Brian Park and Erik P.M. Vermeulen

Chasing Strategic vs Financial Returns: How Should CVCs Operate?

Following the Herd! Start a CVC!

0

25

50

75

100

2010 (Est.) 2011 2012 2013 2014 (Est.)

Corporate/Direct off the balance sheet

LP in VC FundLP in VC Fund (Optimized)

Total CVC

CVCs Are Gaining Steam!419 Global CVC Initiatives 2010 (2H) to 2014 (1H)

Spin-off (1 LP)Spin-off (1+ LPs)

0

10

20

30

40

2010 (Est.) 2011 2012 2013 2014 (Est.)

Corporate/Direct off the balance sheet

LP in VC Fund

LP in VC Fund (Optimized)

CVCs Are Gaining Steam!419 Global CVC Initiatives 2010 (2H) to 2014 (1H)

Spin-off (1 LP)

Spin-off (1+ LPs)

Calculated % of Deals with CVC

National Venture Capital Association

02468

101214161820222426

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

20132014

Start a CVC! Are You Kidding Me? Number'of'Startups'Founded'! Number'of'VC'firms'!' Number'of'Industries'Disrupted'!' Number'of'Unicorns'(1+'B'Valuations)'!' Number'of'IPOs'!' Number'of'M&A'Deals'!' Number'of'Media'Coverage'on'Startups'! Number'of'People'Employed'by'Startups''!'

Calculated % of Deals with CVC

National Venture Capital Association

02468

101214161820222426

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

20132014

Start a CVC! Are You Kidding Me? Number'of'Startups'Founded'! Number'of'VC'firms'!' Number'of'Industries'Disrupted'!' Number'of'Unicorns'(1+'B'Valuations)'!' Number'of'IPOs'!' Number'of'M&A'Deals'!' Number'of'Media'Coverage'on'Startups'! Number'of'People'Employed'by'Startups''!'

Fundraising

ContractingDeveloping

Harvesting & Distribution of Returns

Investors

VCs

Portfolio Companies

Exit

Fundraising

ContractingDeveloping

Harvesting & Distribution of Returns

Investors

VCsExit $

Spin- Outs

Portfolio Companies

Developing

Harvesting & Distribution of Returns

Exit Open Innovation Acquisitions

0

10000

20000

30000

40000

50000

60000

70000

0

4

8

12

16

20

24

2009 2010 2011 2012 2013 2014

202 of the 419 CVC Initiatives are inactive or have made 0 investments since their fund has closed

202 of the 419 CVC Initiatives are inactive or have made 0 investments since their fund has closed

Why?

(1) Herd Behaviour (2) Lack of Focus/Interest (3) Lack of Internal Know-how/Talent (4) Internal Politics (5) Wrong Incentive Structures (6) Disappointing Performance (7) Regulatory Issues

0"

10"

20"

30"

40"

50"

60"

70"

80"

90"

Sub"(VC"Compensa9on)" Sub"(Non

0"

10"

20"

30"

40"

50"

60"

70"

80"

90"

Sub"(VC"Compensa9on)" Sub"(Non

0"

10"

20"

30"

40"

50"

60"

70"

80"

90"

Sub"(VC"Compensa9on)" Sub"(Non

0"

10"

20"

30"

40"

50"

60"

70"

80"

90"

Sub"(VC"Compensa9on)" Sub"(Non

0"

10"

20"

30"

40"

50"

60"

70"

80"

90"

Sub"(VC"Compensa9on)" Sub"(Non

Key Takeaways

1) Corporates must act like a VC.

Corporate Engagement in VC is IMPORTANT, But Highly Variable, Cyclical (Herding) Strategic Aims Must Take the Backseat to Align Incentives, Expectations, Aims w/ Startups = FOCUS ON FINANCIAL RETURNS! Corporates Can Have Role in Ecosystem, But Only Under 2 Specific Circumstances:

Fund-of-Funds

VC Fund

Secondment

Partner

Top-quartile funds often over-subscribed

Disruptive (entrepreneur-friendly) Visible

Hyper-active

Past Performance

Future Performance

Key Takeaways

1) Corporates must act like a VC 2) Otherwise, its best that they invest directly in a VC, FoF (as a real partner)

Corporate Engagement in VC is IMPORTANT, But Highly Variable, Cyclical (Herding) Strategic Aims Must Take the Backseat to Align Incentives, Expectations, Aims w/ Startups = FOCUS ON FINANCIAL RETURNS! Corporates Can Have Role in Ecosystem, But Only Under 2 Specific Circumstances:

erik .verme

ulen@philip

s.com

e.p.m.verm

eulen@til

burguniver

sity.edu