In this week’s Observer, Leon Neyfakh wrote about AOL Ventures, the venture capital arm of the former dial-up monolith that’s working to reinvigorate their image and get their hands dirty with investments in the New York tech scene.
But You’ve Got Mail associations aside, another set of challenges facing Mr. Brown is general to all corporate venture capital projects. In competing to invest with the best entrepreneurs, such corporate entities face two major problems, the first being their past unreliability.
Depending on how you define venture capital, corporate efforts in the field are currently enjoying their fourth or fifth wave of popularity, dating back to the 1960s. We’re currently in the middle of another, but the last one bottomed out with the economy.
“If you’re [the CEO of a corporation] and you’ve committed money to this VC thing, and suddenly the world is ending, you’re going to say, ‘Hey we’re not doing that anymore,’ and pull the money back in,” Mr. Brown told The Observer. “So then you really kill companies because you actually don’t have the capital to follow-on if you wanted to.”
Gary Dushnitsky, an associate professor of strategic and international management and entrepreneurship at the London Business School, said in an interview that in past waves, “the average lifespan of a corporate venturing unit was about two and a half years, or as one of my contacts once put it, the tenure of the CEO.”
More often than not, such investments were an effort to be a part of a fad, Mr. Dushnitsky said, and this touches on the thornier second issue: a wariness about the investing company’s motives.
“There’s lots of old horror stories about oil companies investing in computers and stuff like that where it just didn’t make a lot of strategic sense,” said Josh Lerner, a professor at the Harvard Business School with a specialization in entrepreneurial management.
And if they are strategic investors, there’s a chance that the investing company may throw a wrench into a future sale, even one motivated by failure on the part of the start-up.
Failure or success aside, entrepreneurs also may not want to be so cozy with a company in the same general industry. Mr. Dushnitsky pointed out that corporate entities may be liable to regard start-ups as a branch of their own R&D division. It’s cheaper to invest in start-ups over R&D, he said, amid depressed tech valuations.
All that said, corporate venture capital firms still have much to offer in the form of office space and guidance, and the trend is not yet slowing.
“Entrepreneurs are actually very smart people and we wouldn’t have seen so much corporate venture capital had it not been the case that entrepreneurs view them as viable,” Mr. Dushnitsky said. “There will always be a venture capital fund out there that will be willing to fund you and if you’re still going to corporate, I think it’s telling.”