According to a venture capital database (CB Insights), the venture capital market invested $74.2 billion across North America in 2015. The Corporate Venture Capital (CVC) groups participated in 17 percent of the deals in that region, making up 24 percent of the total venture investment distributed to startups that have been fueled by VCs.
This definitely reflected a reasonable improvement in CVC activities as their participation was limited to 12 percent in 2011. Significant growth has been observed in this investor type as an alternative source of funding for new businesses, but only a few know what corporate venture capital is.
Corporate Venture Capital (CVC)
CVC is defined as an equity investment by an established company in a startup business. It can be put together as an independent part of a company or an appointed investment team that is off their company’s statement of financial position. The main goal of CVC is to invest in companies showing high growth prospects. Some of the marquee brands having venture presence in the technology and healthcare industry, include Dell Ventures, Google Ventures, Cisco Ventures, Intel Capital and Johnson & Johnson Innovation.
Corporate venture capital has been one of the most critical contributors in the venture capital ecosystem that has matured over time.
Research and Development (R&D) and Corporate Venture Capital
R&D and CVC are two prominent sources of creating new potential.
CVC can be used as a substitute for internal research and development in creating such opportunities or capabilities. In different theories proposed by Dushnitsky and Lenox (2005), Cassiman and Veugelers (2002), and Gompers and Lerner (2001), there was unanimity on the idea that R&D backs the increasing use of CVC, in contrast with CVC to be used as a substitute for internal R&D. However, not much consideration has been given to how different industries might affect the relationship between these two sources.
Preferred Use of Investment
With the rapid changes in the global market, companies have drawn their focus on research and development investment to strive for achieving short term targets, as VCs are considered too quick to get caught up in the latest thing. But it doesn’t have to be this way. A number of opportunities with the great potential to boost innovation already exist, except corporations are not able to make use of it. One of these means is to use corporate venture funds.
Corporate R&D – Slow and Expensive Investment
Research and development investment is mostly focused on perfecting technologies that are already used by the public. The United States has spent billions on gigantic science projects for years, but the commercial returns were not as expected. Cutting back on R&D is not the right choice either, as Kodak ended up filing for bankruptcy when they cut their research funding and focused on film, and Nokia is now being purchased by Microsoft as they tried to keep their focus on low-end phones.
Corporate Venture Capital – Quick and Cheap Investment
CVC, on the other hand, is better at identifying new regions and is quite flexible and cheap as compared to R&D. During the last 20 years, a number of CVC initiatives gave a boost to pharmaceutical companies that were struggling to catch up with new advancements in bioscience.
The large companies in a corporate sector stay cautious of CVC, as they have seen them distributed ineffectively. For a corporate venture to be a successful mode of investment, its goals should be in line with corporate objectives and the approval of funds should be done smoothly with the same compensation levels as offered by independent venture groups. If a company fails to provide a fair incentive, it is likely to face a consistent flow of desertion. Rewards should always be given if people solve a problem or launch a new product in the market, but they do not necessarily have to involve cash. Recognition can also be a significant reward for such efforts.
Traditional R&D are not good at pointing out threats from the competitors. Instead, it keeps its focus on a specific number of projects that results in ignoring innovative advances that happen outside the company. Whereas, CVC quickly responds to change and potential threats, which allows decision makers to withdraw from any investment that doesn’t seem to be generating revenue in the future. It is highly likely that a creation of the CVC fund would prove to be a breakthrough idea that changes everything.