June 21, 2020

Corporate Venture Capital - how does it work and how is it different from a Venture Capital, by Mark Crawford.

Corporate Venture Capital - how does it work and how is it different from a Venture Capital, by Mark Crawford.

In this episode of Fundraising Radio, Mark Crawford - Venture Capital Investor at Stanley Ventures and Intel Capital will explain how does Corporate Venture Capital (CVC) work and how is it different from a Venture Capital (VC). Lots of insights into this question by an experienced investor who was on both sides of it - the VC and CVC. In this episode we also discussed the government-sponsored venture capital funds, specifically Invest Nebraska Corporation, how it invests and who should consider it.

In this episode of Fundraising Radio, Mark Crawford - Venture Capital Investor at Stanley Ventures and Intel Capital will explain how does Corporate Venture Capital (CVC) work and how is it different from a Venture Capital (VC). Lots of insights into this question by an experienced investor who was on both sides of it - the VC and CVC. In this episode we also discussed the government-sponsored venture capital funds, specifically Invest Nebraska Corporation, how it invests and who should consider it.

Stanley Ventures: https://www.stanleyventures.com/

 


Transcript

So, Mark, let’s kick it off by you giving us some background on yourself and on Stanley Ventures.

Sure. Hey, thanks. Thanks for having me. So let me tell you a little bit of how I got involved in the asset class. So I'm a twenty year veteran I got into the venture capital venture capital asset cloud in the early two thousand.

So, I sold the business to a large financial service company, and I was looking for what's next. It is so long ago that I actually put out a paper resume.

So I had a list of business cards, and I was wanting to sit on the other side of the table.

So, I got a bunch of bond paper from from Staples and sent out a, a bunch of resumes not really understanding what venture capital is as an asset classes. And what those guys did.

I just knew they wrote checks to early stage businesses to help them scale. So one of those letters was was actually responded to and off by went.

So I started as an associate in early two thousand then work my way up. So I've been an associate I've been a V. P.

has been a a director I've raised my own bond twice and essentially exited that one in a secondary transaction and one of the funds is still going and then I jumped into,

as you mentioned,

Intel Capital,

give you a little background on Intel Capital.

One of the world's leading CBC, so.

My practice back at at and so we typically invested between three hundred and five hundred million dollars per year. Oh, so very, very large. Absolutely.

Some of the investment themes and pieces that we pursued are are all pack from a vertical perspective, but really aligned to the Silicon.

So, what's going on and Intel as what goes on the many cbc's is they use the, the investment practice as a path finding mechanism.

So, Intel was looking to diversify and move away from the silicone if you don't know chips and chipsets are quickly becoming commoditized.

But you also have is is tech companies, which are obviously some of intel's largest customers producing their own chipsets that are optimized to their product.

I E, Apple will produce a chipset that goes into their iPhones with that kind of technological trends upon us and upon itself they are, they are moving on.

So what's next and that sort of brings up the so what I do it family venture. So, I was charged with reopening their West Coast practice.

I had four I have four partners that sit in other parts of the world, but they really had no representation out here where I think at the epicenter of of startups and venture capital.

Here in Silicon Valley, so my practice here is as I mentioned very, very strategic, and it's the focusing on a diversifying daily daily blocking back to the largest, ever prior to working here.

The large tool company, diversifying some of their product offerings.

So I invest in and and startups of all type with the particular focus on number one disrupting the construction trade,

whether that be a betting payments,

the beginning pulling permit logistics,

supply chain on the job performance efficiency and effectiveness.

So things such as how much of a job has been completed, and tying that back as I mentioned, the logistics and payments, and then also monitoring the assets.

So, after a structure is built how to run that efficiently, and effectively in a cost efficient manager manner to actually continue to make money.

Right. So it sounds like you have a very, very big and impressive background and I want to go step by step because some people probably don't even know what CBC is. It's a corporate venture capital. So, let's start with that.

How is corporate venture capital different from a regular venture capital? Because you've been on both sides of that and can you just give me like, some major differences between those two.

Sure,
let me start out as a,

at the first point that that you understood is that a majority of corporate venture capital funds invest from the balance sheet,

meaning they're a line item in the budget on an annual basis to be a really, really large number like Intel Capital,
or it could be a smaller number,
but it's from the balance sheet.

So,

the good and bad that good is that these large corporations that that have the bouncy capacity to bond a venture capital effort as a general rule,

they're able to write larger checks.

They're also able to be a little bit more patient in their capital, because they don't have the L. P considerations of return capital in that year. Brian frame that's associated with the traditional venture capital firms.

The bad is that and turbulent times, or any times, where a liquidity already changes in the balance sheet, or even a change in the management team.

Those funds tend to dry up. So, you have to walk that that particular balance.

Also, something else to keep in mind is the majority of venture capital firms are strategic, not financial and that's very, very important to understand what that means while certainly the, the funding and in the efforts at a CBC.

They're not trying to lose money. Their main objective is to achieve strategic returns and how are those features achieved?

Well, you know, I essentially defined success as me investing in a startup.

That start and going back to the mothership in this. In my particular case now, Stanley, black and Decker.

That startup working closely with standing back and Decker to a go to market with a particular product, whether it be a joint venture, a rev.

Share agreement or maybe a, a completely new product skew go together to market to go to market together. And ultimately, that that particular offering being so successful, that Stanley intern buys it.

Stuff like that the ultimate success,

and I think most bbc's are following that model really had finding billing in gap in the product roadmap through the partnership with the startup,

or ultimately filling your,

your bucket putting capital from a CBC perspective in the startups allows that corporate entity to date that startup before they ultimately marry it.

Right? And I've heard some of those stories, actually, one of my speakers who got acquired by Cisco, they first got investment from Cisco. So that's completely right and I was wondering, how do you sorcerer deals?

So, how do you find those starts that you think or good strategic investment for you?

So this is pupil, my particular investment practice, heavily dependent on syndicate relationship. So, as I mentioned, I've been in the asset class a long time, and I think that's sort of the a bit to my detriment.

But as a young man game. So, those associates that I met back in my rotten groom day, that the early two thousand's are now running their own bonds around the country.

So we certainly keep in touch and share deal flow back and forth.

Also, there's the, the, the attending startup events, coffee meet getting your name out there, speaker ships, doing one for my cat like yours.

But then you have the other side of the coin, is that who better to know what can enhance their business unit than those business unit members, or V U leadership.

So, a lot of my deal flow comes from the business units that family that I support. They do what they need. They know what's out there essentially they have done a wonderful job of identifying.

Who's going to be their future competitors, or where the market is going? No, they provide a a pipeline over of startups to the venture unit, but which to explore and and start to bet.

That's great. That's great. And that's really interesting. And you mentioned something that somewhat caught my attention, which is meet ups, coffee, meet ups and all those events.

That's one of the frequently asked questions that yet it's which events should I attend to find someone who can lead me to investment or actual investors.

So, what kind of meet ups to attend are those focused on some specific industry? Are there do they even have a focus or is it just like Star founders?

So, I think it's sort of founders meet up and, you know, they advice always get to the startup founders and those CEOs are that the conversations that I should have with them, start before they're seeking funding.

And I say that as a, as a long normal, a twenty year career, I guess that one a year career in the asset class, and I have never funded a company out of the blue.

So, I know there's a, there's some information out there that you could send over a business plan or and in the modern day.

And I, and I remember back in those days, when people used to write business plan but now it certainly fits within the pitch deck.

Over the trend, some to a venture capitalist, and they will pick it up and suddenly find interest in it and move on and eventually get your entity funded. I have never done that.

I don't know any a VC guy. That that's sort of had that old email. And essentially followed up on, it is actually worked out and there's been a transaction. So that doesn't work. And this is a relationship business.

So, I'm out at the, at the startup events, the coffee meet ups, the talk, any of those type of event pitch competitions to actually develop those relationships and often times this startup.

Obviously they're not going to work in. They, they're, they're going to fizzle out.

But they will establish a relationship with with Mark propert or people that have a similar function to mark Robert. So, on that, next into the instead of sending something called, they can remind me that we've met.

We've talked actually, like each other and they can introduce their new project or epic rate. Right?

And that's a trade by stealing relationship in advance is wonderful and super important, but there's another side of this point.

So,

when you build relationship early on,

and,

you know,

that you'll start funding,

probably in a year or so you have to keep in touch with that person,

you are trying to build a relationship with because,

you know,

in a year to say,

hey,

when Matt in two thousand nineteen when it's two thousand and twenty right now and the guys like,

wait what?

I don't remember anything. So, what's your advice on, you know, sustain that relationship without being without bugging it person? Basically, how should they do this?

So,

I think project update thought updates are are really appropriate sending me articles that are around your business thesis are are appropriate,

not appropriate is is blowing up my folder or texting me ad nauseum about what you're up to.

But certainly periodic updates are appropriate. Also, as I mentioned, the lifeblood of any investment practices, Mike is is syndicate network and the ability to generate deal flow.

I am certainly welcome and open to sharing that Rolodex,

but it is inappropriate for for founders to essentially call any,

any guy and my best,

any venture capitalist then,

and and ask them on unfiltered.

And without that relationship to introduce me to someone that's going to fund. My startup, right? That's another great advice for you, mark. We're in a good track here.

So the last thing that I wanted to to cover while we're talking about corporate venture capital is a which level can founders actually approach CBC?

So, I assume that's you can really understand if it's a strategic strategic investment, early on. So, for example, you will not invest in preceed for probably even seats. So which stage do you usually invest?

So so scaling the full lifecycle investor and that's one of the benefits of working with a CBC, is that we're, we're investing off the balance, be a failure. They fifty billion dollar plus company.

So we can afford to write fairly large text as you can imagine Stanley is a little bit different, and that we do write those smaller checks right?

After the friends family and pools around. So my investment practice, I've written checks as low as two hundred, fifty thousand dollars to working on deals as high as fifteen million in particular. Really?

Depends on the investment theme thesis. Some CVSS. I like to get in early to have that startup that they invested in optimized to their problems statements.

Some of them like to go a little bit later stage after the is developed, then focus, particularly on commercialization. So, I don't think there's a one size fits all strategy from a CBC perspective.

Definitely not like anywhere else in the startup world. So that you've pointed out and it's good to know that some cbc's invest actually so early on. I personally didn't know that. So, now, let's talk about that state fund.

It's venture funds. So invest, Nebraska. Can you tell us a story about that fund? What was that?

Sure, sure. For lack of a better term it was the state of Nebraska venture fund, which I, which I started and and ran for a number of years prior to coming out here to Silicon Valley.

So many states have that a lot like that, you know, twenty to the thirty and really focused on two things, economic development and innovation.

So,

let me talk a little bit about the,

the state of Nebraska,

and as Silicon through the whole,

and I'm finding Silicon,

which was essentially the geographic footprint,

where would guide the board capitalized North Dakota,

South Dakota,

Nebraska,

Iowa,

and Kansas.

So right there in the middle of the country, what you have, there is an economy that's heavily built on two things. Obviously agriculture and the second thing is is medical healthcare and biotech.

So is within that frame of what we started,
the,
the venture capital activities of investor,
Nebraska give you a little history generally in that particular part of the reason,
they don't call it Flyover country for nothing venture capital firms are generally investing on both coast.

May we're ignoring this very, very fertile ground. They had a number of promising startups that if they wanted funding, they would take the funding and immediately get Toronto to Silicon Valley or or or New York.

The infinite wisdom of some of the municipalities government structures, and quite frankly, family offices and financial institutions they wanted those particular organizations stay put and stay quote unquote home.

So,

with that we started invest in Nebraska and and off,

we went,

so we originally had an investment thesis around,

as you can imagine biotech and exec what quickly expanded to that and became a,

the venture capitalist that had an agnostic focus meaning that we took a look at all situations and then all sectors.

So back at, I MC, we, we invested in early stage companies who participated in bios. We even did some. With a two fold purpose number one boost up that ecosystem train.
The,
the next generation of startup founders use an entrepreneurial spirit and,

and those younger people that,

that were coming out of the local universities,

and also to return the money to the till to back to the state of Nebraska.

Got it so I was wondering this mix of government and BC, and the startup world was really interesting for me I love it personally. So I'm curious how is it structured in terms of financial?

So, what are you looking at when you're sourcing your deals? What are you looking on on the business plan? One your investment from a perspective on investment Brasco.

Are you looking forward the impacts that that startup has on the specific field? Or where are you looking at?

So, important to keep in mind a large, a large part of the LP base, or or the municipalities of abroad.

So the state of Nebraska, the price to pay pension fund, those type of things, there were some other people with high net worth individuals, family offices.

Those type of things, but but sort of really focused on keeping that and keep that in mind that it was very geographically focused firms.

I think what you're asking is what did we invest in and why and, and I will tell you,

what you have there is a bunch of smart people very ingrained in the community and but no access to capital.

And then just because they did not have that history of access to the capital. So prior to firms,
like invest in Nebraska or drive capital or Flyover capital or done D,
which which are now established in investing within that Silicon per ecosystem, the typical funding mechanism for startup was friends and family.

And then traditional bank can imagine some of the other criteria that are associated with banks. They just we're not getting the funding. No, you right.

So, those, that, that sort of rose to the top and we're, we're essentially groundbreaking or build that. Nick. From a traditional venture capital perspective, if they happen to bubble up.

They would quickly be code and part of making that funding. They would require that firm to pick up and move over to Silicon Valley while you're having it now.

And I, and I'm a Silicon Valley investor is that many VC firms are taking a harder lens from a startup perspective and starting and maintaining a company here because of the unit economics.

They're encouraging some of their portfolios to possibly move back to the Midwest. That's the recent thing,
and it's kind of indirectly what's going on in the business that,
you know,

quite frankly an engineer software engineer here in in San Francisco is a significantly more than a software engineer,

even based in a city like Chicago perhaps the venture capital money goes a lot further.

Right so my next question was who should consider it so what kind of founders you can see there this visually government sponsored venture funds who should try to play I think,

I think all founders to consider that,

you know,

I like to say everyone's money is free.

So you have, but here, one Sand Hill, road firms who are, who can participate in your round and write a check you also have those venture funds that can just rate and write a check.

I think the difference is, you know, quite frankly to be very transparent. Is some of the following capital that you can extract?

We're dealing with the you're one Silicon Valley firm on Sand Hill road is is a little bit different. It actually means something as a postpone may fail, then Teresa and a first round participate, as opposed to.

And I'm certainly not picking on those guys that's been a lot of syndicate deals with those guys, say map Ventures or or invest Nebraska or the venture capital firm.

In Rhode Island or Illinois Ventures so that's something to consider, but certainly the money screen. I would offer that often times with the.

The venture capital funds, there are other perks I E, other government agencies or innovation arms of the government. They often get involved into might or help in different ways.

I've seen examples where state venture capital funds have seeded companies and another, or within that same government has offered them free space.

I've seen them when they've offered them a free resources in terms of bringing on people, and they pay their salary for the first couple of years.

So they should definitely consider the, that that funding source is a viable option when they're trying to get their startup capitalized.

Absolutely, I think having the U s, government on your cap table is a pretty good good thing to have. So yeah. Good point. And now we're moving onto reaching out to investors.

So we talked a bit about corporate venture capital. You said, that's clearly you don't really invest in people out of the blue.

You have to have some sort of relationship with them prior to investing them and doesn't work the same way with the basically government venture funds or is it different?

So, you know, I, I would say a little more more of an open process from a government perspective, but but, but still.

The warm relationship is very appreciated, and at least a better outcome.

Right. So basically the approach to the investors of the state venture capital is the same as approach to investors at and right.

I I think so as well, you know, and one piece of advice that I always get entrepreneurs, or would be entrepreneurs, is that a, as a general rule, the asset class invest in business is not ideal.

So,
even before we have that conversation about some of your thoughts feelings and what you have created,

have it created a well thought out have embedded also there are stages in terms of the capitalization process.

And depending on where you are is where you could approach that, that capital sorts, that venture capital source I often tell entrepreneurs that.

If you're if your grandmother won't invest in you,

why would I,

a total stranger invest that money to secure that capital have her believe in your vision in it and put some of her capital on risk at risk and then approach me it's a much it's a much better conversation and once again much better

outcomes.

We definitely have completely different views on raising money from friends and family. I'm heavily opposed to that fundraising source but it's it's their individual thing. You just haven't seen some stories. That brought to really, really horrible and troubling.

And I think it's just not worth it, but but I think if he really wants, it's worth worth a shot. So,
last thing before I move on to the last question,
it's the beach deck is a presentation actually,

where the major mistake that you see when founders speak to you when they first make a connection on those small me ups,

when they just realize you're an investor you might be the person who keeps the money. What's the mistake that you see often?

So, I, you know, there's a lot of diligence and, and we can have conversations about the investment philosophy of East Coast investors, or to Silicon Valley, West Coast investors, and the different mentality here. Let me touch on that.

And I think it would be helpful. I've invested in both ecosystems. I was a East Coast, venture capital investor very much like a investor is very focused on business.

Great scalability. A West Coast investor is very focused on the tech and tech development.
So, that's something important to keep in mind, depending on which coast the venture capital firms.

This is how we should approach that particular firm where you should focus in terms of major mistakes that I, that I see that I would love to be corrected.

Is that as a general rule venture capitalists, but an awful lot of time vetting the management team and embedding that management team. Some of the things that that's stands out. Believe me. And I think some of my colleagues as well.

I, I would say the majority of my colleague, you know, what I wanna see from a management team is the management team that's worked together before I'd also wanted the management team that has sector expertise.

I would like to see that you have worked in this field that you're trying to Floyd and and operate in for a number of years. Something that's often overlooked that I want to see at birth today.

I would, because that's really tells me that you're able to manage my cash in both good and bad times. So that's something that's really, really important. The diligence that we do a management team.

I'm a firm believer that if you have an a management team, you can overcome a B product and be successful and have that liquidity event.

So, the advice I pass down to answer, your question is focused on your management team, find the right partners. I don't want to see all tech people.

I also don't want to see all of the software Gill people. I'd like to have a nice mix and and make sure you have that mix in place prior to approaching me, or any other venture capital entity.

Also make sure that you understand how the venture capital asset class works. Meaning that that we are truly partners.

I am no pun intended invested in, in, in your success.

And I guess the first thing is to remember as, you know, it, it's probably better to own a little bit of something that's valuable than a lot of something that has no value at all.

So, and and that particularly goes to the areas that, and conflicts over evaluation.

Perfect no going in that. We're probably going to think your company is not as valuable as you think it is. Right? Right right. Probably every episode of mine. Okay like every second or third episode. Mine has a question.

How do you evaluate your company and can we just go shortly over that with you? Well, so what do you think are the major metrics that you should look at while you are trying to figure out how much your companies worth.

So, valuation is an interesting so I will say evaluation is is what someone is willing to pay. I think it's like that if you're buying a car or how you have a list price and what someone is willing to pay in an ongoing transaction.

So that's how I approach evaluation, every venture capitalist, every good venture class that I know. Take the approach evaluation using cops, what someone has paid in the path and a similar company.

So, please,

do your homework look at potentially your competitors a look at other entities that have been funded within your the year of operation and Benchmark your evaluation based on

their success,
or in some cases failure that potentially how I'm going to determine what your,
what your company is work also be flexible.
There are very unique structures where you can ratchet up or or,
and some typical cases ratcheting down evaluation but,
and also obviously have have realistic expectations.
There. There are numerous cases that I'm sure you've had other guests come in and say you've had a.

Companies with with zero revenue, but like, their companies over, worth more than a hundred million dollars and sort of sticking to that. But you very well might be interested in the management team and and see that.

This is a promising investment and it has a lot of traction, but zero revenue, zero revenue right?

And we have a, we have financial returns that that we have to we have a pit and boats that we have the head.

So, we are are making a valuation judgment, keeping those things in mind right right. And that's that's a good advice.

I think, for looking at your competitors is probably the best advice you can give in terms of validation. It's really it's worth taking your time to do that. So we're moving on to the last question of today's episode and it's a call to action. What's that?

One thing that you want the, at least here to do as soon as the episode is over. Sure,
so feel free to reach out to me,
Mark Crawford at the feedback Tom,

you know,

my investment themes and thesis checkout sailing Ventures website,

I would say,

you know,

never give up you're going to hear a lot of news in the venture capital asset funds.

That's part of the business. My job is actually to stay. No, I looked at over a thousand deals a year and now I will fund less than ten of those.

I feel comfortable with a no, I'm also, I will tell entrepreneurs be committed and that commitment to show it and it's really, really important. You can't be half and half out.

I think the third piece of devices is own your pitch own your deck. My jobs and knowledge capital job is to point out potential pitfalls and and they exist. There's no perfect business plan.

There's no perfect pitch deck,
but but be pretty unfair to to the,
your stance and it,
it if I push back or even capitalists pushed back on parts of your business model, please address it but it's not an indictment.

And and if I know some of the risk of investing, that doesn't mean, I'm not going in there's no risk free investment in the venture capital. I just want I just want to make sure we're aligned when I identify the risk. And then we can mitigate that risk together.

Right, right and that's that's a great advice. Never give up at this positive, you know, who will wrap it up thanks a lot more for coming up. You definitely met my high expectations.

There was definitely a love New interesting stuff set in this episode. So thanks a lot for that and stay safe. You to take it easy.