertise and experience, the authors advise entrepreneurs to assess their own company’s needs and stage of development before selecting one or the other. For startups, the complementary strengths of each type may make using both the optimal solution. Venture capitalists should also take heed of their firms’ areas of expertise and select portfolio companies accordingly, perhaps through a two-step financing strategy. Independent venture capitalists, who can add the most value in the areas of raising funds, recruiting employees, and building organizations, would work with younger startups through the enterprise-nurturing stage. Corporate investors with superior capabilities in technology and commercial credibility would take over during the commerce-building phase of a company’s life. Cooperative syndication between the two could prove more fruitful than each working in isolation.

Abstracted from Venture Capital:
International Journal of Entrepreneurial Finance
published by Routledge
(part of Taylor & Francis Ltd.)
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