Jun 2014

Is carry the way forward for CVC?

Corporate venture capital (CVC) is an important and exciting part of the venture sector and one that is growing at an exponential rate. Year on year, more corporates – in pursuit of a sustainable innovation strategy – are launching CVC funds and, with figures from showing that CVC funding participation hit an eight-quarter high in Q1 2014, there is every indication that this trend will continue.

The ongoing rise of CVC is dependent on several factors. As well as relying on economic conditions and government programmes, it requires the right people to fuel its growth; and – as is the case in any rapidly expanding market – demand for talent soon exceeds supply.

There are, however, a number of available options when it comes to recruiting for CVC. The investment sector can often provide a rich source of candidates with valuable expertise in both finance and innovation. Another tactic would be to recruit high-calibre individuals with experience gained within the parent company or its industry and then train them in investment. Intel’s award winning CVC, Intel Capital, adopts both these practices and has attributed their ability to scale to recruiting good people who either know investing or know the business.

Sourcing talent is only half the challenge – attracting and retaining world-class executives can be an obstacle, especially when financial investors and CVC are still worlds apart in terms of compensation. Carried-interest (or carry), for instance, is still something of a rarity within CVC, whereas in the VC world, it is the norm. A 2012 survey by JPMorgan and J Thelander Consulting found that financial VCs receive an average 23.9% of the profits (carry), generated by their deals.

As such, it can prove a difficult stumbling block when attempting to recruit someone from that market. To further illustrate this, at a recent panel discussion at the Global Corporate Venturing Symposium, panel leader and Intramezzo Chief Executive, Dermot Hill, asked who in the room received carry: in an audience of over 100, only seven people raised their hand – two of whom were corporate investors.

This echoes the findings of the Thelander report, which revealed that only three of the 60 corporate venturing units in its study included payment of carried interest as a component of compensation to its corporate venturing executives.

So is there an argument for CVC to begin considering carry as a means to lure good talent into the industry? There are mixed views and while it can be a powerful tool to attract and incentivise, there are potential pitfalls.

One particular example would be Xerox Technology Ventures (XTV) – launched in 1989 by Xerox and lead by Robert Adams, the fund grew at an impressive rate – from $30m to more than $200m in a 7 year period. But, despite this performance, Xerox took the decision to close XTV – feeling that the success was actually coming from Xerox technology and customers while XTV-funded startup companies took all the credit.

Further exacerbating this scenario was the fact that XTV’s partners received 20% of the carried interest in the fund, resulting in payouts of $30m to the partnership (far exceeding the amount that Xerox’s CEO had been paid in those years)*.

While it can be said that Xerox were a victim of their own success, there are other notes of caution to be taken when it comes to using carry as incentive. One such concern would be that it could create misalignment in the way in which investors and the main board deliver the innovation strategy – if the CVC partners are too heavily targeted on a financial basis, this could impact on their investment decisions, which must be in sync with the parent company if it is to be sustainable.

With CVC experiencing a resurgence, this sustainability is key if the sector is to avoid the bubble bursting. In 2000, when venture capital was riding high, more than 300 large companies invested $16 billion of venture funds in small startup firms. Three years later, however, that amount fell to $1 billion (NVCA).

However, sustainability is also achieved through the ability to retain talent and, to do this, CVC needs to be competitive. Whilst it is certainly not without its risk, there can be little doubt that carry can be a powerful and compelling prospect to many of the financial world’s best and brightest.

*For more information on Xerox Technology Ventures, please see:

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