Corporate Venture Capital
Diving into the VC Arms of Fortune 500 companies
What is Corporate Venture Capital?
Venture capital has long been an area of high interest for a variety of individuals. Among them are various Fortune 500 companies. Some of the most well-known companies such as Google and Intel have their own venture capital arms called Google Ventures and Intel Capital, respectively. This so-called “corporate venture capital” is defined by the Business Dictionary as the “practice where a large firm takes an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise; the objective is to gain a specific competitive advantage.” CVC is not synonymous with venture capital but is instead a subset of it. Venture capital describes a third party managing an external fund of capital, which typically comes from investors, whereas corporate venture capital is utilizing existing funds from the underlying corporation and investing it directly into startups.
In essence, corporate venturing is all about creating a compatible “structure” between established corporations and external ventures to drive mutual growth. These external ventures can be either startups in the early stage or a scale-up stage (one that has found product-market fit). However, due to the drastic difference between a corporate’s structural rigidity and the unpredictable nature of a startup, it’s often extremely difficult to manage a corporate venture capital and realize potential synergies.
Harnessing the Value of Early-Stage Investing
According to a study done by Bain & Company, CVC is ideally “deployed as a market-sensing mechanism.” This means that it’s most beneficial for corporations to utilize the startup ecosystem as a way to better understand industry dynamics and trends before the general public, allowing them to better capitalize on early gains and disruptive technology. Consider the fact that when traditional venture capital firms seek to invest in startups, they might only invest in 2 out of every 100 startups they meet. Even though only a small percentage of startups actually get invested, the real value comes from the exposure and insights gathered from all the startups that were not invested. Venture activity often gives investors a glimpse into the future of what potential disruptive trends there are in the market. Not only does early stage investing give corporations strategic insights on how to better themselves in terms of economic moat, but it also reduces the risk of future M&A activities. By investing a small check in relative comparison to traditional M&A, a company is better able to mitigate risk through years of diligence exposure rather than the traditional weeks of diligence and integration.
Global CVC Hits All-Time High
Corporate venture capital-backed funding doubled from $70.1B in 2020 to $169.3B in 2021, hitting an all time high. This increase was the result of the number of new CVCs rebounding after a 6-year low, with 221 new CVCs in 2021. This increase of 53% from 2020 provided ample financing for early-stage companies and the venture capital industry consequently boomed in 2021. According to Factset, more than $612B was invested in venture capital globally in 2021, an all-time high and an increase of 108% from 2020. Recognizing the torrid pace of the VC industry, corporations are now scrambling to develop venture arms. The incentives are plentiful, including opportunities for M&A, coveted partnerships, and early access to game-changing technology. The additional potential for significant financial returns makes large corporations having a venture capital arm a no-brainer. As many companies near maturity and struggle to penetrate new geographies and expand their customer base, CVC offers an additional source of revenue and provides financial stability.
Implications and Future Outlook
CVC funding is expected to continue to grow throughout the foreseeable future. As companies become corporations, they will look to differentiate themselves from competitors, develop strategic partnerships, and generate additional streams of revenue. The major players in the current CVC environment appear to be here to stay, and it’s to be seen which companies develop successful VC arms. However, it’s important to note that an excess in capital creates the potential for investors to overvalue startups and overinvest. If startups aren’t able to successfully scale and dry powder runs out, CVCs will be left wondering where they went wrong. In this case, they can fall back on the corporation’s business model and revenue generation in the hopes of accumulating enough capital for future venture investments. CVC is an intriguing subsector of venture capital, and while it’s fundamentally different in many aspects, having a CVC arm can make a good company great.
Sources:
https://www.cbinsights.com/research/report/corporate-venture-capital-trends-2021/
https://medium.com/inv-global/5-corporates-you-didnt-know-had-a-vc-arm-ad7874d208c5
https://www.bain.com/insights/corporate-venture-capital-m-and-a-report-2022/
https://techcrunch.com/2022/03/03/corporations-are-scrambling-to-get-into-the-venture-game/
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