Technology-led disruption is the new normal for virtually every segment of the economy. It has profound implications for the way businesses organise themselves, serve customers and develop new products. Venture capital is a major driving force behind this disruption. Venture funds provide much of the investment necessary for technology startups to reach a scale where they can disrupt established corporations and eat into their revenues.
Businesses must find ways to participate in the technology revolution that is changing the way we all live and work, or risk extinction. Only half of the Fortune 500 firms of 1999 remain as of 2015 and the pace of change is accelerating.
One way that incumbent Forbes Global 2000 businesses have responded to the emergence of agile, digital native competitors is by establishing their own corporate venture capital arms so they too can engage with emerging technology companies.
Dumb vs smart money
Within the VC community, the role of corporate venturing has often been maligned. It has been called slow dumb money with thin value-add for investees. In some cases, this criticism has been justified.
However, a group of strategic corporate venturing arms has been steadily developing a strong track record for high-quality investments in new businesses that are driving significant changes within their corporate parents. They provide attractive distribution channels, existing customer bases, access to complementary products and technical expertise for creative entrepreneurs. We call these strategic growth Investors.
Growing force
These strategic growth investors are gaining prominence at a time of growth and diversification in the corporate venturing industry. According to the Global Corporate Venturing Leadership Society, there are now more than 1,000 corporate venturing teams and the number of active corporate venturing groups making an investment in the secod quarter of 2016 is almost double the same figure four years ago.
Corporate venturing has been increasing its share of overall venture-backed company funding. We believe direct corporate and corporate venturing investment will account for 35% of total global VC dollars invested by 2025, up materially from the current level of about 28%.
Types of corporate investors
We believe the corporate venturing market will continue to segment into three types:
• Starter efforts – small new teams making two to five investments a year, between $500,000 and $2m per deal, often with a less mature and predictable investment process and uncertain commercial value-add.
• Credible corporate venturing efforts – established for more than five years, greater investment in terms of people and capital, with some predictability of process and value-add.
• Strategic growth investing groups – world-class efforts with well-established people, processes and value-add that form part of the parent company’s long-term strategy and offer thought leadership in relevant technology sectors.
The last group – strategic growth investors – have the potential to be enormously effective for both corporations and entrepreneurs. They will reach their potential, however, only if they have certain characteristics, including access to sufficient capital to be an active investor, the ability and incentives to provide genuine commercial value beyond funding and the long-term support of the parent.
The full report is available from https://www.telstra.com.au/content/dam/tcom/personal/ventures/Telstra%20CVC%20paper_FINAL.pdf