Returning from the Global Corporate Venturing Symposium held in London last month, it is hard to ignore the leading role that corporates take in the startup ecosystem worldwide. Whereas in the past 20 years Intel via its Intel Capital division, was leading the way through the ups and downs of the venture capital cycles, today it seems like the majority of global corporates are engaged in some sort of corporate venturing activity.
What is Corporate Venturing
Corporate Venturing (CV) could be defined as the activities that corporates initiate to engage with the startup ecosystem in order to harness emerging innovations. The realisation that disruptive innovations happen outside corporates, led to a spurt of new CV units in the last few years and of the coining of new terms such as “open innovation” and “distributed R&D”.
Corporate Venturing Growth
In fact during 2013, CV’s invested more than VC’s as measured by the number of deals and total invested amount. CV’s invested $3.9B in Internet startups in Q1/14, an increase of 183% on Q1/13. It is estimated that today, there are more CV units than VC firms and that over 50% of corporates have already established their own CV unit (Source: SVB).
Corporate Venturing Activities
Merger and acquisitions (M&A) - corporates acquire startups to expand current or develop new capabilities (including a defensive play to protect an existing market share)
Corporate Venturing Capital (CVC) – corporates invest in startups similarly to VC’s but in addition to financial return they gain strategic advantages
Accelerators and incubators (A/I) – corporates setup internal/external programs usually with the help of an established program to either encourage internal innovations or foster external ideas
Invest in funds and fund of funds (FoF) – corporates invest in external fund managers to get access to a large and often highly diversified portfolio of startup innovations
Corporates Invest in Early Stage
It is interesting to note that while the first two activities, the M&A and CVC could be considered as the more traditional ones, the latter two, the A/I and the FoF is where the new focus has been. That indicates that corporates are now moving down the funding stages and effectively covering the whole spectrum from seed all the way to M&A. In fact in 2013 CV invested earlier than ever before with 5% of total investments in seed and 13% in series A rounds (Source: GCV).
It seems that now when it takes much less money and time to fund and scale a startup, corporates no longer can afford to wait. With the understanding that disruptive innovations happen outside the corporate walls, corporate’s biggest fear is to completely miss or be excluded from a deal that would potentially change their competitive landscape. In addition, being late could have a substantial financial implication (e.g. Facebook’s acquisition of WhatsApp for $19B).
A recent research has shown that startups with corporate investments are valued as much as double than startups without. This is a testimony for the value-add that corporates have over traditional VC firms. Although most VCs would argue that they provide their investee companies with mentoring and connections, it is unlikely that any VC could match the Rolodex that global corporates possess. The ability of a corporate to support its portfolio companies with channel distribution as well as technical and business model verification cannot be match by even the most prestigious VC.
Cross Sector Investments
Corporates create a diversified portfolio by also investing in sectors that are adjacent to their core activities. A recent BCG report has shown that besides Cleantech and Healthcare where investments are relatively concentrated, corporates often invest heavily in other sectors than their own. For example, Media companies invest substantially in IT, Consumer and Services sectors while only 44% in Media related startups. Chemical companies invest in Healthcare, Industrial, IT, Consumer, Transportation and 37% in Clean Technology (Source BCG).
Corporate Ventures Partnerships
To support emerging technologies and enable platform and digital driven efficiency developments, CV units of competing corporations are co-operating between themselves. Such co-operation was evident for example between gas and oil companies such as BP, Shell, Chevron, ConocoPhillips.
Corporate Venturing are Here to Stay
Unlike the contraction in the number of CV units that was seen post the Internet bubble burst in 2001, it is now widely expected that CV units remain for the long haul. CV units are now serving a central role in the corporate business development and future strategic planning and in general doing a better job in proving their strategic value (in additional to the financial returns) to the corporate mother ship.