Venture

Your Next Check Could Be Cut From One Of These Atypical VC Firms

There’s a lot of competition for VCs looking to make one of the first bets into the next best company, and it’s changing how some venture capitalists choose to participate in deals.

To start, let’s take you through the new class of corporate venture capitalists, folks against term sheets, and a firm that offers VC-as-a service.

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The New Corporate Venture Capitalists

Corporate venture capital (CVC) funds are everywhere. The category is loosely defined as corporations starting venture capital arms to work with smaller startups.

Within CVC, there’s a subset of companies that use a third-party operating group to do their investing. The funds don’t function under their corporate parent’s branding. Instead, they make their own, separately branded fund. Take Next47 for example, a firm that was backed by a Siemens’ commitment of $1.2 billion. This is a thread different than say, Intel starting Intel Ventures and investing across startups under that branding.

Another recent example of this happening is Cisco starting Decibel, a VC firm that is an independent entity focusing on enterprise innovations.

Decibel will execute its own investment strategy, fund operations, and portfolio management, all while still having unique access as a highly collaborative and aligned partner to Cisco,” the company said in a blog post.

For independent venture funds spun out of corporations, check out Sapphire, GV and M12.

The issue with traditional CVC is that they lack the longevity of a traditionally built out venture capital firm, according to Lak Ananth, the CEO and managing partner of Next47.

He added: “It’s the cycle.”

This cycle, understandably, could leave the startups that work with a CVC fund in an unfavorable limbo. So much so that at least one accelerator recommends doing quite the opposite: it brands itself as helping founders avoid traditional investment, and go the bootstrapping route. That brings us to our next topic: the group of investors who are convincing startups they are more than profit hungry, by never taking equity.

The Anti-Termsheet Club

Clearbanc, a new kind of venture capital-ish firm from Michele Romanow and Andrew D’Souza, doesn’t have any equity in the over 700 companies it works with. But it put investments in each of them.

How does that work?

Flexing its “20 minute term sheet” the firm’s strategy uses an algorithm to sift through a startup’s data and see if its a fit. The entire process was created to be shorter than the average investment timeline. The fund’s definition of the ideal investment? An e-commerce company that has positive ad spend and positive unit economics.

As companies are under demand to raise more venture capital money before going public, Romanow tells me Clearbanc wants to help founders keep more ownership of their company amid the trend.

Romanow cited how, for example, when Microsoft went public Bill Gates owned 49 percent of the company. For comparison, when Lyft went public, the founders only owned around 5.5 percent of the company.

This data-only strategy has helped Clearbanc break patterns with investing in people who look and sound like the status quo. Romanow says they’ve funded 8 times more women than the average VC. Clearbanc has 2,069 projected investments in 2019.

There are, of course, some aspects that will never go away from traditional investing. She says that while their deal flow is heavily driven by numbers, associates at Clearbanc have the ability to singlehandedly veto a deal if the founder and startups don’t match up culture or personality wise.

“There’s always got to be due diligence,” she said.

But what happens when you outsource that due diligence?

VC-As-A-Service

Pegasus Tech Ventures, a firm which we wrote about last month, invests in startups on behalf of corporations through its “VC-as-a-service” model. It manages over $600 million in assets across all of the large corporations it works with, and has done over 150 investments.

Corporate venture capital’s main issue is that corporations don’t have the motivation to help the startups they invest in, grow to the next step, says Anis Uzzaman, the founder and CEO of Pegasus Tech Ventures. With a third party firm like Pegasus, he claims, a fund can help a startup grow beyond just one round. He claims that Pegasus has made multiple follow-on investments in 80 percent of their portfolio companies.

This idea of an ecosystem, where one sides feeds another, didn’t work well for at least one venture firm: Social Capital. The company notoriously had a strategy to participate in every stage of a portfolio’s life company, from startup to unicorn trying to go public.

Additionally Uzzaman says that Pegasus has the network of traditional VCs, unlike CVCs.

“We do not have any restriction from introducing the startup to other corporations and funds,” he said during a phone call. So they do. Once, a startup was even funded by three separate corporate funds underneath the Pegasus umbrella.

In the event of economic downturn, Uzzaman explained that half of their investments are outside the United States. They currently have a presence in 17 countries.

Big Picture

Regardless of all of this innovation and flashy changes, venture capital is a long term business. Returns take time, even up to 15 years, some say. So these new versions are, just like the startups they’re investing in, bets. This is just a part of the evolution, and you can be sure we’ll be tracking the success as and when the first returns roll in.

Illustration: Li-Anne Dias