Saturday, October 29, 2016

Considerations for Healthcare Entrepreneurs Thinking About Corporate Venture Capital

This past week I had the opportunity to listen in on a “Reverse Pitch Day” presentation held at the Cambia Grove, a unique ‘accelerator-incubator-innovation-startup space-support hub’ that's a subsidiary of Cambia Health Solutions, a non-profit healthcare enterprise located in the Pacific Northwest; and a four-state (OR, WA, ID, & UT) BCBS Association licensee.

At the start of the event (available here on YouTube) and at various points throughout the presentation, the host, presenters and audience/participants shared information about dealing with corporate venture capital (CVC) organizations and the benefits and challenges associated in dealing with CVC's. This post presents some information about CVC's and summarizes some of the information shared during the Reverse Pitch Day event. A future post will share more details about what was shared at the event. Of course you can review the 80 minute long YouTube Video too.

Corporate Venture Capital in Healthcare

It seems like every major health plan, health system and healthcare provider enterprise has some sort of corporate venture capital group working to identify, nurture and leverage the quickly evolving technologies and the entrepreneur’s using them in new and innovative ways to address healthcare opportunities, challenges and issues.

While corporate venture capital organizations have been around since the 1960’s, corporate VC units have really seemed to take off in the healthcare space over the last 5 or 6 years. Whether the result of past healthcare mandates like ICD-10 and Meaningful Use - or Mega Regulations like the ACA and MACRA; or perhaps due to a shift in the historically risk-averse healthcare corporate culture, there's definitely a willingness of large corporate enterprises to bet their capital and invest their human capital on developing new products and services that can be used to both advance their own business AND earn a potential investment gain.

How Does Corporate Venture Capital Differ from 'Traditional' Venture Capital?

Corporate venture capital has distinct differences from independent venture capital (IVC) that entrepreneur startups should be aware of before deciding which fund-raising route to take up with. While not a complete list, and perhaps subject to some opinion, the following have been identified as major differences between CVC’s and IVC’s:

1. CVC’s usually have greater industry knowledge due to the business focus and technological fit between their parent firms and the entrepreneurial firms in which they invest.

2. CVC's often have greater tolerance for failure due to longer investment horizons they'll tolerate.

3. CVC's pursue both the strategic and financial objectives of their parent companies, while IVCs’ sole goal is primarily to achieve high financial returns as soon as possible.

These three differences are summarized in ‘Corporate Venture Capital, Value Creation, and Innovation’ as follows:

“CVCs are usually more open to experimentation and to occasional failures in their portfolio firms compared to IVCs. The presence of a corporate parent may provide CVCs with a unique knowledge of the industry and the technology used by their portfolio firms, which is absent in IVCs. This superior industry and technology expertise of CVCs may enhance their ability to better use the soft information they receive about their portfolio firms’ R&D activities, thus allowing them to better assess and nurture these new ventures’ technologies and products.”

Connecting w/ Corporate Venture Capital

1. The incentives of Corporate VC's are typically aligned to the needs of the sponsoring corporate entity and those incentives may not be aligned with the entrepreneurs. It’s very important for entrepreneurs to understand the CVC’s intention (need) BEFORE deciding to make their pitch, invest their time and spend their resources establishing a formal relationship with the CVC.

2. Large enterprises have key strategic relationships with many other large enterprises that can be of tremendous value to an innovative startup.

Internal Intrapreneurs vs. External Entrepreneurs

Many CVC's invest in and nurture both internal entrepreneurial activities and products being developed by external organizations. 

The following was shared during the Reverse Pitch Day event:

1. External organizations dealing with Corporate VC will have a greater sense of autonomy than those internal to the organization and will essentially be treated like a vendor. Corporations have 100’s of vendors vying for the attention of the corporate enterprise and the entrepreneur has to be able to stand out from the other vendors.

2. Startups pitching Corporate VC’s have a real opportunity to build a commercialization alliance. But they must be aware that they'll also likely be tied into and subject to the corporate restrictions and concomitant bureaucracy/slow decision making process present is nearly all large enterprises. Essentially they're going to be subject to more restrictions as to what you can and can’t do - as opposed to as (somewhat) more hands off relationship when partnering with a more traditional VC outfit.

3. If seeking revenue or funding from the internal perspective, it’s helpful to keep the perspective of leveraging corporate business development resources. (More on this in a following post)

What’s Next

In the next post I'll provide more details and information, benefits, challenges - and some tips for startups - that were shared during the Reverse Pitch Day event at the Cambia Grove. 

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