Telstra Ventures, the strategic investment arm of Australia-based telecommunications firm Telstra, has provided its vision concerning where the corporate venture capital market is heading, in a report entitled Strategic Growth Investing: The Next Evolution of Corporate Venture Capital.
Global Corporate Venturing’s Leadership Society has stated there are more than 1,000 active CVC units, and Telstra Ventures’ report predicts that by 2025 corporate investors will be responsible for around 35% of the total venture capital provided globally, up from 28% today.
The report suggests that corporate venturers will increasingly become segmented into three distinct types: small teams that take part in two to five deals a year, investing up to $2m each time; more established units that put more financial and human resources into the process; and strategic investment groups that make up part of their parent company’s long-term strategic plans.
The third group, identified by the report as Strategic Growth Investors, typically invest at least $50m each year in deals aligned to their parent’s core business as part of a long-term commitment, and actively seek to provide commercial value as well as a return on investment.
Strategic Growth Investors have the potential to be extremely beneficial for corporates and portfolio companies as long as they maintain access to the capital required for lengthy commitments to companies, and are given ample space and incentives to add commercial value to their deals.
The number of CVC units that made an investment in the second quarter of 2016 is nearly double the number that did so four years earlier, and the growth in corporate venturing comes as established corporates are increasingly finding themselves fighting off disruption by newer, leaner, digitally-based competitors.
Although the size of many corporates makes it difficult for them to innovate in an agile and disruptive manner, several are making an effort to engage with open innovation. The paper cites a recent Boston Consulting Group report that identifies how the corporate innovation toolkit now includes accelerators, incubators, CVC investing, innovation labs, hackathons and strategic partnerships with startups as well as M&A and internal R&D.
CVC investment can help act as a bridge by giving corporates access to new technology without committing too much capital or entering into long-term integration schemes. The downside is a lack of control and potentially a long time in scaling the technology, but if a startup does crash and burn, the corporate is only on the hook for a fraction of the costs, compared to the cost of failure in an internal R&D program.
Taking a look at the nature of the CVC space at this point in time, the report observed that although the five most active CVC investors are all US-based, it is China-based corporates such as Alibaba and Tencent, which jointly invested $10.8bn in the first half of 2016, putting up the most money.
Asia has increased its share of the overall VC money flowing to startups from 13% in 2011 to 28% in the third quarter of 2016, while the share originating from the US dipped from 76% to 61% (Europe stayed steady, rising from 10% to 11%) in the same period.
Based on analysis by Telstra Ventures, the report suggests that while hedge funds and private equity firms are driving competition among investors at late stage, and incubators, accelerators and crowdfunding are doing the same at early stage, corporates are most actively competing at the ‘middle stage’ where they can add value through access to revenue through their existing customer bases and sales channels while VCs provide connections and expertise in board governance.
CVCs can also assist startups by providing expertise in areas such as product, business models, wider industry trends, functional benchmarking or best practices, or through contact with entrepreneurs-in-residence.
Traditionally, CVCs have had a less than stellar reputation in the startup scene, related to an inconsistent presence, slow decision making, lower budgets and a lack of incentives within the corporate environment.
However, the report claims corporates can reap the rewards by helping grow portfolio companies’ revenue early, by supplying their distribution channels and becoming a customer themselves, and by targeting investments where the portfolio company’s disruptive technology aligns with their own product lines. The corporate can also collaborate with startups on the development of new offerings.
In fact, the report states, corporates can go even further by using their CVC investments to challenge their existing business units and partner ecosystem, and could use their expertise to target the startups most likely to disrupt their business. The startups provide new thinking while the corporates supply resources, channels and customer relationships.
Telstra Ventures managing director and co-author of the report Mark Sherman said in a statement accompanying the paper: “Technology disruption, global competition, and corporates seeking access to new revenue streams, products and customers are driving the increase of CVC in both percentage and absolute dollar terms.”
“Apart from funding emerging private companies can benefit significantly from CVCs if managed properly, including access to established channels to market, large customer bases, complementary products, brand endorsement and other capabilities.”