Denice R. Preston
In industries experiencing stagnant growth or negative impacts of uncontrollable forces outside, numerous businesses are resorting to venture capital to innovate. However, the famous venture capitalist Fred Wilson once said that venture capitalists from corporations were an investment in the “devil.”
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However, venture capital from corporate sources is on the rise. The number of active CVC business units increased by 773 in 2018, up 35% over the previous year. Corporate VCs were part of 23 percent of all investment deals for un internal startups.
Although expected, tech giants like Google, Intel, and Salesforce are among those most involved and most invested in dollars. Other industries are also being invited to join in the fun. A few recent non-tech players are Pearson (education), Shell (energy), Airbus (aerospace), Novartis (pharmaceutical) as well as Mitsubishi (mobility).
Is Wilson in the right? Or is he an unhappy loser with the increase in the price of good deals?
Many companies that have seen slow growth or negative influence from external, uncontrollable factors use corporate venture capital as a way for innovation. I contacted a small group of Toptal finance professionals with CVC expertise to determine whether CVCs are illusions or actual growth opportunities.
Why Does Corporate VC Make Any Sense?
Corporate VCs are an independent division of a firm that allows them to make a small bet (own percent instead of the whole project) on a grand idea and provides access to entrepreneurial and innovative talent. Corporate VCs are like traditional VCs because they prefer to invest in high-growth moonshot-type projects. CVCs, however, are thought to be more long-term-oriented than conventional VCs.
It is uncertain whether CVCs focus more on innovation and strategic wins over financial rewards. We’ll explore the subject further in How to Make Corporate VC to be Right.
Why do companies invest money into these VC arms instead of just R&D or in acquiring a complete scale?
CVC Can Identify Growth Opportunities with minimal commitment
Since companies can put CVCs from their account balance (usually), this gives them more scope in research and development (R&D) that the P&L can provide. Additionally, companies can gain access to talent with a creative and innovative outlook that you won’t find within corporations. In addition, companies can place small bets on a variety of moonshots instead of being the sole owner of the project, as companies would have to do if they were the exclusive responsible party for the project through their funds for research and development.
Although the graph below is likely an oversimplification and the precise “level of commitment” between R&D and CVC can be argued over, it offers a general notion of the value each channel on your investment presents.
The acquisition is different from. R&D vs. Corporate VC
The graph below is a simplified representation of investment. R&D vs. CVC. Some subtleties could create an acquisition strategy that is ingenious and yet not quite at the commitment scale (e.g., the serial acquisition of small innovative companies). But, we have compiled this chart to help identify these strategies’ most popular methods.
The chart has also been caveated to show only what we call the “first interaction,” meaning that this chart doesn’t reflect what might happen if the CVC transformed its investment into an actual acquisition. In that scenario, it’s somewhat personal and individual in which direction the strategy will be positioned on our spectrum.
The purchase process is the highest quantity of dedication to the plan that a company could offer. If you purchase a company and you’re a part of it, there are no “backsies” if you don’t enjoy what you get. But, after the business is acquired, and if it’s not an acquihire that is essentially hiring people, the potential of future advancement for the company’s core company is comparatively small. Most often, acquisitions are used to increase breadth or expand into a market currently being served, but it’s an event that happens once.
When you are in Research & Development, You have a little flexibility regarding commitment. A group of R&D experts is devoted to any initiatives the company believes are essential. Removing them from specific projects and placing them on others is possible. But what happens if you’re looking to investigate the area that your R&D experts aren’t experts on? Toptal Venture Capital expert Alex Graham noted a critical reason why big new ideas that are not mainstream are likely to occur with an organization’s current R&D group: “You don’t want to innovate yourself out of a job.” However, within a specific range of innovation, internal R&D can be successful because they know the corporate culture and are aware of their customers. Apple or Netflix can be excellent examples of innovative, effective internal R&D.
Corporate Venture Capital arguably provides the lowest commitment but has the highest degree of innovation. The level of commitment is minimal because you don’t have to purchase an entire business or even staff R&D as a whole team on a single project. Still, it’s not entirely ineffective since you must invest in the overall CVC infrastructure. CVC itself. It’s important to remember that a purchase made by a CVC arm may eventually be the basis for a complete acquisition. The initial venture capital investment provides a certain amount of financial information and a better comprehension of the advantages and disadvantages of the venture (versus being a stranger to the market with having a previous relationship) as well as access to a company that is younger and likely to invent solutions to a new issue.
CVC is a place where innovation is at its highest. CVC is on the high part of the spectrum because it provides access to many fresh ideas generated by young, agile companies working on problems that haven’t been addressed before.
Toptal Venture Capital expert Khaled Amer observed this when he was the analyst for Vodafone Ventures: “A CVC provides a new perspective in the realm of innovation. As a telecom business, we were thinking, ‘How can we expand into IoT, and how do we improve the quality of data consumers consume by providing users with digital media content on different apps and websites? It was necessary to think outside of our main business.”
Amer spoke about Vodafone’s motivations to explore CVC for innovative growth channels. “Vodafone is a major telecom firm. We had huge growth with a high margin. However, the growth rate slowed dramatically over the last few years. The reason we chose CVC was to develop new ideas outside of our core business and attempt to improve top-line growth.”
