One of the biggest misconceptions about corporate venture capital, according to Lilly Ventures Managing Director Edward Torres, is that corporate venture investments are merely a means to broker a deal with the parent company.

In fact, corporate VCs often use financial as well as strategic parameters to measure returns, Torres said last week during a panel hosted by Southern California life sciences industry association BIOCOM. The panel compared and contrasted traditional venture capital firms with corporate venture firms such as Eli Lilly & Co.'s Lilly Ventures, GlaxoSmithKline plc's S.R. One Ltd., Novo Nordisk AS's Novo Ventures, Amgen Inc.'s Amgen Ventures and others.

Torres described Lilly Ventures as "financial investors in strategic areas of interest," meaning that the firm uses its $175 million fund to generate strong financial returns by investing in companies working in one of Eli Lilly's target indications. He added that while his firm is happy to facilitate introductions to parent company Eli Lilly, none of the 25 Lilly Ventures portfolio companies has signed a partnership with or been acquired by Eli Lilly.

Instead of focusing on acquisition advantages or preferential rights to compounds, as some corporate VCs do, the strategic return Lilly Ventures brings to Eli Lilly is "much more subtle," Torres said. "Innovation is the way to win the game, and you have to do lots of things to be exposed to that innovation," he explained, adding that the informal networking that takes place during portfolio company board meetings is where Lilly gets its true strategic return.

Corporate venture groups have good reason not to help their parent companies gain an unfair advantage in any partnering negotiations: doing so would upset the rest of the syndicate and likely result in the fund being blackballed from future deals. "We want to earn our seat at the table and keep it," Torres said.

Joel Martin, partner with Forward Ventures, said his firm has had good experiences participating in syndicates with corporate venture firms, which are "typically very good" about keeping discussions confidential from their parent company and are committed to maximizing shareholder value.

"Corporate VCs as a class tend to be overly careful about avoiding conflicts of interest," said Robert More, partner with Domain Associates LLC. Many corporate groups will excuse themselves from a board meeting when exit strategies are discussed.

Others, however, have a business model that does not include confidentiality and that does seek acquisitions or compound rights as part of the exit strategy, so it's important to know upfront which model matches your company's goals, the panel advised.

While corporate VC firms can offer benefits like introductions to the parent company and advice on how to position your company or asset for licensing, they also have drawbacks. More said there is a perception that the investment teams at corporate funds change jobs more often than the folks at traditional VC firms, which increases the risk that the portfolio company may "lose its champion." He also noted that some publicly traded parent companies may limit their venture arm's investments to avoid heavy losses on their balance sheets.

But in the end, corporate and traditional venture firms are not all that different. "I don't think it really matters that much whether it's a corporate or traditional VC," More said, adding that what the individual investor brings to the table is far more important. He advised companies to ensure they target the appropriate partner at a venture fund, and to conduct due diligence on that person's investment history, personal returns and relationship with the rest of the partners.

"At the end of the day, the great entrepreneurs have control over VCs, not the other way around," More said. He added that despite popular opinions, there are still products available in the biotech industry, but the "shortage is on the management team side."

And after all, if the relationship doesn't pan out, the loss of a few million dollars probably won't affect the VC, but losing years of a career can cripple an entrepreneur. "It's our money," More noted, "but it's your life."