Will Corporate Venture Capital Disrupt the Traditional Investment Ecosystem?
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Corporate venture capital is picking up speed in the investment industry, as large companies start setting aside funds for external investment in fledgling companies or startups.
Tech giants like Intel, Dell and AMD all have strong track records with their proprietary funds, and more companies like Microsoft and Salesforce are now entering the venture-fund game. During the past four years more than 475 corporate venture funds have started, bringing the worldwide total to more than 1,100, according to Global Corporate Venturing.
With this surge comes a lot of uncertainty. How will corporate venture-capital players influence the funding ecosystem? What do entrepreneurs need to know when choosing between corporate and traditional venture-capital partnerships?
Related: The 25 Most Active Corporate VCs
Large companies can be slow moving and bulky, making it tricky to come up with innovative products or services. That’s especially true for the pharmaceutical, technology and telecommunications industries where internal R&D usually means more hiring, higher capital expenditures and increased fixed operating costs, all without the guarantee of a return. A corporate venture fund, however, provides an opportunity for innovation without paying high R&D costs or incurring too much risk.
Corporate venture capital also lets large companies operate on a smaller scale, which lets them innovate faster, conduct research on disruptive technologies and pre-empt competitors. And it’s an efficient way for companies to explore potential acquisition targets. Data from Crunchbase shows that about one-third of corporate venture-backed startups have been acquired, versus 10 percent of startups with funding only from private venture capital. Corporations can use their venture arms to influence their industry's ecosystem by identifying new markets and building up their existing businesses.
According to a recent Volans report, corporate venture capital accounted for 1,068 investment deals worth $19.6 billion last year. Since 5,753 venture-capital transactions worth $48.5 billion occurred in 2013, corporate ventures comprised nearly 20 percent of all deals and 40 percent of transaction value worldwide.
A traditional venture-capital firm raises money primarily from institutional investors and high-net-worth individuals, while corporate venture capital uses cash reserves from a parent company to fund new endeavors.
This difference is significant because it means more external pressure is typically put on independent venture-capital firms to generate above-average returns. Since corporate ventures are typically considered R&D alternatives, expenses are already built into the business structure. And separate revenue-generating businesses help offset any corporate venture-capital losses. That’s a safety net that traditional venture-capital firms don’t have.
Corporate venture-capital efforts also have the advantage of involvement with startups at the early stages, when they can most benefit from access to a large, established customer base, credibility through brand association and a larger network of partner companies and advisors.
Corporate venture-capital efforts can make good co-investment partners with traditional venture capital firms because each brings different expertise to the table. Venture-capital firms have the drive and know-how to realize financial results while corporate-venture capital groups provide industry knowledge and a talent pool.
My company, Blue Cloud Ventures, with an enterprise software-focused late-stage fund, has successfully collaborated with corporate-venture capitalists in three companies: Resumator, with Salesforce Ventures; Vidyo, with Juniper Venture Investments; and Cloudbees, with Verizon Ventures.
Given all these advantages, why isn't a larger proportion of total deals in the venture-capital space taken up by corporate funds?
For one, independent venture-capital firms still hold a competitive advantage over their corporate counterparts due to their flexibility, speed and experience in helping companies succeed financially. Corporate venture-capital firms that benefit from high cash flows might be willing to spread out their investments over a few similar companies and take a back seat in terms of driving their growth, while a venture-capital firm is typically motivated to take a more focused and hands-on approach for its portfolio companies.
Corporations have been actively investing in venture capital since the mid-1960s, when the venture capital industry itself was just emerging. But as more corporations become involved, the emphasis on how to build the next generation of businesses could shift away from high valuations and quick exits to creating a nurturing environment for bigger and better ideas.