“Corporate venturing takes many forms. At its most basic it can be purely a financial investment with a larger company taking an equity stake in a smaller company. This is often done through a separate fund being set up specifically to invest in startup and growth companies in the same way that a traditional venture capital firm would.” – Startups.co.uk
Simply put: It’s corporate investment providing huge opportunity for startup businesses, and businesses looking for high-growth alternatives.
Henry Chesbrough, professor at Haas School of Business at UC Berkeley, explains in his “Making Sense of Corporate Venture Capital” article, Corporate Venture Capital has two hallmarks:
1) its objective; and
2) the degree to which the operations of the start up and investing company are connected.
Corporate Venturing is unique from private VC in that it commonly strives to advance both strategic and financial objectives. Strategically driven Corporate Venturing investments are made primarily to increase, directly or indirectly, the sales and profits of the incumbent firm’s business. A well established firm making a strategic Corporate Venturing investment seeks to identify and exploit synergies between itself and the new venture. The Goal is to exploit the potential for additional growth within the parent firm. For instance, investing firms may want to obtain a window on new technologies, to enter new markets, to identify acquisition targets and/or to access new resources.
Corporate Venture Capital started due to the vast emergency of startup companies in the technology sector. The markets started to change and entrepreneurs were developing exciting new business concepts almost overnight – causing major disruption to the heavier, corporate world. There was no ignoring the reality – it was time to adapt, or risk being left in the dust by a startup far more exciting, innovative and agile, than your own.
Corporate Venturing does not use third-party investment firms and does not own the startup companies it is investing in as compared to pure Venture Capital investments.
Objectives of Corporate Venturing
Unlike Venture Capital, Corporate Venture Capital strives to achieve goals both strategically and financially. A strategically driven Corporate Venturing primarily aims to directly or indirectly increase the sales and profits of the venturing company by making deals with startups that use new technologies, entering new markets, identifying acquisition targets, and accessing new resources, while financially driven Corporate Ventures invest in new companies for leverage. They’re looking to gain competitor advantage.
This is often achieved through investment exits, such as IPOs or the sale of a company’s stakes to interested parties. Both strategic and financial objectives are often combined to bring higher financial returns to investors.
So, what’s in it for the Larger Corporate doing the investing?
Organisations who are looking to diversify and move into new fields see Corporate Venturing practice as a way to keep their fingers on the pulse of new business development. They may choose to take an equity stake in a smaller, more innovative, more specialist firm giving them immediate access to a new breed of entrepreneur. Large corporates who have been stuck in antiquated, traditional hierarchies may find it difficult to move as quickly as the market demands, and many see investing in smaller, more agile businesses, as the way for them to leverage new thought to grow into new, more exciting markets – meeting the demands of their changing customer base.
“For investing companies, Corporate Ventures serve as a gateway for the possible acquisition of smaller, innovative startups. With Corporate Venturing strategically and financially driven objectives, these capitalists can maintain their position as a market leader, even if there are small companies stealing the scene and overtaking the pioneering giants. One example of this is Snapchat and Instagram, which are now owned by Facebook.” – Corporate Finance Institute
What’s in it for the small business receiving the investment?
Although much debate exists about the “threat of the big guy buying up all the smaller, independent businesses”, there’s a lot to be said about the value of corporate venture capital – and the leapfrog opportunities it provides to smaller businesses who have hit a growth limit and need an injection of funding, expertise or market-share to move them onto the next high-growth phase of their business.
For many corporate ventures deals, the smaller business receives not only a cash injection giving them the equity they need to build their strategy further, but the investing company may also provide the startup with management and marketing expertise, strategic direction, and/or a line of credit – gold dust for startups looking for experience business knowledge to help them grow.
“A startup firm can enjoy the large investing company’s industry expertise, prestigious name brand, stable financial standing, network of connections, and ecosystem of developed products. This relationship can even lead to a partnership between the Corporate Venture investment, or SMARTCO, and its parent firm, which, in turn, can instantly boost a company’s value.” – Corporate Finance Institute
The biggest Corporate Venturing players and the growth of the market
Some of the biggest Corporate Venture Capital players include:
- Google Ventures -> https://www.gv.com/
- Qualcomm Ventures
- Intel Capital
In additional to these, there are other industries that Corporate Ventures are popular in as well. These include sectors like biotechnology and telecommunication companies. Currently, Corporate Venturing has a fast-growing market influence, boasting over 475 new funds and 1100 veteran funds.
CFPro Ventures is proud to work with organisations on both side of the Corporate Venturing process. We have extensive experience in working with startups and high-growth businesses looking to grow, and bridge the gap by providing the right access and support to investors and investing organisations who are looking to gain their own competitive advantage. If you’re interested in hearing more about how we work, get in touch today.