Like a Moth to the Flame?
To make money you need to spend money. To develop great innovations and introduce them to the market you need a lot of money and a lot of support. Traditionally, entrepreneurs who had great ideas for technological breakthroughs sought support from venture capitalists who could provide financial support unavailable to them through other means. More recently, corporate venture capitalists emerged as a new kind of strategic players that can provide not only the much needed funding but also all sorts of technological and market support to startups.
Many leading corporations set up captive venture capital programs to provide funding and help to startups with promising technologies. On the face of it, it looks like a marriage made in heaven: resource-starved startups get access to the money, technological expertise, facilities, and distribution channels of the leading corporations, which removes the many roadblocks on the way to success. But as often happens, it comes at a cost: if the corporate investor abuses the power that it gains by funding the new venture, it may lead to the loss of know-how by the entrepreneurs and forestall the bright prospects offered by the great technology. Entrepreneurs should be extremely careful accepting CVC funding. Checking the reputation of a corporate investor before taking the money may help the startup avoid welcoming the Trojan horse.
There are three distinct kinds of reputation that entrepreneurs should consider when making a decision to accept funding from a corporate venture capital programs, explains Entrepreneurship
Professor Sergey Anokhin from Kent State University. The first one is obvious – the reputation for experience. Other things equal, it is a good idea to work with a corporation that has a long and productive experience working with startups. Few entrepreneurs would want to become guinea pigs in the hands of corporations just starting to toy with the idea of supporting entrepreneurial ventures.
The second kind of reputation that matters is a reputation for strategic involvement with startups that corporations support. Some corporations, like Adobe, prefer to keep things distant, and even ‘subcontract’ their VC activities to professional third parties. Others keep startups on a short leash and always demand seats on the startup boards such that they have a much tighter control of their operations and strategies. This may be both a blessing and a curse at the same time, says Dr. Anokhin.
The third kind of reputation is perhaps most important, suggests Professor Anokhin. It is the reputation for misconduct that is reflective of past breaches of trust – such as misappropriating the startups’ ideas – on the part of corporate investors. In that the best predictor of future behavior is past behavior, entrepreneurs are advised to investigate whether a particular corporate investor has been implicated in intellectual property disputes in the past when deciding on accepting the money from a given corporation.
Do startups pay attention to these reputations?
To study whether entrepreneurs pay attention to these three reputations when taking the money from corporate investors, the research team led by Professor Sergey Anokhin has looked at hundreds of CVC investment deals over a number of years. What emerged came as a surprise. While, predictably, reputations for experience and involvement positively affected corporate attractiveness for startups, so did the reputation for misconduct. It appears that there is no such thing as bad press. Anything that serves to increase the corporations’ visibility to startups – even bad PR – serves to increase their attractiveness to entrepreneurs. Like a moth to the flame, startups are drawn to corporate investors that may claim new ideas as their own.
Only when the reputation for misconduct is combined with the reputation for involvement do entrepreneurs show signs of hesitation. The chance of being held on a short leash by investors who have implicated themselves in intellectual property disputes in the past is the only thing that makes startups wary. Perhaps, this speaks to the overconfidence on the part of entrepreneurs – they simply do not believe that they will fall victims to the same misfortunes that befell many others before them.
What it all means
The most important implication of this study, says Sergey Anokhin, is that entrepreneurs are not discriminating enough when it comes to choosing funding partners. Many corporations explicitly pursue ‘window on technology’ when offering support to startups. Although entrepreneurs understandably gravitate to corporations with solid track record on the CVC market, and justifiably seek partners who like to get involved with the ventures they support, it is essential to exercise caution when admitting corporate investors to the inner workings of the new technologies and revolutionary ideas. Entrepreneurs would be wise to analyze CVC reputations strategically.