At a seminar by UK-based law firm Taylor Wessing, John Bates, adjunct professor of entrepreneurship at the London Business School, said the fundamental reason companies wanted to promote internal and external corporate venturing was to add speed, innovation, flexibility and excitement to the larger business.
He said these strategic and operational reasons boiled down to accessing new distribution channels, products, lower market entry time or operating costs, or pre-empting competitive attack, as well as creating an ecosystem to help broaden and deepen the market for the parent’s products, especially in technology companies.
As Sir Martin Sorrell, chief executive of advertising company WPP Group, one of the most active media corporate venturing supporters, said: “Every chief executive wants the power of a global company with the heart and soul of an entrepreneurial company. Or as Louis Gerstner, former chief executive of IBM, pithily put it: “Who says elephants can’t dance?”
For entrepreneurial businesses, large companies have huge advantages and potential synergies to work with, including experience, resources, market penetration and processes to commercialise a business concept, as well as lower cost of capital, according to Bates. He said, however, that firms often failed to meet their objectives and use the advantages of corporate venturing because of poor timing or lack of choice about the appropriate model to follow.
The five models are venture harvesting – turning internal resources into cash; venture innovation – developing new business ideas using venture capital-like processes; ecosystem venturing – investing in a community of related businesses; corporate private equity – creating an in-house VC unit primarily for financial return; and new leg venturing – developing new business lines.
Bates said a common pitfall for venture harvesting lay in firms trying to build new legs rather than manage the unit for cash. For venture innovation, the pitfall was often trying to address a general corporate need for cultural change, Despite the maturity of corporate venturing divisions, there is still debate about the best model while ecosystem venturers could suffer loss of focus or a push for autonomy. New leg investors faced the issue of time and commitment by the parent. But when done well, a corporate venturing unit could act as a catalyst for change to “help spawn venturing in other parts of the organisation”, Bates said.
Simon Walker, a partner at Taylor Wessing, said performance improved with practice. He said: “The issue for corporate venture capital is how many deals do they do per year?
“Are they sporadic and opportunistic where corporate venturing is not mainstream but seen as the occasional way to acquire an interest in a technology/product which would otherwise pass them by?
“Alternatively, is it a mainstream activity where they are, as much as anything, looking to maximise returns from their investments but at the same time recognising there will be losers as well as winners?”
It also partly reflects the overall level of venture invest- ing, as many corporate venturing units avoid leading syndicates in funding rounds in favour of following top independent VCs.
The latest data from US trade body the National Venture Capital Association, published last month for the period to end-March, found the proportion of corporate venturing investment had broadly held steady apart from the three dot.com bubble years around the millennium.
The PricewaterhouseCoopers/NVCA MoneyTree Report, which collates data from Thomson Reuters, said the proportion of money from corporate venture capital funds was 9.1% of the $4.8bn invested by independent VCs in the first three months of the year. The range has swung between 5.9% ($434.4m) in 1995 to a high of 16.2% ($16.2bn) in 2000. However, corporate-sponsored funds were involved in 101 (14.4%) of the 701 venture deals in this year’s first quarter.