One of the most common arguments in favour of corporate venturing appears to be wrong. They do not help their portfolio companies increase their sales and productivity despite the promise held out from often having strategic resources to offer entrepreneurs trying to break into a sector.
The consequence of unique research of 8,370 European high-tech entrepreneurial firms by the European Union-funded Vico Project is clear: corporate venturers must try harder.
The effect of corporate VC investments on productivity turns out to be "negligible", according to the report, Venture capital: Policy lessons from the Vico project. Corporate venturing made up 11% of investments* in the 759 venture capital-backed companies in the study of 8,370 European high-tech entrepreneurial firms.
By contrast, independent venture capital (VC) firms are successful at providing "unequivocally positive impact, greater than that documented in previous studies, on the productivity and sales growth of European high-tech entrepreneurial ventures".
This effect was largely attributable to the treatment effect rather than to selection by VC investors of highly efficient firms with superior growth prospects. The productivity growth of VC-backed companies originates mostly from sales growth, while improved efficiency in the use of labour and/or capital is negligible.
The report said: "These results are in line with the view that independent VC investors, because of the need to make a rapid exit, strive to increase total factor productivity (TFP) and sales of portfolio companies… [and] especially applies to less reputable investors that need to ‘grandstand’ (document their investment ability to capital providers) so as to be able to raise new funds."
Corporate venturers, with often less need for a quick exit, typically invest at an earlier stage and are more international than independent peers, the report said. This was due to "having different objectives relating to their ‘technology window’ strategy".
The unspoken question, therefore, is whether the technology window is effectively just a one-way mirror that allows the corporation to see the new ideas and technologies but actually provides little benefit to the portfolio company. If so, corporate venture capital is just that, capital, and perhaps worse than any other investor. Entrepreneurs, therefore, would rightly prefer other sources of funding unless desperate.
To prove otherwise, a number of corporate venturing units have started pointing out the benefits they provide, with a number noting how many of the portfolio go on to have joint ventures or other agreements with business units at their parents. More examples and evidence of innovation, jobs and sales growth is needed to reassure entrepreneurs and other syndicate investors but the evidence is pointing that more needs to be done, and quickly.
*There were a total of 3,475 investments – events in which one VC invests in one company in a given point in time – in these 759 VC-backed companies. For example, a syndicate of three VC investors involved in two rounds of financing generates six investments.
Reader Feedback:
Anonymous:
"I am sure that all good journalists are provocative. Your summary of the Vico project conclusions as they relate to CVC certainly achieves that objective! Surely if a survey has covered 8,370 high tech firms its conclusions must be fairly representative and sound? Well, there is a reason that "lies, damned lies and statistics" is quoted so regularly.
"I look at the partners who contributed to the report and see no evidence of anyone who is likely to have a real understanding of CVC. I also note that the majority are based in VC hotspots like Estonia, Italy, Belgium and Finland. The only name I recognize in this list is Sophie Manigart. She gave a talk at EVCA Budapest [conferece] two weeks ago on this report. Charming lady, nice presentation, lot of data but, as I discussed with other attendees on the day, I found her conclusions to be very naive. It struck me as an academic crunching data but with no experience of the real world to help place the whole exercise in context. One of her conclusions was that seed and very early stage investments have a higher failure rate than later stage investments so investors should focus on later stage deals. Worth the full EVCA fee alone.
"If corporates need to sell themselves as investment partners I agree with your comment that more could be done. However, there appears to be no shortage of start-ups and VC funds who are eager to have corporates invest in/alongside them. Each case is considered on its own merits and there are always some where a corporate investor, or maybe a certain corporate investor, is not desirable at that particular stage.
"There are also many investments that are classed as corporate investments where the corporate has no intention of adding strategic value, nor did they ever claim that this was their intention. Such cases need to be purged from the data. A key indicator would be from tech companies that took in a corporate investor which had indicated it could deliver value over and above its simple cash. Did they deliver that additional value or not? We have all heard of cases where the answer was yes, and other cases where the answer was negative."