The growing interest in corporate venturing which has come in the past three years has been accompanied by an explosion of corporate schemes to support early-stage investing.
This corporate interest in such investing has imitated and also supported the success of widely toasted start-up programmes such as Y Combinator and TechStars.
Global Corporate Venturing research has tracked 110 corporates running their own early-stage activities and we have traced 62 early-stage firms, incubators and accelerators with corporate backing.
(The full research outlining all the corporates we are aware of involved in early-stage investing is available to our subscribers on request, or to interested parties for a fee. Contact tlafferty@globalcorporateventuring.com for more details.)
There is also a healthy interest in early-stage deals coming from universities and research organisations, and this will be an area of subsequent research for our sister publication Global University Venturing.
Many big corporations, including IBM, Microsoft and Cisco, have strong links to universities’ attempts to commercialise research. Taking a specific sector, of the more than 50 premier clinical and medical research organisations surveyed by US-based healthcare group Cleveland Clinic for its coming Playbook, 63% have an incubator or accelerator.
Scale of Activity
The scale of recent interest in early-stage investing among some corporates is highly ambitious. Google Ventures, the corporate venturing unit of the US-based search engine company, told Global Corporate Venturing last year it intended to invest in as many as 50 early-stage companies in 2011.
There is no sign of this interest dimming, with the corporate venturing unit taking on board from Google Kevin Rose, the founder of former start-up darlings Digg and Milk, whose well-regarded angel portfolio includes an early deal in social network Twitter.
Similarly ambitious at the early stage have been the actions of Spanish telecommunications company Telefónica. Its Wayra unit has made more than 140 investments across 11 countries to date, investing about $50,000 in each, according to news provider Mobile Business Briefing in July.
Why corporations look at the early stage
Some of the current programmes came into being as corporates became genuinely concerned the financial crisis, which began in 2007, would cause significant problems for early-stage companies.
Nagraj Kashyap, head of Qualcomm Ventures, the corporate venturing arm of the semiconductor company, said his firm had set up its QPrize for early-stage companies for this reason.
He said: “When we started QPrize in 2009 it was the height of the financial crisis and we were keen to make sure early-stage innovation in mobile did not slow down.”
The concerns about lack of early-stage capital have begun to ease in the US. However, the rest of the world is still suffering, according to Kashyap.
He said: “There is not a shortage of early-stage capital in the US like there was in 2009, but in other regions even three to four years after we started QPrize, early-stage seed investments are not common.”
Other corporates have become interested in early-stage investing because they think it is a good way to spot trends in the market. Michael Harries, chief technologist of the Citrix start-up accelerator programme, said: “We are making early-stage investments to validate they have products which work in the market. This will influencewhat Citrix does in five years time.”
Other companies are investing because they think it is the easiest way to build a division. Timo Hannay, managing director of Digital Science, an early-stage platform of UK-based publisher Macmillan, said: “We are not a venture fund looking to turn one lump of money into a bigger lump of money.
“We invest in order to acquire businesses over time. This investing is not about pure financial returns, looking to divest at a profit, but is the most effective way of building a new business in this space.”
Digital Science was originally set-up as an offshoot from Macmillan’s Nature publishing group, and is designed to acquire companies for a division intended to provide tools for scientific researchers.
Hannay said: “We perceived there were opportunities to meet the information needs of researchers. By investing we could jump much further ahead than if we tried to do it internally.”
Alternative ways of support
Other corporations are not investing money in companies but are providing softer support. Such is the case of IBM Venture Capital, which runs SmartCamp, an entrepreneurial programme for companies which can help IBM’s plans for a “smarter planet”, and provides software and mentoring.
IBM Venture Capital’s Martin Kelly, who set up SmartCamp, and won Global Corporate Venturing’s Personality of the Year award in 2012, said: “There are lots of competitions which offer money as a prize. I have spoken to lots of entrepreneurs.
“The good ones do not chase after a small cheque – the good ones are looking for networks and access to clients. The key thing they needed was recognition and help being recognised and validated.
“We thought if we gave a cheque we would not have attracted the right companies and our organisation would lose patience. This is a long-term initiative.”
Kelly said companies that have joined the SmartCamp programme have raised more than $60m in venture capital.
This is also the case for Microsoft, which provides soft support for early-stage entrepreneurs through its BizSpark programme (see box below).
In recent months Microsoft also runs an accelerator in parallel with TechStars and recently launched its Bing fund.
Nascent best practices
Of course, corporate interest in early-stage opportunities is nascent. Citrix’s Harries said his company had changed the way the programme worked, after taking time to think about its approach in the first half of this year.
He said: “We have adjusted the way we make investments so we can empha-sise the lean start-up principles. This is encouraging teams to follow best practices.
“As a start-up it is very easy to say, we have knowledge here and we will build xyz. Then they realise what they build is not what is needed. We started off being more hands off.
“We did a lot of events but the companies were less directed. Now we do more directive early work with these companies.”
Those that do not demonstrate results may run into difficulties in their programmes. Qualcomm’s Kashyap said: “You have to be careful. Some accelerators and incubators have a mixed track record.
“From our perspective, QPrize has been very successful. I am not sure how many corporates experimenting have broad executive support. In a couple of years a lot of things will be successful and other people will shut them down. You have to establish a good track record.”
Those who fear the current nascent interest in incuba-tors could be a recipe for trouble may recall the words of Kleiner Perkins Caufield& Byers’ John Doerr, who told news provider Business Week in 2000: “They are incinerators – for cash and for people’s careers.”
The jury is out on the current batch of incubators – some lessons have been learned from the dot.com era, when there was a significant collapse in the sector.
With new corporate incubators being launched at least every month, many will be hoping any shake-out this time around will be mild. Some believe the current corporate interest in early-stage investing is an important turning point in the support of innovation.
IBM’s Kelly said: “I think it is the start of something much bigger. There is quite a lot of hype, but a few companies have figured out how to make it long-term.
“It is only going to go one way. There is much more activity, and helping small innovators makes sense for everybody. We are all learning. Nobody knows what the model is. There will be successes and failures, which is all part of the process. Yet when you find great entrepreneurs, they are passionate and infectious. This can energise big-company staff and that is what it is all about.”
Impressive early-stage actors
It is difficult to assess which corporate early-stage investors are here to stay, as the present heightened level of interest in smaller companies is a new phenomenon.
Yet some programmes stand out as best-in-class. Most executives when asked which corporates have done a good job at promoting and supporting early-stage com-panies mentioned Microsoft.
This appears to be a point generally accepted by the venture capital community, and hammered home by a promotional video on the website of Microsoft’s soft support programme BizSpark, where well-regarded venture capitalists, including Vinod Khosla, Tim Draper and Brad Feld, discuss the future of technology.
Google Ventures also seems to be an early-stage investing force. A week seldom goes by without a fresh raise of capital by its portfolio companies.
The others in this list have also impressed, with the volume, influence or originality of their approach to early-stage investing. Let us know whether you believe others should be listed and why.
Table: Corporations to watch in early-stage investing:
Microsoft
Google
Qualcomm
Citrix
Telefónica
Salesforce
IBM
Research in Motion
Tencent
BP Castrol
Merck
Deutsche Telekom
Bertelsmann
CyberAgent
Rackspace
Singtel
BMW
Hartford
Shell
SAP
Methodology
The way Global Corporate Venturing has compiled its list of more than 100 companies investing in early-stage is by tracking all companies that run an incubator or accelerator.
We have also included all companies we have tracked that have completed a seed deal in the past two years as well as all companies that mention “early stage” in their investment criteria.
An alternative way to look at the stage of a company’s lifecycle is to assess it based on its product development. Academic Martin Haemmig said: “When you start including emerging markets, never go by round (first, second, third). This is because 90% of all first-round investments in China are in revenue companies, and 15% to 20% in profitable companies.”
For this reason Haemmig believes companies should be assessed by four categories – the first two defined as early-stage, and the other two as late-stage, start-up, product development, pre-profit and profitable.
Box: QPrize rings in returns
When US-based semiconductor company Qualcomm launched QPrize in 2009, the company was concerned that innovation in the mobile sector would be damaged due to scarce capital, according to Qualcomm Ventures head Kashyap.
Yet this means the programme has also timed the market very well, which can be seen in the amount of capital raised by the prize’s entrants. Kashyap said: “Nine of the 10 winners have gone on to raise series A. The only one that has not has a licensing model, so has less need to raise capital.”
He said the nine to have won funding have subsequently raised $65m in total, and Qualcomm has invested in all follow-on funding rounds.
Kashyap added: “The key to note is that for most of the companies that won, it was their first money in. This is a major injection of cash at an early stage.
“We invite local venture capital firms(VCs) to vote for a winner. While we give money only to the winner, they might like other companies that are presenting and other VCs have ended up funding them. If we add in the financing raised by QPrize finalists,the total exceeds $100m.”
Qualcomm will provide more than $1m in prize money for the third instalment of the QPrize this year, in the US, Europe, India, China, Israel, Korea and Brazil.
It has previously backed 10 companies through the prize, and regional winners typically receive $100,000, with an additional grand prize of $150,000 for the over-all winner.
Other regional partners back runners-up, including Microsoft BizSpark in India, while VC Sequoia Capital contributes to the overall pool of capital in China.
Box: Microsoft lights fire with BizSpark
Four years into its BizSpark programme, US-based technology company Microsoft is widely regarded as one of the most influental corporates supporting young companies.
The company does not generally take equity in the companies it supports through this programme, but instead provides software to help reduce costs for the start-ups it backs, as well as business training and a network of incubators, investors, advisers, government agencies and hosters.
Since it was established in 2008, more than 45,000 companies in more than 100 countries have joined BizSpark.
Microsoft argues it is more beneficial for it to pursue this form of equity-less corporate venturing.
Dan’l Lewin, corporate vice-president for strategic and emerging business development at Microsoft, said: “If you follow the logic it is pretty straight-forward. Corporates by definitionare strategic investors that do not value a one-time return every few years. Also, very few VCs actually receive carried interest [a share of investment profits].”
Lewin added: “Making investment in young companies is not typically good for us. We work with professional financiersand help them reduce risk and costs. In this context we can help in the early cycle where we have permission to play.”
While it is the case that BizSpark has already made an impact, the company will look to increase the scale of the programme gradually. Lewin said: “We will steadily increase investment over time, incremen-tally and slowly turning up the volume.”
BBVA’s 500 Startups move
While many financial institutions are reassessing their role in venturing as private equity investments by banks feel regulatory heat from the Volcker rule – designed to restrict speculative investment, Spain-based bank BBVA is stepping up its venturing activities.
Jay Reinemann, an executive director at BBVA, said the company had invested in the fund raised by early-stage firm 500 Startups as its first deal, to get a view of investments generally.
He said: “[500 Startups’ founder] Dave McClure has payments in his DNA, as an ex-PayPal guy. His portfolio has a decent number of financial services-related companies, and access to a broader category of consumer internet services is useful for us to understand customer needs.“
BBVA has taken some risk that shows its commitment to innovation. This is a first-time fund. Most traditional investors would not touch a first-time fund.
Furthermore, BBVA expects to announce an early-stage deal and another fund investment shortly, although only 10% of the portfolio will be early-stage – 20% in funds.
Reinemann said the bank had made the fund investments aware that it may need to exit them because of the Volcker rule.
He said the venturing unit was the “baby” of Francisco Gonzalez, president of BBVA, who he described as a “forward-thinking leader” who had embraced open innovation as a way of understanding the new context for business.
He pointed to Gonzalez’s early past as a programmer at US-based technology company IBM, and said he regularly attended meetings in Silicon Valley with both start-ups and larger technology com-panies in the region.