The Legal Kaleidoscope of a CVC’s Journey

The Legal Kaleidoscope of a CVC’s Journey

May 9, 2024

Interviewed by Nicolas Sauvage on October 1, 2020

Ellen Ehrenpreis began her career as a law school graduate with minimal exposure to technology. With guidance from a mentor, she was introduced to the corporate venture capital world and has been hooked ever since. With over 25 years in Silicon Valley, she has accumulated invaluable information she shared with Corporate Venturing Insider. The best practices she has developed for evaluating startup investments through a legal lens will help those already in the ecosystem and those who wish to put their foot in the door.

Orrick

Ellen, a Partner at Orrick, said the company’s commitment to innovation is deeply ingrained. The Orrick Labs Incubator epitomizes Orrick’s ethos by actively developing and implementing technology to enhance its legal practice. But it doesn’t stop at technology creation; Orrick consistently searches for novel ways to bring value to its startups.

“Our focus on innovation is at many levels,” Ellen said. “It’s not just how do we create new legal tech but also how do we innovate to provide legal services to our clients.”

This multifaceted approach to innovation has led to transformation tools such as the Orrick dashboard, which serves as a comprehensive workspace for company and investor clients. Another initiative focused on commitment to innovation, the Toolkit, is designed for startups to provide cost-effective solutions to founders seeking guidance as they embark on their journey. Orrick’s pursuit of innovation serves to be an inspiration to all interested in the field.

So You Want to Start a CVC?

“I think a company is ready and it makes sense (to organize a CVC)when there’s real buy-in,” says Ellen. “A commitment and desire to learn what’s happening outside the corporate organization.”

She clarified that the commitment cannot be confined to or satisfied by internal R&D alone. Rather, it must extend to fostering a culture that is open to external innovation. A CVC thrives when driven by introspection at the leadership level, aligning with the company’s strategies and long-term goals. Amid such a rapidly changing landscape, the importance of surviving leadership transitions while upholding a forward-thinking vision cannot be overstated. This connects directly to how adaptable a CVC is. Ellen believes an organization only earns its CVC stripes once it has survived a CEO change.

She notes that the days when financial backing was the only form of investment are over. Today, corporate investors are sought after because, besides financial support, entrepreneurs covet access to the mothership’s customer base, technology, and commercial capabilities. Corporations must understand and address the market pain points while creating alliances externally.

The Journey Begins

Ellen highlighted the idea that balance sheet investing may face uncertainty during economic downturns due to cost-cutting measures. On the other hand, separating the CVC from its corporate entity, as exemplified by TDK’s approach, affords both protection and commitment. This standalone structure enhances legal protection and signals a level of dedication and commitment in the market. While different corporations opt for appropriate setups, the allure of a separate entity with an autonomous fund reflects a commitment to long-term investing, even in the face of economic turbulence.

“The venture community is big but it’s small,” says Ellen. “Everybody knows everybody and that’s true in corporate VC, it’s true in the VC community generally.”

Uncertainty and risk are inherent in the investment landscape, and reputation is a venture capitalist’s shield. Investors, whether individuals or institutions, gravitate toward those with proven track records of ethical practices and astute judgment. Ellen said a strong reputation not only facilitates access to capital but also fosters enduring relationships which in a small community as she said, is invaluable.

“It’s like a small sandbox, if you play nicely and develop a good reputation, the likelihood that you’ll sit at more tables or you’ll have more access to the sandbox tools will increase,” she concluded.

Venturing On

Diving into the intricacies of effective investment strategies, it becomes evident that pushback and negotiation are integral facets. Ellen noted that side letters wield substantial influence. She revealed that her approach to side letters is not about seeking more but rather discerning what truly matters.

She said that every CVC’s journey is marked by a learning curve. New players have to understand how to navigate the complexities of investment strategies. Education is key, as it is essential to understand the legal intricacies and establish a unique process that strategically aligns with the corporates.

“I would say the cost is almost necessarily higher in the early days,” Ellen said. “But over time is there’s a cadence that develops.”

Passing through the education phase, efficiency begins to formulate which is another key characteristic a CVC should carry. Ellen explained how at this point in the timeline, collaboration between the CVC team and legal advisors can become a cornerstone in their journey. One pivotal juncture is the investment committee approval, which often includes a multi-step process that mandates synchronization between CVC teams and legal counsel. Ellen described how a meticulous investment summary is crafted through strategic collaboration between the two groups to work efficiently.

But how does one create that efficient collaboration? The secret, according to Ellen, is communication.

“It’s all about having that open communication so that I or the legal practitioner understands the conditions that need to be met and having a conversation about how to achieve those needs in the most efficient cost-effective manner.”

With the ecosystem constantly evolving and rapidly changing strategic directions, Ellen’s advice on communication truly offers one of the most basic but essential characteristics a CVC needs to have to be successful. It’s always better to be open and upfront and build relationships on trust. Your CVC will get much further.