Romans says CVC is a means for Southeast Asia’s startup scene to leapfrog slower organic growth
Note:This is an evergreen article and e27 thought readers would enjoy a second look. It was originally written on March 3, 2017.
This coming April, Bali will be some big names from the Silicon Valley tech scene at the Global Ventures Summit 2017. The event boasts speakers Dave McClure, the 500 Startups Founding Partner, Go-Jek Founder and CEO Nadiem Makarim and Fenox Venture Capital CEO Anis Uzzaman.
When asked about the goal of the conference, Ahmed Shabana, a Managing Partner at Parkpine Capital, told e27,
“[The goal is to] create a more connected ecosystem between high growth, innovation, and availability of capital. We are raising fund 1 for Parkpine Capital with that focus in mind. A more connected ecosystem drives more foreign LP’s to invest in SV funds.”
One of the speakers is Andrew Romans, a General Partner at Rubicon VC and the author of Masters of Corporate Venture Capital.
Corporate Venture Capital (CVCs) are becoming a hot topic in Southeast Asia, so e27 sat down with Romans to hear some thoughts from an expert. Edited excerpts from the interview are below.
In Southeast Asia, the corporate VC trend is just starting. We are at the beginning of the tail. As CVCs become part of the ecosystem, what can we learn from the American example?
So I think the it’s an opportunity to not make the same mistakes that we made in the US.
The lifetime for the average CVC — from the time they announce they are open for investment to when they announce they are closed — is something like 2.5 to 4 years.
So if you’re a Founder and you let a CVC invest in your startup, you might consider that they will never invest again because their program will be cancelled by the time you go through your next funding round.
Another amazing thing is that most CVCs do not provide a typical ‘two and twenty’ compensation to the Investment Professional that invests at the CVC.
They just get a base-salary and a bonus on the performance of the conglomerate — rather than a phenomenal investment exit. And these guys are investing with us, and they see us making millions of dollars while they are are not.
So what tends to happen is the people that work at the CVC are planning to leave to join a VC as quickly as they can. Or, if they are unsuccessful in getting that job, they try to spin off the CVC where the corporate is the sole LP, but politicly that is hard to pull off.
The third option is they stick around for two years to put their name on that investment so they can get a job at a different CVC that offers a bigger base salary/bonus/options etc.
Part of the problem with CVCs is if they don’t cancel the programme in 2 to 3 years, the individual who started the CVC is going to be gone.
I interviewed over 100 people, more than half of the people are no longer at the CVC after the interview. It makes the CVCs dysfunctional.
So I think the corporations should ask themselves, ‘Why are we doing this?’
Write down the objectives. Get the CEO, and all the C-level people to agree. And then now, let’s design the CVC to get achieve the goal as quickly as possible.
One of the big buzz words cropping up right now is ‘corporate innovation’. Do you have any thoughts on that? Which is a bit different than CVC.
Yeah, I think a lot of corporate innovation programmes hire someone who does not have any responsibility or ability to invest cash.
I think that when there is no cash, it is hard to reward success or punish failure. When there is cash involved and they are doing actual CVC, whether it is investing in a fund-of-funds or direct investments, the CFO over time can measure money-in and money-out.
When the person in charge of CVC is going to be measured if this is loss-making or profitable endeavour, the quality of their game goes up and they start doing a better job of partnering with good startups.
When the person of a corporate innovation programme approaches me, and tries to get a partnership, I kind of look at them and say, “I doubt you have any power in your corporation to make a partnership that is valuable”.
There is a lot of resistance and barriers to doing business with an early-stage startup and I don’t think those people that run those corporate innovation programmes have the mojo and power to get things done.
Our startups need to achieve a lot, in a short period of time, with a little bit of money. So I tell them to not take the meeting.
If you want to get serious, my advice is invest in a whole bunch of VC funds. It is what Cisco did, it is what Telefonica did, it is what Verizon did. Buy your way into this dealflow. Buy your way into this extremely complicated ecosystem.
If you invest in VC funds that want your money, that want to create partnerships between their startups and you, you get their attention if they know they have access to the people with power in the company.
But [CVCs should] only invest in the fund if they want the partnerships and they are going share real-time information. CVCs should have access to every single investment the VC makes, and the ability to create partnerships with those startups. And then, if they are going to make a partnerships with the companies, the startups have been filtered through the VC funnel.
By the time we bring the startup to the corporate, we are dealing with the top 5-10 per cent of startups. If you are the ‘open innovation programme’ you are dealing with the bottom ten percent, and that’s a waste of everyone’s time.
Then the CVC starts doing direct investment by cherry-picking the best deals.
The result is the programme does not get cancelled because it starts to get exits, and it starts to make money, and then the corporate will not spend 10-15 years trying to ‘figure it out’.
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