It is conventional wisdom that venture capitalists (VCs) do not always perceive initial public offerings (IPOs) as being in the best interest of their portfolio companies. As fundraising growth is limited by capital overhang and diminishing return multiples, VCs increasingly induce entrepreneurs to sell their companies to strategic investors. Are these developments in fundraising and growth coincidental?
The main theme in this article is the growing symbiosis between VCs and corporations as a reflection of these new market circumstances. Note that the involvement of corporations in the VC industry is not new. Corporations introduced venture capital initiatives in the 1980s and 1990s. Corporate involvement in the venture capital industry significantly declined after the internet bubble burst in 2000. Still corporate venturing persisted.
After the financial crisis, corporations appeared to increase their involvement and investments in innovative technology companies again, thereby slowly but surely regaining market share. There are many explanations for the revival of corporate venturing initiatives. For instance, setting up corporate venturing units provides the corporations with a window to the fast-moving and innovative start-up market. They need this window in order to find the “next big thing” in other companies and markets.
Corporate venturing initiatives are not without challenges. First, the scope of corporate venturing units is often unclear. Second, corporations often lack the experience and expertise that is needed to succeed in the VC industry. Third, the corporate venturing units often employ an ineffective governance structure and compensation system.
It is therefore unsurprising that new venture models are beginning to emerge. In particular, VCs are increasingly establishing partnerships with mature corporations. Empirical research shows that 64% of the 134 reported announcements of corporate venturing initiatives in 2012 and the first quarter of 2013 can be characterised as joint VC models. It has been known for some time that the joint VC model may provide a mix of strategies that may offer a more effective basis for funding projects. The pie chart gives an overview of joint VC models announced in the first quarter of 2013.
It is only to be expected that the new joint venture capital models will develop further in the future. Consider, for example, the rise in the number of VCs that have started to play a key – and collaborative – role in the innovation strategies of mature corporations. Also, we find VCs becoming part of the corporate organisation itself. There can be little doubt that VCs could add value to corporate units.
Their experience and skills undoubtedly enhance a corporation’s innovation potential. The table overleaf contains some examples of renowned VCs who moved to corporate venturing units in 2012 and 2013.
But there is more. Previous work on the presence and role of VCs on the boards of listed corporations have typically viewed this association as a mechanism for better post-IPO performance and better corporate governance.
Additional insights emerge from recent empirical work that has examined the extent to which VCs as board members in mature public corporations have a positive effect on operating performance and innovation outcomes.
From this perspective, the appointment of VC directors on the boards of listed firms can be understood as an important mechanism in promoting innovation and growth. Indeed, listed corporations often start losing their entrepreneurial spirit beyond the IPO. They may become less responsive to disruptive innovations and see talented employees leave for hotter start-up companies. In this context, the recruitment of experienced VCs could provide a solution. As a result, they could assist a corporation’s executive management with initiating joint VC models and other open innovation strategies through which the corporation partners or acquires smaller start-ups.
Certainly, these open innovation strategies, which are increasingly viewed as a successful, healthy ageing model in the lifecycle of companies, provide an explanation for the decision to appoint VCs as independent directors in the boards of mature listed companies.