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The rise and rise of corporate venturing

By: Jeremy Colless

According to a recent report from CB Insights “Not The Same: Understanding Corporate Venture Capital Versus Institutional VCs” in 2015, corporate venture groups participated in 17% of all North American deals, accounting for 24% of the total venture dollars deployed to VC-backed startups. This reflects an increase in corporate VC activity, since CVCs only participated in 12% of deals in 2011.

There are numerous explanations for the rise in corporate venturing including:

  • Cyclical improvements in the balance sheets of corporates since 2008 means that they are cashed up and looking for acquisitions
  • Massive cash balances of successful technology companies such as Google, Facebook, Amazon, Apple striving to maintain market leadership
  • Faster cycles of innovation and technology adaption leading to rapid demise of incumbents and shorter life expectancy of listed companies
  • A realisation that external engagement and investment in startups (distributed R&D, open innovation) are critical components of a corporate’s holistic approach to innovation. Internal R&D can be painfully slow and often focused on efficiency innovation rather than truly disruptive opportunities. Poor cross company communication and internal bureaucracy can be factors that lead to a failure to innovate
  • A growing realisation by corporates that they can be competitive with traditional VCs. As well as $$, corporate VCs can bring customers, distribution and can provide founders with potential exits at an earlier stage in a new ventures development
  • A new iteration of corporate venturing with an acceptance by boards/management  that to be successful corporate venturing decisions need to be made with greater independence and less central control. This is coupled with acceptance that corporate venturing  is a strategic tool for business longevity and not particularly suited to quarterly measures or reporting.

Australia is starting to see growing participation in the startup sector from corporate venturing activity. Some key participants include:

Australian corporates are still at an early stage of defining and/or refining their innovation and corporate venturing strategy. Corporates will play an important role in the Australian startup ecosystem as investors and acquirers of innovative ventures. Corporates will need to build their venturing strategies to defy cyclical downturns and plan for a sustainable and long-term commitment to venture capital investment.

The challenge for many corporates will be to look further than their key vertical for potentially disruptive technology and business models. In the article “Big Bang Disruption” in the Harvard Business Review the authors Larry Downes and Paul Nunes state that “the biggest challenge to incumbents is that big-bang innovations come out of left field, combining existing technologies that don’t even seem related to your offerings to achieve a dramatically better value proposition”. To understand this type of innovation challenge corporate incumbents must compete with upstarts that have three defining characteristics; unencumbered development, unconstrained growth and undisciplined strategy.

A key reason for corporate venturing is to outsource R&D and “see” disruption coming. A strategy that places many small bets in a diversified portfolio of early stage ventures  (not only inrelated verticals) will provide important research, themes and due diligence for later stage acquisitions and M&A activity.

To be successful (and survive) corporates will need to hire key personnel and collaborate externally with experts who can “interpret the real meaning behind seemingly random experiments”.

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