Why Corporate Venture Capital Is Changing -VC Mike Edelhart

Here’s an excerpt from this week’s CIO Newsletter. To get it to your inbox, sign up here.

To kick off this week's issue, I invited my old friend Mike Edelhart to share some insights from the front lines of venture capital. Mike is managing partner of Ataraxia, an early-stage fund focused on helping people live longer and live better, along with leading the Joyance Partners and Social Starts venture capital partnerships. Some of you may know him as the original Executive Editor of PC Magazine or as CEO at several startups, including Olive Software, Inman News, and Zinio. Here's Mike:

"Before I got into venture capital, when I still worked with big companies, the worlds of venture and corporate management stood well apart from one another. That’s no longer the case. Most large companies now invest in new ventures, often through their internal corporate venture capital (CVC) arm.

If you’ve worked with CVCs–on the corporate side, as a partner or as a venture that’s received such funding–you probably already know that the record is mixed. There are a lot of reasons for this. Early-generation CVCs stuck close to their company HQ and strategy, often missing market pivots and using a dated script to measure a startup’s potential. Their metrics may be muddled by other priorities. Some treat CVCs as a backdoor way to do M&A. Others use it as a way to dabble in a new area or connect with the cool kids starting companies. There’s the challenge of partnering the big with the small. Unlike traditional venture capitalists, CVCs rarely risk their own money. Some are not even pressured to make money. In other words, they’re not really venture capitalists.

I want to propose an approach that I think would yield better results for companies: Get in early and think more creatively about your role. Full disclosure here or, rather, a reminder: As an early-stage venture capitalist, this is what I do. That means I can tell you why I’m seeing a growing number of CVCs do it, too.

We recently did two Series A rounds with Pepsi Ventures and Leaps by Bayer, a US-based fund backed by its European parent. In the case of Pepsi, an operating group (Gatorade) helped get a startup launched and the venture arm then led a multi-investor round. Leaps, meanwhile, does deals that Bayer’s CVC arm would never consider. That’s because its mandate is to invest in paradigm-shifting advances in life sciences that could change the world.

That might sound like philanthropy or R&D or some unicorn-spotting exercise. It’s not. Bayer is using the VC model to invest significant and sustained capital in the people and technologies that could change the world. Think about how the Medici family supported and sustained masters like Da Vinci, Michelangelo and Botticelli in Renaissance Italy Consider how film directors like Martin Scorsese or Greta Gerwig know how to tap the right talent to build collaborative teams that yield incredible results. And then think about the breakthroughs needed to tackle crop loss, inequality, pandemics, polarization and all the other challenges that have put us in this "polycrisis," as many now call it.

No one company is likely to own the solution., nor should it. We need to invest in creating an ecosystem for risky but promising new technologies to have a shot at being transformative–and collectively profit from the results.

Going forward, my corporate brethren, I believe this is how you will grow. Gary Dushnitsky, a professor at London Business School who is also an advisor to our funds, agrees. He argues that corporate venture funding could become the key driver in determining future pockets of growth. In fact, Dushnitsky believes CVCs are more likely to influence VC investment trends than the other way around.

Chalk it up, in part, to the speed of disruption. But other factors are also at play. Many of the “weaknesses” that used to slow CVCs down are increasingly being recognized as potential strengths: scale, relationships, capital and expertise. Polarized politics add to a growing conviction that, to innovate in areas like ESG, the private sector will have to lead the way.

If you’re waiting for a later-stage round, where a risky bet feels more like a safe play and potential target for M&A, you might find that opportunity never comes. It will be too late.

Success is always about much more than making money. Our Joyance Partners fund is 100% backed by one Japanese company. Along with potential returns, our corporate backer is getting insights and a chance to forge relationships in a realm that could define the future of their enterprise.

Think of it as an investment in curiosity. I’ve reviewed hundreds–make that thousands–of business plans over the years. While I might only invest in 2% of what I see, I always learn from the other 98.

I enjoyed my days of working in big corporations–the planning, the team-building, the resources, and the infrastructure, not to mention the opportunities to collaborate across different functions and cultures to make an impact. I enjoy working with CVCs for similar reasons–the opportunities to collaborate in areas of mutual interest and the willingness to partner in creative ways. While I’ve partnered successfully with many traditional venture funds over the years, I’ve found they tend to partner more narrowly and want to be in the ascendant position.

But my message to C-Suite leaders isn’t to look at me but rather to look at yourself. If your company has a corporate venture arm, I think now is the time to open up and wield those resources more broadly on your organization’s behalf. You will discover and build relationships with potentially valuable companies. You might gain insights on transformative trends and technologies. Better yet, you might help to shape them. Dare to wander away a bit from your areas of expertise. If you’re deeply invested in, say, renewable energy, explore who’s innovating in a realm like consumer behavior.

If your organization doesn’t have a CVC, now is a good time to consider one. With global venture funding down by more than a third last year, there’s likely less competition on key deals. Recession-wary governments are also increasingly recognizing the need to provide seed capital to spur sustainable and inclusive growth. (New York Governor Kathy Hochul announced a $30 million pre-seed and seed-matching fund program earlier this month.)

Personally, I’m excited to see the worlds of corporate long-term planning and early-stage venture capital start to converge. Both reward a focus on building meaningful value over making a quick buck. Both require new tools, partners and approaches to succeed. The stakes are too high and the speed of change is too fast to go it alone."