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Is some money really smarter?

Both traditional venture capital firms and corporate venturing operations are under increasing pressure as the investment community continues to address the post ‘bubble' correction. Kit Gould of IDGVE takes the entrepreneur's perspective and asks which type of investor adds more value to a business. It provides investors with an insight into some of the issues involved in being a venture-backed company.

I have heard and read a lot about the differences between the traditional venture capital approach and the corporate venture capital in recent months and when times are tough everyone likes to focus on new subdivisions and more exclusive clubs of which they are members, or more importantly differentiators to use to exclude others. I have listened to this debate with a reasonable degree of detachment and not an unhealthy amount of mirth.

The fundamental difference being that in the traditional case, VC funds are aggregated from a wide spectrum of different ‘institutional' investors' money such as banks, pension funds and a range of cash rich corporates. Their strength is often perceived as coming from purity of focus on the financial returns that they provide for these backers. As a consequence the degree of professionalism is often regarded as higher and it is argued that the individuals have seen more economic cycles, know (or even have written) the ‘rule book' better and run their systems more rigorously so that they will ultimately produce a better return.

In contrast Corporate Venture Funds tend to have a single investor and they focus on delivering strategic as well as financial returns. These strategic gains can range from simply keeping abreast of emerging technologies related to their sector to placing a down payment on a future purchase. The argument goes that the corporate backed guys have market knowledge, access and contacts that will help in both the selection of companies to invest in and in subsequent support of revenue growth particularly in the early days when building quality reference clients is so important.

Now both groups are under significant pressure as the investment community continues addressing the post bubble ‘correction'. The traditional funds are having to deal with less then spectacular returns, many mergers and write offs, extra financing rounds as profitability moves further over the horizon and at the same time often having to return to the very institutions that provided the funds in the first place and ask them for more. For many of you brave new start up entrepreneurs out there this explains why they may not quite so good at returning your calls of late.

The Corporate guys have had similar problems and in addition they can be susceptible to changes in internal support for their activities. Ultimately, the corporate backer may need the funds for something that has a more positive short-term effect. So whilst in theory they may have a more forgiving corporate parent, we all know what ultimately happens to your pocket money when your parents' earnings decline. We have seen many corporates reduce their exposure and investment rates and even in some cases close down their funds completely.

So as entrepreneurs looking for funding who do you chose. The first thing is that ‘no money is dumb money' and you should seriously consider why you wouldn't take it. I am not advocating that one should ‘never look a gift horse in the mouth' but a bad deal is usually better then no deal. The second is, that if you are fortunate enough to be in the exalted position of choosing between these two types of VC then do your own due diligence. What will the VCs deliver to the company beyond the financial injection? Just how good is their contact book? How much knowledge and expertise do they have in your sector and for later how much in the IPO/M&A markets? Can they really get their corporate backer to be a huge customer? So talk to their portfolio companies, current and historic if you can, and ask these questions. Their answers will help you close the gap between promise and delivery.

At the end of the day I think the division is a false one or at least an irrelevant one. The origin of their money is no real divider and probably the least of your concerns in selecting a VC partner.

Copyright © 2002 IDGVE

Kit Gould is managing partner at IDGVE

IDGVE is a $100m London-based fund helping entrepreneurs grow innovative companies on a global basis. It is an independent partnership making investments on behalf of its limited partner, International Data Group, the world's largest IT media company. IDG currently has a $580m network of funds spanning Europe, North America and Asia that have invested in over 100 companies over the last ten years. For more information please visit www.idgve.com