ontrary to popular belief, not all venture capitalists are individuals or partners in a traditional venture capital firm. In fact, corporations themselves are active participants in the venture capital industry as well.
In a world in which the pace of technological change is advancing at an ever-increasing rate—according to IBM, the volume of information doubles every 11 hours—corporations increasingly understand that they cannot successfully rely on internal product development and their own research and development efforts alone to remain on the cutting edge of innovation.
Most businesspeople heartily agree with former Intel CEO Andy Grove’s statement that: “Only the paranoid survive.” Consequently, corporations are increasingly eager to look outside their organizations to work with and finance the work of dynamic entrepreneurs through venture capital investments.
Moreover, many of the top technology companies in the country such as Microsoft and Google themselves benefited greatly from venture capital investments so they understand the value of the asset class and are willing to build separate well-financed corporate venture entities such as Microsoft Ventures and Google Ventures, the latter of which is one of the most active venture capitalists in Silicon Valley!
What is Corporate Venture Capital?
Corporate venture capital can be defined as the investment of corporate funds directly in external startup companies via an equity stake that often entails not only the provision of finance but also managerial and marketing expertise particularly as it pertains to a specific industry.
Over the last decade, corporate venture capital has exploded in both its size and significance. According to Bain, corporate venture capital has doubled from 11% of all venture capital investing in 2010 to over 20% in 2021 with a compound annual growth rate of 31% during the same period:
Corporate venture capital deal value has increased by more than tenfold over the last decade. By the third quarter of 2021, corporate venture capital investments in startups amounted to over $105 billion. Moreover, these investments are quite broad-based spanning many different industries but with the largest segments consistently being health and information technology which corresponds to their attendant relevance to the economy as a whole.
That said, the corporate venture capital market is not immune to current economic adversities as corporate venture capital investing experienced a steep 57% decline in value during Q3 2022.
Why Do Corporations Engage in Venture Capital Investing?
As we alluded to earlier, a common and prime motivating factor in corporate venture capital investing is the imperative to constantly adapt to fast-moving technology markets.
Specifically, it’s used as a tool to avoid the overused but nonetheless relevant phenomena of being “disrupted.” Nowadays, disruption can come in so many different ways: new competitors may emerge with a new, more innovative technology and/or business model; existing competitors may successfully transition into adjacent markets or merge complementary assets in new ways; or large established institutional actors may leverage their scale, resources, and contacts to embrace the challenges and financial opportunities intrinsic to new market opportunities.
Competition, however, is not just domestic but is also global with new innovations arising daily from emerging markets like China, India, and Brazil. Because of this, it’s super difficult to sustain a competitive advantage only through internal efforts. A corporation must be externally engaged and aware of changes within and across industries in order to survive. Corporate venture capital provides a mechanism to do so.
Generally speaking, the objectives of corporate venture capital are financial, strategic or a combination of both. Financial investments by corporations are just like those of any other venture capitalist in that they are simply looking to maximize their return on investment, aka they are in it for the money and that money can be used to bolster the corporate bottom line.
Strategic investments are more sophisticated and nuanced: the company is trying to use the investment in a startup to enhance the competitive advantage of the parent corporation by identifying new markets, synergies, business models, best uses for new technologies and the like. The argument then is that this is the most important objective of corporate venture capital investing as it is critical to the firm's long-term viability.
Another way of viewing strategic investments is as a market sensing tool. For example, a dirty secret and cautionary aspect of traditional venture capital firms is that although they only finance a small percentage of the startup proposals that they review, VCs learn a great deal about technologies and markets from every entrepreneur that they engage with.
Even if an investment is not made or a financial return is not generated, the mere act of interacting with startups builds the knowledge base and intellectual capital of the venture capitalist. VCs are constantly soaking up knowledge until they are ready to deploy it for the benefit of the startup that they regard as being best positioned to successfully execute so as to win in the marketplace.
Corporate venture capitalists are the same: they gain enormously by listening to how startups are endeavoring to use novel technologies and innovative business models to tap into nascent markets that the parent corporation has often been ignoring because it is focused on serving its established clients using tried and true technologies and methodologies.
Corporations are constantly making acquisitions. A goal of many startups is to seek to be acquired by a large company as an exit or liquidity opportunity. However, acquisitions often fail due to poor due diligence. One of the things that drove General Electric into the ground is that as the company became more financialized and devolved into an M&A shop, it made a series of poorly timed acquisitions that proved disastrous.
For example, in 2015, it bought Alstom’s coal-fueled turbines power business for $9.5 billion at a time when renewables were surging in popularity and it was later forced to sell it at a loss. This is where corporate venture capital can be extremely beneficial. Corporate venture capital can act as a tool to de-risk M&A deals.
Specifically, by taking a minority investment, corporations can obtain early access to a company that they may consider acquiring later and perform extended due diligence over time to more accurately assess the quality of the management team, technology and real versus imagined synergies with their business. This is far more valuable than a two to three-month period of due diligence before taking on the much greater risks intrinsic to a full acquisition.
In recent years, the external investment fund has become the most popular corporate investment modality as it provides distance from the politics and corporate bureaucracy that are likely curtailing innovation to begin with. Hiring a dedicated team of investors and giving them freedom to act independently of traditional corporate norms and biases is regarded as the best way to build a strong innovation-oriented corporate venture capital team. There is however one caveat: too much distance from the parent corporation is a negative. Linkages need to be cultivated between the external fund and the parent organization so that the latter can learn and provide the industry knowledge, marketing skill, contacts and tacit information that is extremely beneficial to startups.
Corporate Venture Capital vs. Traditional Venture Capital
Corporate venture capital and traditional venture capital are both alike but also different at the same time. They can be alike in that they are both interested in generating a financial return so as to validate the investment made but making as much money as possible is the primary concern of traditional venture capitalists.
A traditional venture capitalist must maximize returns for its partners and investors or it will have greater difficulty in raising another fund. In contrast, the strategic and financial goals of corporate venture capitalists means that they take a more holistic approach and are often willing to subordinate financial gain for strategic benefit.
Corporate venture capitalists are more flexible because they are not solely in the business of finance. In addition, they have a longer time horizon as they are not constrained by the life cycle of the fund as is the case with traditional venture capitalists. Corporate venture capitalists also differ from traditional venture capitalists in terms of the benefits they offer to entrepreneurs.
Generally speaking, most traditional venture capitalists offer access to broad networks across entrepreneurial and industry ecosystems while corporate venture capitalists offer deep domain expertise, specialized networks and industry-specific marketing contacts.
Iteration and constant product refinement are essential to startup success and corporate venture capitalists can provide direct access to their customers for the purpose of performing product/market fit exercises.
Indeed, a startup in a specific industry like finance or healthcare might well be better off receiving funding from a corporate venture capitalist affiliated with a top firm in those industries as the specialized expertise could prove invaluable to refining the product’s features and value proposition while positioning the company for sale to an established firm.
This leads to another distinction between corporate venture capitalists and traditional venture capitalists: the pressure to exit. A traditional venture capitalist has a fiduciary obligation to push for the exit—an IPO or an acquisition—that generates the best returns for its partners.
In contrast, a corporate venture capitalist is under no such obligation as their focus is usually on real strategic synergies which may prove to be beneficial to the startup in the long run as it endeavors to develop the intrinsic value that is vital to lasting competitive advantage.
The desire of traditional venture capitalists to cash out as expeditiously as possible is a cautionary tale due to the plummeting valuations of many firms in the current economic environment. Still, in place of the pressure to exit into the capital markets, corporate venture capitalists may pressure the startup to be acquired by the parent corporation but they will likely not do so unless they perceive such an acquisition as being of true strategic benefit so this may serve as real market validation.
Ultimately, whether corporate venture capital or traditional venture capital is best depends upon the goals of the entrepreneur but a sound understanding of the benefits and the risks of each model is essential because they have different incentives and objectives.
Trends in the Corporate Venture Capital Sector
Aside from the growth in the amount of money that corporate venture capital firms have invested in startups over the last decade, what is amazing is the wide variety of firms that are increasingly active as corporate venture capital investors. The range of companies investing in venture capital runs a wide gamut.
In 2019, 77% of Fortune 100 companies invested in venture capital and 52% of Fortune 100 companies had their own investment arms.Overall, according to Pitchbook, 990 corporate entities made an investment in at least one startup in 2021, which is more than triple the 273 that made an in investment in 2011.
Companies from many different industries have corporate venture capital firms including financial services, healthcare and media. Even the energy giant BP and the construction firm ABB have established one which is a testament to how important venture capital is in general as well as the strategic importance of innovation to corporate strategy. In 2021, 140 corporate venture capital funds were established with two-thirds (92) being new corporate venture capital programs while the remaining third (48) were successor funds for corporations that already had an existing corporate venture capital initiative.
The distribution across industries is broad and varied but about half of the 92 new corporate venture capital funds established in 2021 were in three areas: software, financial services and media & entertainment.
The breadth, depth, diversity and vitality of the corporate venture capital sector is reflected in the varied mission statements of some of these firms:
- 7-Ventures: (7-Eleven® CVC): startups that complement 7‑Eleven’s mission of convenience.
- AB Health Ventures: startups transforming the future of healthcare, creating healthier futures for people and animals.
- Allstate Strategic Ventures: startups whose disruptive technologies help shape the future of insurance and adjacent sectors.
- Amex Ventures: portfolio companies pioneer advances that transform how businesses and consumers interact.
- Ascension Ventures: a strategic healthcare venture fund with more than $800 million in capital under management.
- Avery Dennison CVC: emerging technology and materials science companies.
- AXA Strategic Ventures: technologies that shape insurance: enterprise software, fintech, consumer, digital health.
- BASF Venture Capital: chemistry, new materials, sustainability, digitization and new, disruptive business models.
- Baxter Ventures: therapeutic areas in critical, hospital, nutritional, renal and surgical care, and others.
- Bloomberg Beta: bringing transparency to markets, with strong, open cultures embracing technology.
- Caterpillar Ventures: startups infrastructure and resource industries.
- Cisco Investments: disruptive businesses committed to shaping the future of the networking ecosystem.
- Citi Ventures: category-defining startups with potential to augment and enhance Citi’s products and services.
- Comcast Ventures: focuses its investments in advertising, consumer, enterprise and infrastructure.
- CVS Health Ventures: high-potential, startups making healthcare more accessible, affordable, and simpler.
- Dell Technologies Capital: investments in disruptive, early-stage startups in enterprise and cloud infrastructure.
- Deutsche Bank CVC: companies that use technology to support or enable banking and financial services.
- Dow Venture Capital: technologies for clean water, renewable energy, and increasing agricultural productivity.
- Eighteen94 Capital: was formed by Kellogg’s to back food-industry consumer products.
- Enterprise Holdings: emerging transportation technology and mobility companies.
- GM Ventures: growth-stage innovative companies to ensure GM’s customers have access to the best technology.
- GV: (Alphabet CVC): life science, healthcare, artificial intelligence, robotics, transportation, cyber security, & agriculture.
- Home Depot Ventures: emerging technologies to improve the customer experience and shape the future of home improvement.
- IBM Venture Capital Group: new complementary technologies for the industries and customers served by IBM.
- Intel Capital: Cloud, Devices, Frontier and Silicon, the four domains that feed into the future of compute.
- INX CVC Program: innovative businesses with relevance to the global printing inks and coatings industry.
- JetBlue Technology Ventures: invests in early-stage startups improving travel and hospitality.
- Johnson & Johnson Innovation: ideas in pharmaceuticals, consumer, and medical devices sectors.
- Kaiser Permanente Ventures: partners with entrepreneurs to advance clinical quality, service and affordability.
- Lilly Ventures: invests in life science innovations that have the potential to create a pipeline of life-changing medicines.
- Louis Dreyfus Company CVC: startups with innovative and sustainable products and technologies in agriculture and food.
- M12 (Microsoft CVC): AI/machine learning, data/analytics, SAAS, cloud, emerging tech, productivity & comms, security.
- Mass Mutual Ventures: financial technology, cybersecurity, data analytics, digital health & enterprise software.
- Merck Ventures: medicines, vaccines, and animal health products.
- Motorola Solutions Venture Capital: mission-critical communications & intelligence-driven public safety products.
- NG Partners: invests entrepreneurs with a provocative vision for Energy & IT.
- Next 47: (Siemens CVC): new markets in electrification, automation and digitization.
- Nokia Growth Partners: connected enterprise, consumer solutions, connected car, digital health and enabling tech.
- Northwestern Mutual Life Insurance Ventures: personal finance, health & wellness.
- Novartis Venture Fund: looks for unmet need and clinical impact, novel proprietary science.
- Pfizer Venture Investments: therapeutics, platform tech, diagnostics, drug delivery, pharma services, healthcare IT.
- Porche Ventures: automotive startups.
- Qualcomm Ventures: wireless, especially virtual reality, the internet of things, robotics, cloud, and wireless health.
- Roche Venture Fund: innovative life science companies for financial return to Roche.
- Salesforce Ventures: (Salesforce CVC) focused on creating the world’s largest ecosystem of enterprise cloud companies.
- Samsung Venture Investment: semiconductors, telecoms, software/Internet, bioengineering/medical, film/video.
- Slack Fund: where & how people work—for Slack customers or to support developers using the Slack API.
- SR One: (GlaxoSmithKline CVC): emerging life science companies pursuing innovations to impact medical care.
- State Farm Ventures: meeting customer needs in ways they wouldn’t think possible with their insurance company.
- TDK Ventures: early-stage hard-tech projects creating a new era of sustainability and social value.
- Tin Shed Ventures: (Patagonia CVC): environmentally and socially responsible start-up companies.
- Tyson Ventures: invests in sustainable nutrition.
- Unilever Ventures: providing access to Unilever’s global ecosystem in personal care and digital.
- United Airlines Ventures: investing in new technologies and sustainable solutions to improve customer travel experience.
- VEB: is focused on creating venturing and emerging businesses for The Coca-Cola Company
- Verizon Ventures: devices/hardware, media/entertainment, advertising, infrastructure/networking, data/analytics.
- Warner Media Investments: invests in early to mid-stage companies that generate strategic value for WarnerMedia.
- Wipro Ventures: invests in early to mid-stage companies building innovative enterprise software solutions.
The mission and strategic orientation of these corporate venture capital funds is of critical importance because it reflects how they see the future of their respective industries evolving. In a very real sense, corporate venture capital investments by those who are “in the know” are a reflection of how industry stakeholders feel about the present and future of their industries.
There are powerful structural shifts afoot within the venture capital industry. Not only is the industry rapidly globalizing but increasingly traditional venture capitalists face stiff competition from corporate venture capitalists. Corporations are no longer just exit opportunities who can serve as a buyer of a startup financed by a traditional venture capitalist but they are in direct competition with them and are increasingly disinter-mediating them by taking early stakes in the very firms that they may later seek to acquire.
In addition, the strategic role of corporate venture capital as a tool to obtain competitive intelligence should not be underestimated. All of this speaks to the power of innovation in the Information Age and how important it is for firms to be as directly engaged as possible in understanding the technologies, business models and trends that impact not only their industries but adjacent or previously unimagined ones as well.
What is great for entrepreneurs is that they now have more choice. But they must understand the pluses and minuses of both corporate and traditional venture capitalists in order to make the most of these new options.
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