The mandate of corporate investors combines financial with strategic objectives and targets. Therefore, unlike independent venture capital firms (VCs), corporate investors can be expected to pursue broader strategic objectives from their new venture investments.
Research on corporate venturing has documented the range of strategic goals and uncovered how corporate venturing activities can generate strategic value for the corporate parent. While it is now widely established that corporate investors can provide highly-valuable resources and have a significant impact on the outcome of new ventures, limited evidence exists concerning whether the interests of corporate investors may conflict with those of independent VC co-investors, and in turn, impact on the outcomes of new ventures.
A recent study, published in Strategic Entrepreneurship Journal, by Haemin Park of Drexel University and Kevin Steensma of University of Washington directly examine the potential conflict of interest, so to uncover the specific role of corporate investors on new venture innovativeness. Specifically, the study investigate “how the preferences, resources, and influence of corporate investors vis-à-vis their VC co-investors affect their selection of investment opportunities and subsequent nurturing of new venture investees”.
Based on a sample of 508 US-based ventures, their results show that “corporate investors tend to fund new ventures with greater pre-funding innovative capabilities and new ventures receiving corporate funding exhibit greater post-funding rates of innovation compared to those funded solely by independent VCs, particularly when their corporate investors are highly reputable relative to their independent VC co-investors”.
This can be, in part, explained by the fact that corporate investors can indeed directly benefit from technological synergies. Interestingly, the results indicate that new ventures improve their innovation performance further when their corporate investors are highly reputable relative to their co-investing independent VCs.
Summary
As described above, corporate investors can be an interesting source of added value to resource constraint startups, including their innovation capabilities. However, since corporate investor objectives can differ from independent and private VC firms, there may also be some conflict of interest that can have significant impact on these young ventures.
To showcase some of these factors better, the graphs below highlight some of these considerations and facts and can also help explain some of these drivers that can lead to these challenges. In addition, some of the results also highlight the global/regional differences, as well as nuances across different industries and the impact on entrepreneurial companies that exit via an IPO or an acquisition when corporates participate in the investment as minority investor.
Reference
Park, HD & Steensma, HK (2013) The selection and nurturing effects of corporate investors on new venture innovative-ness. Strategic Entrepreneurship Journal, 7: 311-30.
Corporate venturers focus on market intelligence and strategy:
In previous market VC cycles (dot.com era), corporates tended to focus on acquisition opportunities and worried about missing internet trends. With startups popping up globally these days and particularly in emerging markets, corporates are struggling to understand user and consumer behaviour, while particularly mobile internet usage is disrupting sales channels, supply chain and consumer purchasing decisions. For these reasons, corporate priorities focus on market intelligence, leading to better informed strategic decisions. In addition, financial returns have also become very important, because corporate venture teams have to survive in any downturn cycle, hence, profitability is required.
Corporate venturers are forced to access deals earlier:
Particularly in industries with short product lifecycles – for example, mobile, internet, consumer – typical corporate structures are often too slow to adapt to the rapidly changing market needs. In addition, business model innovation has become equally important to technological innovation, especially in emerging markets, hence, all these factors lead to increasing investments into pre-revenue companies, where CVCs even start taking board seats. This has barely been the case in previous venture capital cycles, however, it is becoming more the norm than the exception. The last 5 years have seen a fivefold increase of “seed-deals” by CVC in the US. When pooling angel investors, micro-VCs, and VCs/CVCs, there is an abundance of funding for seed-stage deals.
Unveiling the myths of corporate investors and startup acquisitions:
It is a well-known fact that about 90% of all VC/CVC-backed companies in the US, Europe and Israel have an exit through an acquisition of a larger corporate or are being merged with another VC-backed portfolio company, while the balance (6%-10%) will end up with an IPO. This often leads to the misunderstanding of entrepreneurs that the key interest of large corporates is to invest initially in order to acquire them. In fact, the largest firms, such as Microsoft, Cisco, Google, Yahoo, Intel, J&J, Novartis and Roche, end up acquiring many companies each year. However, it represents a very small proportion of their investment. Even in the US a decreasing percentage (from 4% to 2%) of portfolio companies in recent years have been acquired by their CVC investor.
Impact on startup holding time if corporate investors participate: It is a well-known fact that corporates have a keen interest in learning more about emerging and alternative technologies and markets, while independent VC firms are keen on financing companies for pure financial returns. Corporates have also proven to be often instrumental in providing access to international markets and to key and launch customers. When comparing portfolio companies in the US, Europe and Israel, which exit either via IPO or an acquisition, in almost every year and every industry, the holding period from first institutional VC investment to an exit is often significantly longer if a corporate investor is involved. However, this may sometimes also lead to bigger companies and bigger exits.
Boris Battistini is a senior research fellow at the Swiss Federal Institute of Technology (ETH Zürich) and an associate at Metellus, a venture capital firm based in Zürich, London and San Diego. Email: boris.battistini@metellus.ch
Martin Haemmig is an adjunct professor at CeTIM at UniBW Munich and Leiden University. Email: martinhaemmig@cetim.org
Reuse of any graph or table for any purpose only with permission of Martin Haemmig