Corporate venture capital – corporations making direct investments in external startups – is not new. The growth of corporate venture capital groups (CVGs) in the last five years has been dramatic. CVGs now participate in approximately 20 percent of all venture capital investments. Since 2012, the number of CVG investing in startups has more than doubled.
Last year, 85 new CVGs were announced, and in the first half of 2016, 53 corporations made their first investment, according to a report by CB Insights. Global Corporate Venturing magazine provides additional insight, reporting that more than 800 corporations invested in startups in 2015 alone. This trend is not limited to technology firms: many banks, insurance companies and even food companies have established their own CVGs. CVG is set to occupy an important role in startup funding for the foreseeable future.
Mark Radcliffe, global chair of DLA Piper's Corporate Venture Capital practice, will moderate a panel entitled "Best Practices in Corporate Venture and Innovation" at the firm's Global Technology Summit on September 27, 2016, in Menlo Park."
What is driving this explosive growth of CVGs?
The increase in CVG reflects the speed of change that we're seeing in business. Many of these changes are driven by technology and corporations feel the need to seek innovation outside of their research organizations.
When companies set up a CVG, they do so to find the innovations for expanding current products or developing new ones. They are seeking a competitive advantage from the products and services the startups develop. The investment in startups and working with them can provide insight into future technologies to help companies better adapt to the changing business landscape.
What challenges and opportunities do CVGs present to the tech sector?
CVGs provide more than just investment capital to startups, they can provide deep knowledge on marketing and deployment of new products. Many traditional technology companies are expanding into other areas. These changes reflect the blurring of traditional business categories: a company doesn't know who will be there competitors in the future. CVGs provide a way for both tech and non tech companies to work together on "cross-over" technologies such as internet of things and autonomous cars.
The automotive market is particularly illustrative because many startups are seeking to provide the technology for connected and eventually autonomous cars. The traditional automotive companies are actively investing in startups in this space as well as purchasing some of the startups.
How do funds stay aligned with the strategic objectives of their companies?
CVGs should make sure they have strategies in place before they invest and that their investments are consistent with these strategies. Are they trying to find companies with near- or medium-term potential – or something further down the road? A recent trend is CVGs joining together to focus on new cross over areas, such as digital health, where different industries are coming together.
How are startups reacting to the influx of CVG investments? How is it impacting traditional VC firms?
Now that CVGs participate in 20 percent of the deals and make up around 12 percent of the money, sophisticated startups are developing their funding strategies to include the participation of CVGs. In some situations, startups will look specifically for a corporation with a CVG, because they believe that the CVG can bring additional benefits, such as a deeper understanding of a market than traditional venture capitalists. CVGs may be one of the few sources of funding in some sectors, such as semiconductors, where few traditional venture capitalists are investing.
The responses to the rise of CVGs from traditional venture capitalists are mixed. Several funds have embraced this change and are actively engaged with them – even appointing specific individuals to develop and maintain those relationships. Others strongly oppose the participation of CVGs in startup investing. I find it very strange to say any startup engaging with a CVG is working with the devil – but that's exactly what one well-known venture capitalist said recently.
What events and trends over the past 12-18 months, or coming ahead, will shape the tech landscape?
I see a continued increase in CVGs and other forms of outreach to the startup community. This outreach could take the form of more support for accelerators or structured partnering programs. I think that we will also see greater coordination between CVGs and other parts of the corporation such as M&A and business development. I think that it is wise to ensure that these different approaches are sharing information and taking a consistent approach, rather than acting as independent silos.
In a broader sense, technology adoption will continue to accelerate and the tsunami of disruptive innovation will expand to encompass more industries. The change with the broadest impact, the Internet of Things, is just beginning and will bring sweeping change across industries from real estate to automotive to manufacturing. At the same time, many legal and regulatory issues will all need to be worked out.
What this all comes down to is something that gets repeated and paraphrased a lot: all companies today are technology or software companies, even if they don't know it yet. This reality raises fundamental questions for many companies about their business and business model. But it also creates a lot of opportunities – which is exactly why corporate venture capital is growing so fast.