Introduction
Corporate Venture Capital (CVC) refers to the practice of established corporations investing in startups or innovative companies. This practice enables large corporations to tap into new markets, technologies, and innovations while providing startups with the necessary financial resources and industry expertise. However, like any investment, CVC comes with its share of risks and challenges. In this article, we will delve into the workings of CVC, explore some success and failure examples, and discuss the potential pitfalls and reasons why corporations may not opt for a CVC program.
How Corporate Venture Capital Works
Corporate Venture Capital typically involves a large corporation creating a separate investment arm dedicated to sourcing, evaluating, and investing in innovative startups. These investments can take various forms, including equity, debt, or a combination of both. Corporations benefit from these investments by gaining access to novel technologies and business models, while startups receive the necessary funding and strategic support to accelerate their growth.
Examples of Success
Google Ventures (GV): Google's venture capital arm, GV, is one of the most successful CVCs. Since its establishment in 2009, it has invested in over 300 startups, including Uber, Slack, and DocuSign, which have grown to become industry leaders. GV's success can be attributed to its disciplined investment approach, leveraging Google's technological prowess and industry connections to identify promising startups.
Intel Capital: Intel's venture capital arm has a long history of successful investments. Notably, Intel Capital invested in VMware, which later went public and was subsequently acquired by Dell. This investment showcased Intel's ability to identify and nurture innovative technologies that complement its core business.
Examples of Failures
Nokia Growth Partners (NGP): Despite making some successful investments, NGP struggled to achieve consistent results and ultimately faced challenges when Nokia's mobile phone business collapsed. This example highlights the risk of a CVC being too closely tied to the parent company's fortunes.
Xerox Technology Ventures (XTV): Xerox's venture capital arm invested in several startups during the 1990s but failed to capitalize on their potential. One notable example is the investment in Documentum, which was eventually acquired by EMC. XTV's inability to effectively integrate and leverage its portfolio companies' technologies led to its ultimate demise.
Pitfalls of Corporate Venture Capital
Conflicting interests: CVC investments can sometimes conflict with a corporation's strategic objectives, leading to tension between the parent company and the startup.
Bureaucracy: Large corporations may struggle with bureaucratic processes that can hamper the nimble decision-making required in the startup world.
Integration challenges: Successfully integrating a startup's technology or business model into the parent company's operations can be difficult and may lead to a loss of value.
Short-term focus: Corporations may prioritize short-term returns over long-term growth, potentially limiting the success of their CVC investments.
Reasons Corporations May Not Seek a CVC Program
High-failure Rate: VC investments typically have a sub-10% success rate, which is not acceptable when compared to traditional corporate ventures
Alternative innovation strategies: Corporations may prefer to focus on internal R&D, acquisitions, or partnerships to drive innovation instead of establishing a CVC program.
Limited resources: Establishing a CVC arm requires significant financial and human resources, which may not be available to all corporations.
Risk aversion: The inherent risks associated with venture capital investments may deter some corporations from pursuing a CVC program. Additionally, the typical returns do not move the needle for $1Bn+ companies.
Conclusion
Corporate Venture Capital can be a powerful tool for innovation and growth, as demonstrated by the successes of Google Ventures and Intel Capital. However, it is not without its challenges and potential pitfalls. Corporations considering a CVC program must carefully weigh the benefits against the risks and explore alternative strategies for driving innovation.