A (lasting?) rise in Corporate Venture Capital

Corporate Venture Capital (CVC), a subset of Venture Capital, refers to the practice of capital investment in fast growth start-ups by organisations that are themselves subsidiaries of non-financial corporations (renowned examples include Intel Capital and GE Energy Capital). Such CVC activity goes back at least 50 years, and corporate interest has ebbed and flowed. 

Historically, corporate venture programs have waned during difficult economic times; but this has not held true over the 2008-10 recession. Furthermore, according to statistics recently published by the US’ National Venture Capital Association (NVCA), CVC investment has reached a four-year high in participation (i.e. share of deals with at least one corporate VC), at 15.2% in 2012 from 14.1% in 2011.

These indicators coupled with the fact that corporate venture capital groups now represent the fastest growing new member segment for the NVCA suggest that the sector is poised to become a very important part of the US venture landscape in the next five years. 

According to a 2011 study by Louvain University, around 20% of the Fortune 500 have created a CVC unit. Examples of well-established CVC funds include:

  • Pharmaceutical companies such as Smith Kline Beecham, GlaxoSmithKline, Johnson & Johnson, Eli Lilly
  • Technology companies such as Google, Microsoft, AOL Ventures, Deutsche Telekom, BlackBerry and Intel
  • And industrial companies such as BASF, Chevron, GE Energy, Dupont, Siemens, or Cargill

What’s in it for these corporations?

CVC programmes obviously aim to benefit their corporate parent. As such, they tend to focus not just on short-term financial returns but also on strategic returns i.e. the development of synergies.

Interestingly many CVC funds invest in ventures that do not operate directly in their own industry sector but rather in adjacent sectors. For example, only 18% of all CVC investment by semiconductor firms goes into semiconductor ventures according to a study by the London Business Schools. Corporations can also use their CVC arm to learn about geographically distant markets or to access distant technologies

Essentially, corporate venturing activity is an acknowledgement of the importance of having a way to scan, identify and leverage innovative ideas developed outside the corporation.

What’s the impact of CVC on the innovation eco-system?

In the past, the limited lifespans of CVC programmes (c.1.5 years compared to 6-7 years for a traditional VC fund) as well as inappropriate compensation structures for CVC personnel (flat salary and corporate bonuses not aligned with ROI performance) have been major hurdles to the long-lasting impact of CVC. The new generation of CVC funds, however, brings reassurance on these scores and one may hope that CVC is now well on course to boost established companies’ innovation capability… and support innovation eco-systems!

CVC funds are active at all stages of investment maturity. They often co-invest with traditional venture firms and also sometimes take the lead and invest prior to any other traditional venture investors. In principle, CVC activity can have a most significant impact on innovation eco-systems in specific industry sub-sectors that are not already seen as prime investment targets by traditional VC funds.

For instance, innovative sectors with high capex requirements and slower maturity curves such as the Renewable Energy / Cleantech sectors have historically suffered from a lack of VC funding. They simply do not fit the investment model of traditional VC funds and very often do not pass their discount rate hurdle. Last week brought the last straw in a series of bad news for VC funding supply into the Cleantech sector, as VantagePoint announced it was forced to give up its attempt to raise a new fund focusing on Cleantech due to lack of interest from the LP community. This news came after many other traditional VC firms have also pulled back in recent years (or changed their strategy to focus on green IT) including Mohr Davidow, NEA, Draper Fisher Jurvetson, and Kleiner Perkins.

Bearing this in mind, I had a look at NVCA statistics to identify the sectors that attracted a high share of CVC engagement in 2012. As it turns out, only four industry sectors scored high both in terms of share of deals (>15%) and share of total investment (>10%), as listed below:

  1. Biotechnology
  2. Healthcare Services
  3. Retailing/Distribution
  4. Semi-conductors

For these four sectors the rise of CVC is very good news indeed. I hope Cleantech will make it to that list in 2013…