The space between theory and practice can be a large chasm. Or, as Brian Park and Erik Vermeulen, two practitioners that have worked at Philips, a Fortune 500 corporation, note in their excellent academic paper, Debunking Myths in Corporate Venture Capital (CVC): What Works, What Doesn’t, and How To Make It Work: “On paper, large multinational corporations and startups seem like a perfect pairing, a match made in heaven.
“Corporates can open doors for startups, provide them with necessary capital, and deliver tremendous resources in the form of knowledge sharing, distribution channels to seemingly endless rolodexes. The list goes on.
“And startups can help corporates stay lean by giving them access to innovation that takes place at the peripheries of their core products or services that may eventually upend the core business itself by being an external source of valuable R&D.”
Alas, in practice, it is harder to make the union work once back down on earth. After five years of reading Global Corporate Venturing (GCV), thanks to being one of our first subscribers, their analysis found that of the 419 corporate venturing divisions that were initiated from the second half of 2010 to the first of half 2014, 202 were already (or were still) inactive by the end of 2014.
Park and Vermeulen in their paper said: “Statistics like these partially explain and contribute to why CVCs are not so highly regarded and the number of quality CVCs are few and far between.
“Though interests between corporates and startups can align in a variety of ways on paper, differences in expectations, aims and ways of operating in practice can largely get in the way of either party actually benefiting from a corporate-startup relationship.”
Their analysis found corporates have had relatively more success in a collaborative model of corporate venturing, by investing in and working with independent venture capitalists, something Philips has had some notable success with by cornerstoning the launch of Gilde’s healthcare fund a few years back.
Those corporate venturing units that do start and then survive the first few years can then develop their unique advantages.
In its recent webinar, data provider CB Insights analysed the 117 most active corporate venturing units in US deals last year and found Google (through its Ventures and Capital units) had backed at least six unicorns (portfolio companies worth at least $1bn), while Intel Capital had the most US exits through flotations and trade sales since 2011.
Globally, the collaborative CVC approach holds a lot of attraction. There are more regions and sectors than most units have capacity to explore. As noted in GCV’s second quarter data supplement, there has been a notable increase in such limited partner commitments (or at least their public notification) over the past few years – something which Park and Vermeulen put into greater context.
However, getting the direct investing element to also work and understand the synergies with the parent and an indirect investment approach is relatively hard.
Park and Vermeulen’s analysis says that for this to happen, the best operations need to also put in place the right compensation and leadership. But the best groups go further by also developing the next ranks of their leadership.
GCV will be presenting its inaugural Rising Stars awards of the best new programmes and emerging talent at an invite-only reception, sponsored by GE, during our Global Corporate Venturing and Innovation Summit in Sonoma, California, at the end of January. To nominate someone, please contact Toby Lewis and Gregg Bayes-Brown.