Corporate VC: Everything You Need to Know
Corporate venture capital is a term used to describe the actions of the corporation investing in an external startup company.6 min read
What Is Corporate Venture Capital?
Corporate venture capital is a term used to describe the actions of the corporation investing in an external startup company. In other words, it's when a corporation provides startup costs to companies that do not belong to or are not subsidiaries of the corporation itself.
Corporate Venture Capital
Corporate venture capital is not for the faint of heart. In fact, a study done in the year 2001 discovered that nearly 1/3 of the companies which had been actively investing corporate funds in startups in September 2000 stopped making those same investments into startup companies just one year later. Additionally, during the same period, corporate venture capital investing fell by 80 percent. Corporate venture capital investing has a history of increases and decreases in the amount of investing in startup business.
However, in recent years, the difference between the amount invested has varied wildly. For example at the end of 1998, corporate venture capital investing was around $468 million. In the beginning of the year 2000, corporate venture capital investments accounted for $6.2 billion. By the third quarter of 2001, corporate venture capital investments fell to $848 million.
Active Corporate Venture Capital Firms
In the third quarter of 2016, there were 204 venture capitalists actively invested. Both Google Ventures, along with Intel Capital lead the pack of corporate venture capital investors. However, corporate venture capital investments expand well beyond companies like these two. Corporate venture capital investments occur in a wide variety of industries. Recent industries engaging in corporate venture capitalism include airlines and food companies, represented by companies such as Tyson Foods and JetBlue. First-time investors in corporate venture capital reached an all-time high in 2016. A full 107 additional corporate venture capital units were developed and invested for the first time in 2016. These include funds like the Sony Innovation fund and the BAIDU venture fund.
Quarterly Active CVC Trends
More corporate venture capital investors actively invested in the third quarter of 2016 than since the year 2012. 195 CVCs, on average, made investments in 2016. Contrast this with the quarterly average of 182 CVCs in the year 2015. Since the third quarter of 2014, there have been more than 160 corporate venture capital investors engaging in deals in each quarter of the year. These investments range across a variety of industries such as digital health, the food and beverage industry, and many more.
Intel Capital and Google Ventures tied as the most prolific venture capital investors in 2016. Salesforce Ventures and Comcast Ventures, along with Cisco Investments, General Electric Co. Ventures, and Bloomberg Data comprise the rest of the leading eight companies engaging in corporate venture capitalism.
While Google, Intel, and Salesforce represent the tech industry, other firms, such as SR One, Pfizer, and Novartis represent the field of health care.
In 2015, Intel Capital was the most active CVC investor. Intel Capital invested in companies such as DocuSign and I Zettel. Google Ventures and Qualcomm Ventures were also extremely active in 2015. As were Comcast Ventures, Bloomberg Data, and Cisco Investments. In 2014, Google Ventures was once again the most active CVC investor in U.S. based companies. Also in 2014, Intel Capital and Salesforce Venture were the second and third most active CVC investors in US-based companies. Health care funds Novartis and SR One were also in the top 10 in 2014.
History of Corporate Venture Capital
Corporate venture capital units have grown significantly in recent years. However, corporate venture history goes back to the beginning of the 20th century.
Investing in startup companies by corporations has grown steadily over the last two decades. Large companies, such as IBM and 7-Eleven have been investing in startup companies both directly, as well as through dedicated venture-capital arms of the corporations. Corporate venture capitalist investment units are becoming increasingly common features of large corporations. Even companies that are distant from tech and biotech industries are choosing to invest in startups. Examples of these include Walmart, Coca-Cola, and the Campbell Soup company.
Corporate Venture Capital Is on the Rise
Many of the leading CVCs today are designed to maximize financial returns. Investing in startup companies allows a corporation to grow shareholder value. CVC's allow corporations to focus on the investment itself rather than running the smaller company. Being returns focused benefits the small company as well as the corporation. This allows the CVC to be measured based on their financial performance in their investing. Additionally, when focused on making money, the corporation can avoid the challenges of annual budgeting and other small business concerns.
Returns oriented investing is essential to long-term corporate venture capital. The incentives that matter focus around returns and retention. One challenge is retaining partners who may decide they need more money or seek greater independence. The parties’ time and energy should be aligned with an eye toward long-term creation of value.
Providing autonomy from the parent investor allows corporate venture capital startups to make decisions and to make decisions quickly and independently. Decisions to invest in a small startup should live within the investment arm of the business, not those running business units within the larger corporation. With a small professional investment team with experience in investing in startups, CVCs are able to make independent and reliable decisions. These teams have expertise in the following areas:
- source and evaluating sourcing
- evaluating investments
- engineering optimal departures
- oversight of portfolio
- value creation for portfolio
Investing in core areas that are of interest to corporate parents enhances the stability and the return for the corporate venture capitalist. When the relationship is between the target sector of the parent and the CVC, the relationship is not limited.
CVC's allow corporations to invest in a broader scope of companies evaluating a large number of opportunities in both direct sectors as well as adjacent sectors. Investing in strategically relevant companies provides a win-win between the entrepreneur the corporate parent and the CVC. For the entrepreneur, the CVCs relationship with a larger more broad-based business increases the likelihood of obtaining lucrative contracts, distribution channels, and unique experiences. The corporate parent benefits from exposure to new partners, new business models, new talent, and new ideas. This sort of relationship would be difficult to foster without the ties that come with a significant financial investment. Finally, for the CVC, relevance tends to enhance the returns obtained by the CVC. The CVC may use proprietary sourcing, post investment value creation, and due diligence to enhance the return.
Evergreen capital refers to capital that is predictably available and does not have an end to its funded life. Corporate parents tend to have predictable cash flow and a deep bench of assets. By allocating just a small fraction of their annual corporate cash flow to the CVC, this ensures the CVC has a visible and dependable as well as reliable source of income with which to make investments. This provides credibility to the entrepreneurial community allows for deal sourcing and diversification. Traditionally venture-capital funds last about 10 years. When a CVC has evergreen funds, this enables the CVC to invest in companies and in sectors that require more time to achieve their full potential.
It's All About Fit
Not all CVCs are good at investing. Not all the CVCs are good at building companies. When an entrepreneur is looking for a CVC, it is best for the entrepreneur to engage in due diligence, considering all options. It's also important that entrepreneurs resist the temptation to fall for stereotypes. It's essential that entrepreneurs do their homework on any partner. Entrepreneurs should look for partners willing to champion the deal at hand, as well as sit on the board, and provide other assistance. Corporations, similarly, should approach investing with caution.
The Dual Dimensions of Corporate Venture Capital Investments
A corporate venture capital investment is defined by two separate and distinct characteristics. The first part of the definition involves what is the venture capital investment objective. The second portion is a question about the degree to which the operations of the startup company and the investing company are tied. It's not uncommon for companies to have a variety of objectives for their venture capital funds. However, investing funds in startup companies usually advances one or more fundamental goals. Some investments are made to increase the sales and profits of a corporation. Other corporations make investments to identify and take advantage of overlap between itself and a new venture. Another question is the degree to which investment companies are linked to the resources and the processes of the startup company. External ventures can offer an investing company the opportunity to build different capabilities or new capabilities.
Four Ways to Invest
There are four ways to invest:
- Driving investments include close connections between the startup company and the interested company.
- Enabling investments allow a company to make investments for strategic reasons, however, typically enabling investments are not closely tied with the operations of the startup company.
- Emergent investments in startups occur when the investment in a new venture might be considered to be strategically of value. This investment has an upside that goes beyond whatever financial returns the investment may garner.
- Passive investing is when there's no connection between corporate strategy and the startup company’s strategy. In other words, the corporation will not advance their own business by tying with this startup company. This is just another investment to make money.
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