Last year, corporate venture investors were the most active investors in the largest digital health deals. As corporate VCs continue to grow their varied approaches to working with startups and what distinguishes them from other venture capital firms is a topic of interest for entrepreneurs and investors. The traditional view is that in a two-way race, corporate VCs would be the tortoise but a tech VC would be the hare.
Matt Karls, assistant director of strategic investments at Cambia Health Solutions, doesn’t think that comparison tells the whole story. In an emailed response to questions, while he acknowledged there’s some truth behind that perception, he said there’s more to it than that.
“I don’t buy that assumption (that corporates take longer) at face value. I’ve heard the horror stories from entrepreneurs – and seen them firsthand – but I think there are a couple of factors at work, practically speaking.”
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Corporate culture Reasons why some corporate VCs process deals at a slower pace include the corporate culture, the corporate VC’s structure (such as requiring consensus building, obtaining support from a corporate sponsor, a more complicated approval processes, etc.), and the fact that “normal timing” is relative. But that doesn’t necessarily apply to all strategic corporate VCs . “Cambia is deliberately structured to be nimble and able to move quickly in a process. CVCs who are not structured this way will ultimately not be able to compete against traditional and more lean CVC teams that can execute quickly.”
Too many financial/tech investors move too quickly. At the moment, fund managers and investment professionals are flush with LP cash that they need to deploy in order to start earning management fees, Karls observed. That creates a tremendous incentive to put money to work quickly, favoring speed over diligence.
Get to know the company and its venture capital arm. This is advice that cannot be repeated enough, it seems. “Some of the most valuable insight that an entrepreneur can get is when an experienced CVC digs in to ask questions to understand and stress test the business model.” That kind of conversation can be “HUGELY valuable” not just for the investor who can better understand the risk profile of the investment. It can also be valuable to the startup management team who can benefit from the insight of a venture investor who understands the corporate side of their business and sees hundreds of companies from sourcing and within their portfolio. These investors can flag issues that they’ve seen others struggle with and validate what does and doesn’t resonate with their corporate parent, among other things.
“I’d also ask entrepreneurs to keep in mind that corporate investors have many intrinsic advantages – including unique market and subject matter expertise, freedom from the traditional 10-year fund model, and the ability to bring high impact strategic value at critical times in the early stages of a company’s development,” Karls added. “Because corporate strategic investors don’t manage a fund, it allows us to take a patient, long-term view to our investments.”
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As corporate VCs become more ambitious they’ll continue to be challenged on their track records. As healthcare startups continue to develop creative approaches to solving healthcare problems, it will be interesting to see whether corporate VCs can outperform other venture capital firms in the long term.
Photo: Flickr user Wally Goetz