Header graphic for print
The Securities Edge Securities Blog for Middle-Market Companies

Corporate venture capital investments – Good for startups?

Posted in Capital Raising
Corporate Venture Capital

Photo by Saulo Cruz

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.