On Corporate VC

I know I’m a bit late to this, but I just ran across Fred Wilson’s comments about corporate VC from two months ago. “I am never, ever, ever, ever, ever going to do that again,” he said of investing with corp VCs, because “they suck.” Why do they suck? “They are not interested in the company’s success or the entrepreneur’s success. Corporations exist to maximize their interests. They can never be menschy or magnanimous.”

On his blog Wilson clarifies a bit: corporate VCs are of two types, passive or active. If they are passive, they can be good, because they act like VCs; if they are active they are bad, “The corporate strategic investor’s objectives are generally at odds with the objectives of the entrepreneur, the company, and the financial investors.” And, “I strongly advise against entering into these kinds of relationships.”

There’s certainly some truth here. I was an active corporate VC in the 90s and I’ve been a stand-alone investor for the past five years so I’ve seen both sides. And I agree with Wilson, pretty much everything he says except that last sentence*.




It’s true that corporate VCs and VC firms should think twice before investing together. They have different goals. But let’s understand this.




You can see the reasons for frustration. Dominating an industry does not necessarily mean becoming extremely valuable. Most of the ad agency holding companies would have preferred owning a piece of, say, Donovan Data Systems to a piece of Yahoo! back in the 90s. Because, as an Omnicom exec said to me back in 1997 or so, “there’s no amount of money you can make that would make any conceivable difference to our market cap.”

But this cuts both ways. Because a corporate VC does not need to exit their investments in a relatively short time-frame, they can be more supportive than a VC firm. Since corporates are not necessarily in it to make money, they can put money and time into a company for strategic reasons, even if it doesn’t increase the market value of the company in the short-term.


When I was a corp VC we didn’t want to invest with stand-alone VCs, for reasons analogous to Wilson’s: their definition of success was different so we had disagreements, brickbats were thrown***, and we had suboptimal outcomes. Whose fault was that? Both sides blamed the other.

Now, knowing what I do about both sides, I invest with corporate VCs, but carefully. The passive VCs are great for filling out rounds, but I don’t ever rely on them being around three years from now: because they have no corporate rationale (neither strategic nor profit) they are arbitrarily shut down when VC stops being fashionable, late in any boom. Passive corporate VCs are classic buy high, sell low players. The active VCs can be extraordinarily helpful (one corp VC I’ve coinvested with has brought some of the first customers to pretty much all of its portfolio, and you know how important getting those first customers is) but I wouldn’t put money into a deal that a corporate VC is leading because I recognize that our interest diverge, especially around exiting.

But entrepreneurs should take Wilson’s complaints–the tension between two very different types of venture investing–with a grain of salt. I agree that if you take money from strategic investors you need to be careful what kind of control they have over your company. You need to retain reasonable control of the exit, certainly, and of raising more money. The corp VC can have very different ideas about what you should do here, what is best for them. You should also be realistic about what you can expect the corp VC to bring you in terms of strategic advantage. In the end they can’t bring you much more than money, advice and some intros. They will rarely bring you customers or tactical help.


Razorfish took Omnicom’s money not because they thought Omnicom would bring them clients but because they knew that being backed by the world’s largest marketing services firm would enhance their own brand. No venture capital firm would have had this effect with Razorfish’s clients. Every company is different and needs different things to succeed. Pick your investors wisely, always, but if a strategic investor is going to bring you more success than a VC, and all else being equal, take their money.

* And the last sentence of the first paragraph. Wilson can be menschy and magnanimous beyond what’s solely in his firm’s best interests because he’s had so much success already. Kind of like how Neil Young could experiment with Trans in the early 80s. Most VCs do not have the leeway to be menschy or magnanimous, corporate or not.  Also, I’m going to ignore the passive corporate VCs because they are, in fact, simply stand-alone VCs that have been conglomerated; much like GE makes jet engines and refrigerators, Intel makes chips and does venture capital. There are lots of reasons to criticize this sort of conglomeration, Sarah Lacy has all of them–and a few more–here.

** Because of the way Omnicom was managed–acquisitions were always accretive to earnings–and the disconnect between a business’ earnings and value during the steep part of the s-curve, we could not acquire the whole thing up front. We also thought that buying out the entrepreneurs when there was still substantial growth ahead would not motivate them as much as letting them profit more directly and substantially from realizing that growth.

*** I had a very, very well-known West coast VC tell me on a conference call once that “I would never invest in California again.” The other corp VCs on the call bought me lunch for months for that out of pure glee. The West coast VC in question followed-on into my first angel deal. To be fair, it wasn’t in California.


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