Innovative startups pose a constant threat to corporations. To integrate some of the dynamism and energy of fast-moving startups, many companies invest in internal R&D, consider mergers and acquisitions, or set up partnerships with new and nimble players in the market. But increasingly, corporations are also turning to the idea of corporate venture capital (CVC) as a way to make disruption work for them, instead of against them.
The CVC Billions
CVC is not a new game, but the tech sector in particular has made it a more visible part of corporate culture over the past decades. Famous investment units like Google Ventures and Intel Capital are spurring the growth in CVC.
According to PwC's 2015 MoneyTree report, produced in association with the National Venture Capital Association, U.S. companies invested $7.5 billion in corporate venture programs in 2015, the highest level this century.
“The best of those companies blend CVC with other operating models such as open innovation, incubators, accelerators and design thinking to drive results," said John B. Riggs, Principal of PwC Innovation & Corporate Venturing, in a blog post commenting on the report. “By investing in innovative companies, your organization can access innovative technologies, discover novel new products and experiment with different business models. And it can do all those things with the clock speed of a startup."
While the growth of CVC has definitely been most marked in the tech sector, it's not the only industry that's recognizing the benefits of investing in startups, according to Dave Zilberman, Managing Director at Comcast Ventures “The rise in corporate venture capital comes from the realization that corporations must look beyond their four walls to access innovation, understand market changes and compete. While this realization started in the tech and healthcare sectors, it's not limited to them as there's a growing appreciation from aerospace, retail, oil/energy, and CPG," he says.
Trying to Make the Cake Bigger
Innovation is the main reason any corporation wants to work with startups, but innovation is a wide umbrella. While partnering with startups might help companies get a new product to market more quickly and mentoring a startup in-house can help promote innovation among the firm's employees, CVC does something different. It supports the whole ecosystem that a corporation operates in and creates opportunities for the sale of its products.
“We understand that the company is part of the bigger ecosystem and it can't be successful on its own, it can only be successful if the entire ecosystem is successful," says Marcin Hejka, vice president of Intel Capital and managing director for Europe, the Middle East and Africa.
“Historically, Intel has been a supplier of processing power; so naturally, facilitating the development of the ecosystem through investing in technologies, products, solutions or services that are creating new reasons for consumers and corporations to use more processing power is a great idea. Plus, you make returns as an investor. I would describe this approach as trying to make the cake bigger for everyone rather than competing for an existing piece."
As an example Hejka mentions Intel Capital's 2005 deal to invest $16.5m in AVG Technologies, then known as Grisoft, the Czech company behind freemium security software AVG. At the time, he explains, Intel was concerned that consumers and small enterprises weren't using as much technology as they could be because of security concerns. But much of the security software available was expensive. The freemium model of AVG, which gives free basic protection and allows users to pay a fee for upgraded security, gave people more security options, encouraging more use of computers and, ultimately, more customers for Intel's processors.
“We believe that the company played a role in facilitating development of the ecosystem, which was the strategic reason to make the investment," says Hejka. "At the same time, the company benefited from having an investor like Intel and we believe we also contributed to the company successfully expanding internationally. They ended up with a successful IPO, so everybody won."
R&D, M&A, and Value for Startups
Building a market for your products is just one aspect of CVC. Companies also use CVC to support their own internal R&D programs to bring in ideas in for future product development. And companies like IBM and Google have often used their venture capital units to scout out possible M&A opportunities. They start out with an investment and follow it up with their merger or acquisition offer down the line.
Corporations can also invest up and down the supply chain. For example, Comcast Ventures has invested in Slack while also being one of its biggest customers.
The Maturing CVC Market
While corporations have long dabbled in venture capital, there is evidence that this type of corporate activity is maturing. According to Gary Dushnitsky, associate professor of strategy and entrepreneurship at London Business School, CVC is growing and CVC programs are lasting longer.
In the past, companies would run CVC programs for around 2.5 years on average — a third as long as independent venture capital (VC) funds — but today, the average CVC program has been in operation for 3.8 years and many of the big ones, like Intel Capital, have been around for more than a decade. That signals a much larger commitment to venture investment as an activity and could also indicate a trend towards embracing innovation by looking to sources outside the corporation, Dushnitsky said in a blog post.
And CVC is expanding geographically as well. While a large proportion of the startups getting CVC capital are still U.S.-based, companies elsewhere are starting to get these investments too. From 1991 to 2000, U.S. firms received 88 percent of investments, but their share dropped to 75 percent between 2001 and 2009. In that period, startups in the UK, China, and India all received CVC investments, along with startups in other European countries and emerging markets.
In 2013, U.S. startups got just 65 percent of CVC deals, according to the Volans and Global Corporate Venturing research report Investing in Breakthrough: Corporate Venture Capital. European startups received 15 percent, while startups in both China and Japan got four percent.
Strategy, long term goals and innovation
In the past, CVC went through boom and bust cycles. The first CVC wave started in the 1960s, and ended when the IPO market collapsed amid the 1970s oil shocks. The next wave in the 1980s was scuppered by the financial crash of 1987, and the third wave burst during the dotcom bubble.
However, there are signs that the current rise may be different, as CVC seems to be powered by long-term goals and strategy, support for the ecosystem corporations move in, rather than quick financial wins.
“The newest wave focuses on strategic alignment, with longer term return horizons," the authors of the Volans report noted. "So far, it seems to be paying off — with the good track records of the top 50 global CVC units going back over a decade or more, exceptionally long compared to past waves."
Intel Capital's Hejka thinks CVC has become an important element of the overall venture capital ecosystem and the numbers bear out this observation. "Q1 of this year saw a record level of corporate VC activity with 21 percent of all venture deals being executed by corporate VCs," says Hejka. "And around 30 percent of capital provided to startups came from corporate VCs."
While the CVC trend is headlined by tech giants like Intel, Google, and Qualcomm, companies as diverse as Time Warner, Citrix, Johnson and Johnson and PayPal are all active in CVC.
“We see more and more corporations getting into the venture capital business. There are almost 200 corporate VCs active on a quarterly basis, and this year alone, we have seen more than 50 corporate VCs being established," says Hejka.
As technological innovation makes it mark in other sectors, startups and CVC will likely expand this trend to industries like education, transportation, food processing, and agriculture.
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