Technology is constantly changing the business landscape as we know it. Many industry giants across the board, which may have been content to maintain a certain status quo, understand that supporting market stability at all costs might not be the best strategy. A good example of this would be the financial services industry. We would assume that even the Wall Street giants could feel the heat when new Fintech options like Square and Robinhood come along as the new “cool kids in town”, offering the same services either at a steep discount or completely free of charge.
With this new reality on the ground, some of the largest corporations in the world are in on the game. The players you would expect to deal with new tech like Intel, Samsung and Dell are very active, but then you have others like American Express, Airbus and Novartis which might be a little less obvious. It is a sign of the times that companies that were probably relying exclusively on internal product innovation are ready and willing to invest heavily in external companies.
And willing to invest they are. The growth in Corporate Venture Capital (CVC) funds over the past few years is staggering. According to CBInsights, in 2018 alone, 264 new CVC’s invested for the first time out of a total of 773 who were active last year with Google Ventures leading the pack. Forbes adds the fact that Corporate VC’s participate in one-third of all venture deals and 75% of Fortune 500 companies have active corporate VC’s.
The goals of the corporates have changed dramatically from the old days of buying out potential competitors, especially considering the fact that there are often other investors in the tech company. From the big picture point of view, the CVC provides the corporate with a window into the technological backyard of a certain industry which can give the decision makers a better idea of where it’s headed and, just as important, key market intelligence.
On the ground, the CVC allows the corporate to work commercially with the startup in many different ways. This range includes investing and also helping build a startup as well as partnering or buying a percentage of ownership. To deep dive even further, there are also several arms of CVCs which include internal or third party accelerators or inking cooperative R&D deals with a tech company.
CVCs also sometimes act as the major funnel for new technologies into business units in the corporate as they are exposed to deal flow across the board and have the connections with all business units. They can therefore channel any relevant company inside the company relatively easily.
To make themselves even more agile, some CVCs brand themselves individually and separately from their “mother ship”. Using a large and known brand for new ventures may be interpreted as “dangerous” for senior management, who are righteously keen to avoid any risk to their brand’s reputation. A new brand on the other hand, doesn’t have to be too careful and could take more risks while moving faster, wonderful traits commonly associated with – you guessed it – startup companies.
Some CVC’s also see the opportunity to invest as expanding their brand’s overall portfolio by looking into adjacent industries. A good example of this would be if an airline were to expand their interest beyond travel tech and back innovations in e-commerce or logistics technologies.
From the tech company’s point of view, the injection of new funds aside, there are many ways CVCs can benefit both the established and the newcomers. To start off with, it is sometimes easier to relay the importance of a certain type of innovation on an investment level as compared to a pilot or PoC. This is especially true if the corporate is professionally detached from the industry the startup is working in.
Corporate investors sometimes work closely with startups to help “professionalize” its board of directors, introducing them to their internal and external network. Larger incumbents, by their very nature, work at scale and often possess sophisticated distribution channels which startups can leverage to broaden the reach and awareness of their products. Distribution tends to be costly unless you have a strong network of partners. This type of opportunities could eventually translate into the term now considered more desired than ever for tech companies – A Strategic Partnership.
In the past, some experts were skeptical about CVCs. Traditionally, corporations take their time in making decisions as they used to look at bottom line figures like potential ROI or meticulously map out KPIs. It seems that over the past few years, that trend has changed, primarily out of necessity. The rapid advancement in technologies is changing industries faster than ever before and corporates seem to have gotten the message in the tune of tens of billions of dollars they are looking to invest in the next unicorn. They’re investing not just to make their shareholders happy with additional profits but to stay relevant as a company.