Finding The Right Founder for an Investable Venture
Talent is today’s leading issue for all organisations, and even more so when organisations look to build new ventures. We see this across our corporate partners, from large MNCs to family offices to the venture capital firms we work with. In this short article, we look to explain:
- How should organisations looking to build ventures search, recruit, and cultivate founders? What are the key considerations?
- How do investable founders consider whether to join a corporate venture?
We will explore both sides of what should be a happy marriage in a way that will allow both to achieve their goals. Our focus here will be on investable ventures — i.e., spin-offs with a cap table that will enable external investors to invest early on. These dynamics will differ for 100% corporate-owned ventures, which is not our core focus. We aim to highlight the critical tensions in this dynamic and potential solutions that can help address those.
The Choices You Can Make
Starting with the institution looking to build a new venture, it must consider carefully the reason for bringing a founder, and that reason will determine many subsequent choices:
A. Do we bring in an existing employee as the founder or an outsider?
B. What incentives and upside do we provide to the founder in case of success?
C. How do we want to interact with the venture in terms of governance?
Let’s dive in:
A. Do we bring in an existing employee as the founder or an outsider?
The first choice would be whether they should make an employee a founder of a spinout versus recruiting a new person. Either option has vital considerations.
Working with an employee-turned-founder has two main challenges:
- The mentality difference between an employee and an entrepreneur/founder is quite significant, with one optimising for safety and stability and the second for taking risk and embracing the volatility of early execution. This is a critical element at the start of the venture when the compensation of the founder changes, such as ample cash compensation turning into a significant equity stake and much smaller compensation, which is a difficult discussion with most such founders.
- A second consideration for the company is changing the relationship between the employee-turned-founder and the corporate. Once an employee becomes a founder, he can no longer be governed by the standard corporate policies as he needs to set up other policies for his own venture. This will mean changing relationships with former superiors and colleagues. And, of course, it means losing the employee’s talents for the core business (this is a 150% job; there is no double-hatting it).
Meanwhile, working with an external founder really depends on their experience and motivation:
The more entrepreneurial the founder is, in contrast to the maturity of the venture program and how heavy its interface is versus the parent company, the friction and success of such a collaboration will be determined. On the other hand, some entrepreneurs who have burnt out from a failed venture will embrace corporate safety a bit too much as a recovery period, leading to failure. Also, only a few corporate venture programs have the right experience in identifying, attracting, and recruiting the right entrepreneurial talent.
B. What incentives and upside do we provide to the founder in case of success?
The second consideration is the overall goal and path of return (for the institution) and upside for the founder. The less likely the venture is to be independent (for any good reason) would suggest hiring true entrepreneurs will add more friction across its stages of growth. This is especially true in a world where relatively few corporate ventures have given entrepreneurs the freedom and upside they wanted, and more are met with suspicion. In both cases, the decision to hire internally versus externally can still be evaluated, so this alone will not determine the type of founder for the new venture but rather what conversations should be had with him/her in the onboarding process.
We hold that the best incentive alignment between a corporate building an investable venture and the founder(s) must be a significant equity stake. This both provides the correctly correlated upside for the founder (a valuable business brings significant returns) and the freedom they need to determine the critical moves to building such a business. Further, ventures can only be VC-investable (the most common type of early-stage investment) if the founders hold very significant equity stakes and can operate the business with specific liberty.
C. How do we want to interact with the venture in terms of governance?
The last critical decision that the corporate will need to determine is about the interface and governance between the new venture and the actual support that the new venture can get from the corporate. Often, corporates underestimate the interfaces needed with their ventures (and sometimes corporate processes can really impede ventures) while overselling their “special power” in helping ventures. This will also impact how to bring in a founder and the relationship with them over time.
Ambitious founders from the outside will only want to join a venture with significant corporate shareholders if a value is derived from that relationship. If indeed it ends up a reporting relationship, where the founders have a lot of extra work interfacing with the corporate, but there is no unfair advantage brought to the table, then this will lead to demotivation and is not conducive to venture success.
What Founders Look For
From a potential founder perspective, whether they come from the corporate or are external to the parent organization, a few things will be considered:
The first thing is whether they are willing to accept a cap table (ownership structure) with a large corporate from the get-go and a Shareholder Agreement (SHA) that protects the corporate, especially in the early days. This has a set of implications depending on the actual position of the corporate. One implication is that the corporate is likely to have a board seat from early on and is expected to have a board meeting format that the founder should follow.
The protections of the corporate early on might seem onerous for the founder, especially if they come from a pure entrepreneurial exercise in which they initially had total control. Of course, with a higher position on the cap table, more power will be given to the corporate at the founder’s expense, which the founder should evaluate.
The second thing that the founder should look at is the startup’s opportunity outside of just the corporate view. Do they believe that the venture will be successful without the corporate, and if the corporate can help the venture in achieving its goals? This is important as while the corporation can add value to the venture it must still be able to stand on its own.
The ideal setting for a founder to do their best work is to get the best of both worlds. They desire the operating freedom they would have in the wild, paired with the corporate advantage to boost their venture. Most are painfully aware that it can turn into a worst-of-both-worlds story — Restricted freedoms for no upside. All good founders understand this.
How to Get on the Happy Path
So what can a corporate looking to build corporate ventures do to attract the right potential founders better, and what should the potential founder do when engaging with the corporate venture?
- Answer the critical questions for the venture before start looking for a founder with some examples of questions (although there are a few more), include
a. What is the goal of the venture from a corporate perspective?
b. How much money is invested in what cap table structure, and what will founder / potential investors have if they come in?
c. What will the interface with the corporate be?
d. What other than initial investment can clearly be supporting the venture in its growth process?
2. Ensure that the venture idea is clear and the value of the validation can be shown to the potential founder (and the founder agrees to the work being done). In our model, we prefer to bring the founder in for the piloting phase, expressly once we agree on the pain points to solve and solutioning scope is clear (otherwise, the likelihood of failure is greater).
3. Especially if the program is not yet mature (i.e., the corporate has not gone through a few different ventures in this case), have an open discussion with the candidate about the above issues and do not ask them just to accept what the future will bring but instead build the process together with them.
4. Ensure that the potential founder understands that while the venture to be built is a corporate venture, he needs to act like a proper founder (and needs to agree on the structure by which they come in) and does not come in to use the potential friction with the corporate as a reason why they do not work as hard trying to execute
5. Finally, as we at Wright Partners always push for, if the venture should be spun out, the corporate should speak with venture capital firms (and other potential investor types) and build relationships with them. The corporate should then look to adopt some of the best practices of those VCs in their SHA and other governance elements, which some of our more advanced corporate partners are already doing.
Conclusion
By carefully considering these factors, corporations can better attract and integrate the right founders for their ventures, creating a foundation for mutual success. Founders looking to join corporate ventures should critically assess the structure and potential of the venture, ensuring it aligns with their goals and provides the necessary resources and autonomy to succeed.
We are also pleased to be an appointed venture studio of EDB’s Corporate Venture Launchpad 2.0. CVL 2.0 is an expanded S$20m programme by EDB New Ventures, designed to enable companies to incubate and launch a new venture from Singapore, supported by venture studios experienced in corporate venture building. You can also find out more on our website.
Interested to learn more about investable ventures? Drop us a line: contact@wright.partners
Authors:
Sebastian Mueller, Co-founder at MING Labs
Ziv Ragowsky, Founding Partner at Wright Partners
