Corporate venture capital has quickly developed into a major funding source
for startup companies. This type of startup funding is available to some
innovative startups and early stage companies, and the dollars involved are
significant. This all sounds great, but is this type of funding right for your
startup?
According to the National Venture
Capital Association and PWC’s Money Tree survey, 905 corporate venture capital deals were closed
during 2015 with $7.5 billion invested (primarily in high growth startup
companies). These transactions comprised 21% of the total number of venture
capital deals closed in 2015 and represented 13% of the total venture capital
funds invested in that year. Not surprisingly, the biggest chunk of these
investments went to software companies ($2.5 billion in 389 deals, which
represented 33% of all corporate venture deals in 2015), while biotech deals
were second ($1.2 billion in 133 deals, which represented 16% of all corporate
venture deals that year).
Many large and familiar companies have implemented venture capital
programs. Some of the most well-known corporate venture funds are Alphabet’s
GV (formerly Google
Ventures), Microsoft Ventures, and Salesforce Ventures. Most of these corporate venture funds are sponsored
by large technology companies, but Airbus Group Ventures is an example of a fund established by a
non-technology company in a specific industry space. While each of these
programs has some independent characteristics, the commonalities are a strong
desire to foster innovation (either generally or in specific industry segments)
and an ability to step out of the normal corporate mold and commit funds to
situations with higher risk profiles when compared to normal corporate investments
like real estate and straightforward corporate industry acquisitions.
There are a number of significant potential advantages associated with
corporate venture capital. For me, two of the biggest potential advantages are
the broader investment scope and the more long-range expectations which may
result in a corporate venture investment as compared to a normal external
venture investment. A corporate venture capital investor can by its nature
take a more broad and strategic approach to its investments and what it expects
from them. The definition of a successful investment for a corporate venture
capital investor may be very different that that used by an external venture
capital company.
Most external venture capital companies have a fairly short-term outlook
that is ultimately driven by a need to build value and achieve a liquidity
event quickly, thus generating cash for the venture capital fund and its
investors. This is not a bad model, and it has certainly enabled and
facilitated growth and innovation in a huge number of companies. A corporate
venture capital company can normally take a longer-term stance with an
investment, however, and this may prove very advantageous to the maximization
of the investment’s value when compared to a quick IPO or acquisition
transaction involving a traditional venture capital investment.
A corporate
venture portfolio company may be able to develop in a more measured and
strategic fashion as opposed to doing whatever is required to maximize value in
a relatively short time period. Corporate venture investments are not
charitable endeavors, of course, and ultimately the managers of any such
investment will have to answer to a corporate board, but corporate venture
investment will normally exhibit more flexibility and strategic positioning
when compared to an external venture capital investment.
Other potential advantages of corporate venture investing include access to
significant corporate resources and opportunities, potential synergies in
market development and sales, increased availability of follow on funding
(especially given the cash rich balance sheets of many companies today) and a
stronger and more supportive corporate infrastructure. All of these advantages
combine to make the corporate venture investment a potentially beneficial
situation for many startups and early stage companies.
Wharton’s Mack
Institute for Innovation Management recently released an interesting study regarding the effectiveness of
corporate venture capital investing in the biotech space compared to
investments made by external venture capital firms. The Institute’s conclusion
was a glowing endorsement of corporate venture capital investment – in fact,
the study found that corporate venture capital investment was twice as
advantageous for biotech companies when compared to investment by an external
venture capital firm. A link to the full study can be found here (you may need to pay to access the full study),
and good summary articles can be found here and here.
Potential disadvantages of taking corporate venture capital include the
imposition of significant control rights by the investor (in some cases
exceeding the normal venture capital control rights), the need to adjust your
business to fit in with the corporate investor’s overall strategy (which may
change over time), and the addition of a corporate bureaucratic decision-making
structure. Corporate venture capital can also be difficult to obtain as
qualification requirements are normally very high and competition for corporate
venture money can be intense. The potential longer time frame for the
development of an investment in the corporate context can also turn into a
disadvantage if the market changes or competition increases.
So should you hang up on the next outside venture investor who contacts you
and focus only on obtaining corporate venture funds? Absolutely not – every
situation is different, and there will be a significant number of situations in
which the traditional venture capital model is the best and most efficient way
to build value and realize success. A traditional venture deal may actually
lower your execution risk if it can get your company to a liquidity event
quickly (and get cash into your pocket).
Company owners must carefully weigh
all of the factors of their specific situations and determine what gives their
company the best chance of success. Carefully consider what your company’s
position and status will be within the corporate venture portfolio. As with all
venture capital investments, company owners should focus more on the value that
will be added by the investor and not just on the cash.
No comments:
Post a Comment