The proliferation of corporate venturing businesses in the past five years has reached unprecedented proportions. Can the industry continue to grow or has a bubble been created that will inevitably burst?
Comparing the current state of corporate venturing with previous phases is a useful starting point in answering this question.
There have been three generations of corporate venturing during the past two decades: the Dotcom-driven phase of the 1990s; the Post Dotcom (or Open Innovation) period from 2001 to 2008; and the current, Post Credit-Crunch generation. While the expansion and contraction of corporate venturing has generally followed economic cycles, the current phase is distinct—the industry has grown rapidly while the economy has been in recession or has stagnated.
The impetus behind the Dotcom era was the advent of the internet. Corporate venturing was about investing in the technologies that would determine the nature of the internet.
Fortunes were made by investing in the big-name successes—Yahoo and AOL—to mention just two. By the late 1990s, the pace of investment was frenzied and the volume of rhetoric deafening. Everyone was on the bandwagon. GE dubbed 2000 the year of digitisation. At a beginning of the year rally, a senior GE Capital executive walked onto stage holding a printer, which he lifted high above his head and then flung to the floor, shattering it into pieces. ‘This is the end of paper’, he asserted.
GE’s corporate venturing unit reported a $1bn profit that year, harvesting the gains from investing significant sums of money in dotcom businesses. The profit represented about a tenth of GE’s total in 2000, not bad for a group of 125 professionals in a global enterprise that employed several hundred thousand.
By the end of the 1990s, the success of corporate venturing was largely due to timing. Those who were able to convert their investments into cash became heroes. But much of the recorded profits were revaluations based on marking to market the share prices of the slew of companies investors had managed to float in a rising market. The stock market crash in 2001 wiped out the previous gains. The GE executive’s declaration was prescient—it was the end of paper profits.
At the turn of the millennium, the number of corporate venturing units had peaked at c. 400. In the following two years, the number had halved, the fall-out from the dotcom and stock market implosion.
The Post-Dotcom phase of corporate venturing began more soberly. Lessons had been learnt: don’t leave your corporate venturing unit on the balance sheet of the parent if it gets too big (alternatively, keep it small); consider carefully the objectives and strategy of the corporate venturing business and create the appropriate structure; embrace realistic goals (the quick profits achieved by a select few in the Dotcom generation proved to be ephemeral).
Post Dotcom corporate venturing (2001-08) had its impetus in ‘open innovation’. Companies had woken up to the fact that their R&D and marketing departments were not the exclusive source of new products and revenue models. Start-ups had also produced a few good ideas. By investing in early stage businesses, corporate venturers could tap into this stream of innovation. By taking minority stakes rather than making outright acquisitions, the corporate venturer could foster ingenuity and avoid the risk of suffocating the start-up by integrating it into the corporate infrastructure.
The Open Innovation phase of corporate venturing had a brief hiccup during the credit crunch of 2008. Withdrawal of credit decimated the leveraged buy-out and recap markets. Similarly the overall private equity market declined. According to the EVCA, total venture and growth capital investment in European companies peaked in 2008 at €14.6bn before falling to €10.9bn ($14.8bn) in 2009 and to €8.1bn by 2012.
In contrast, an analysis of statistics compiled by Global Corporate Venturing indicates that investment by corporate venturers grew steadily from €730m in 2008 to €1.22bn in 2012, representing 16% of total European venture and growth capital investment, over three times the percentage it represented in 2008. Likewise the number of corporate venturing units has burgeoned, having now reached nearly 1000 globally, up by a third in just the past four years.
While the current Post Credit Crunch wave of corporate venturing is also driven by open innovation, there are other reasons for the proliferation of corporate venturing. In the stagnant Western economies of the past few years, companies have sought new products, technologies and business models to enhance their competitive position; corporate venturing has become a standard tool in the quest to innovate. The very fact that so many companies have created corporate venturing units has meant that the range of industries targeted for investment has broadened. While the next generation of internet technologies features in the investment scope of many corporate venturers, there is not the over-concentration in internet startups characteristic of the digitisation Phase.
New investment trends include: sustainability (e.g., renewables, waste-to-energy, distributed power, recycling and efficiency technologies, low-impact consumer products); healthy living (e.g., functional foods, natural or organic products, lifestyle products and services); social impact venturing. It is unlikely that there is an industry sector that has not been touched by corporate venturing.
Viewed in its entirety as a portfolio of investments, corporate venturing is surely better positioned to withstand the next recession and market decline simply because of this diversification. There doesn’t appear to be any systemic bubbles in the economy that would lead to an overall market crash.
The question is whether the corporate venturing industry has created its own bubble because of the sheer weight of numbers—not everyone can be successful. It is also possible that much of corporate venturing represents a strategic fad, similar to the cycles of diversification/consolidation that drive M&A activity. Even without external causes, corporate venturing could self-destruct as quickly as it has grown. There are early signs that not all is well: some of the new entrants were set up hastily in order not to miss the innovation bandwagon; some units have conflicting objectives, are inappropriately staffed and poorly structured.
Venture investing, by corporates or independents, is an inherently risky business. Those firms without the right structure, personnel and mindset, are likely to become the casualties in the next downturn. While there are no simple formulae for success, or any single way to carry out corporate venturing, paying attention to the fundamentals is the only way to survive or thrive.
That means: carefully consider how to match structure to strategy; hire the right people; and above all, be persistent.