Corporate Venture Capital: Painting in Colour
Every company is unique, with its own challenges and opportunities. But the traditional approach towards corporate venture capital ignored this reality. Historically, companies set up a venture capital division that invested in startups with the hope of strategic synergies. Typically, the synergies disappointed, there was turnover at the venture capital team and finally the entire initiative was starved of resources. It was like painting only with black and white.
During the past few years, however, as companies have re-entered the corporate venture capital market more aggressively, there has been more willingness to experiment with a variety of approaches. There are several approaches to consider depending on the the specifics of each firm.
1. Classic Corporate Venture Capital
When done well, the classic corporate venture capital model looks like Intel Capital, with more than 1,400 companies invested and more than 570 exits since 1991 across a variety of sectors. In addition to investment, they leverage their corporate brand, global customer base and technology expertise to support portfolio companies. If your company is thinking about starting a corporate venture capital fund in the classic sense, this is the benchmark, and it is not easy to meet. Intel is exceptional at execution in its core business, and so it is not surprising that it has also done well as a venture capital investor. Instead of blindly trying to create a poor copy of Intel, it is worth considering some of the other models because doing this well over decades is not easy.
2. Focused Corporate Venture Capital
Historically, very few businesses are able to create a tight fit between their operations and their venture capital investment and many times forcing these two together creates friction. When it works, however, the model can be very powerful. Salesforce is a great example of a focused venture capital model. The company invests across stage but with a primary emphasis on companies that are built on the Salesforce Platform or listed on the company’s AppExchange. Therefore, the operating fit is clear and natural, resulting in a genuine benefit for both the portfolio companies and the fund.
3. Moonshot Venture Capital
Google Ventures is part of a broader strategy at Google which emphasizes breakthrough technologies to transform existing industries or create new ones. This strategy can only be implemented with deep pockets, and the company has committed to provide US$300 million per year to maintain an aggressive pace of investment. The fund invests across sectors, the largest of which so far has been health care and life sciences. In addition to the fund, the company also makes direct investments, for example SpaceX. While many of these moonshot investments are not directly related to the business of search, of course Google Ventures provides additional support beyond money by leveraging the company’s significant pool of talent and assets.
4. Limited Partner Venture Capital
The reality is that most companies do not have the resources or ability to launch a dedicated venture capital fund. Fortunately, that constraint can be turned into a competitive advantage by investing as a limited partner in a strong external venture capital fund. For example, WiL is a venture fund backed by several Japanese corporates as limited partners, including Sony, Nissan, Benesse Holdings, the NTT group, ANA Holdings, Isetan Mitsukoshi Holdings and Daiwa Securities Group. As part of the relationship, WiL is also committed to training employees of these companies about venture capital investment. For most companies, investing in an external venture capital fund is the most practical approach to create a successful outcome in terms of both financial returns and learning.
5. Multi-Strategy Corporate Venture Capital
Large companies have the scale to combine multiple approaches. The strategy of Siemens Venture Capital includes direct invest at the corporate level in core areas such as Infrastructure and Healthcare, a corporate venture capital fund, Industry of the Future Fund, and investments in more than 40 external venture capital funds through Siemens Global Innovation Partners. This diversified approach gives the company a broader network of external partners and therefore a better picture of the latest opportunities. Siemens has recognized that working with external partners is complementary, not competitive, to their in-house team.
The rapid evolution of corporate venture capital during the past few years is a significant positive force to create meaningful change at scale. Companies should be actively engaged with venture capital. For most companies, the best first step is to invest in an external venture capital fund. For companies with more significant resources, there are now several options to consider, including the multi-strategy approach of having both in-house and externally managed venture capital funds. Overall, this structural change in corporate venture capital is like moving from painting in black and white to painting in vibrant colour: the impact is transformational.