Corporate venture investing has come of age. Historically prone to boom-and-bust cycles, corporate venturing is rapidly moving from fad to fixture, as companies adapt to a fiercely competitive environment that demands continuous innovation. Across the business landscape, we see companies committing to venture investing for the long term, seeking not just financial returns but also early access to technologies with the potential to disrupt a range of industries.
Corporate venturing is nothing new, of course. For five decades now, companies in innovation-intensive industries such as telecommunications, pharmaceuticals, high technology, and media and publishing have been systematically funding start-ups. In previous cycles, their activity peaked during periods of rising stock prices and excitement over new technological developments, such as the personal-computer revolution of the 1980s and the internet boom of the late 1990s. When markets turned south, however, corporations quickly retreated from the scene, shuttering their venture-capital units and relying on internal research and development and mergers and acquisitions to meet their innovation needs.
This time, it really is different. Our analysis of more than 750 corporate venture capital units and 1,300 recent transactions using Global Corporate Venturing data reveals that venture investing is becoming entrenched as never before as a mainstream corporate activity. The life spans of corporate venture units are steadily lengthening, and companies and industries that once steered clear of startup investing are committing to venturing for the long term. In many cases, their investments in R&D are holding steady or even declining – a sign that senior corporate leaders are coming to view venture investing as a vital complement to their internal innovation efforts.
Corporate Venturing Is Expanding and Evolving
A distinguishing feature of the current wave of corporate venturing is that industries such as consumer goods and construction that for the most part did not engage in CVC activity in earlier decades are entering the arena. Industries with a tradition of venture investing—led by technology, pharmaceuticals, telecommunications, and media and publishing—remain the most heavily committed. In three of those four industries, most of the top 30 companies (as measured by market capitalization) have venture units in place (click for report to see table). Industries that sat out the three previous waves are also positioning themselves in the market, although the absolute numbers of participants are fewer, having started from a lower base. For a deeper analysis, we selected four of those less-active industries—machinery, power and gas production, consumer goods, and construction—and compared their investing focus and activity with the top four traditional sectors.
Traditional Players Are Striking a New Balance Between Venturing and R&D
Within traditional industries, the percentage of the 30 largest companies with dedicated CVC units has been climbing steadily since at least 2007. In three of four industries (technology, pharmaceutical, and telecommunications) more than half of the 30 largest companies have CVC units in place—a sign of the growing recognition of CVC’s value as a tool for innovation, corporate development, and competitive advantage.
Several CVC managers in these industries have reported to us that they regard venturing as an indispensable tool for innovation and development, and, indeed, R&D spending trends in technology and pharmaceuticals reflect that view. Among the 30 largest companies in both sectors, internal R&D spending (as a percentage of sales) fell slightly from 2007 through 2011. In technology, R&D spending dropped from about 11.5 percent of sales to roughly 11 percent, and in the pharmaceutical industry, R&D spending fell from about 16.5 percent of sales to approximately 15 percent. Over the same period, CVC penetration in both industries rose, reflecting a growing recognition that venturing is a necessary complement to internal R&D—so necessary, in fact, that companies are beginning to transfer a share of their innovation investment from R&D to their venture units.
Meet the Newcomers
The machinery, power and gas, consumer goods, and construction industries have been among those that traditionally have not relied on pure innovation to drive growth. In recent years, however, they, like many other industries, have come under growing pressure to innovate in response to demands for cleaner technology, more sustainable operations, and an improved user experience. As a result, they are looking past internal R&D toward other innovation channels; for a growing number, CVC investing is an important additional source of innovation.
Starting from a very low level, CVC concentration in all four industries increased markedly from 2007 to 2012, although the industries remain far below the levels of concentration found in industries with an established history of venture activity. Plainly, facing the unfamiliar pressure to innovate, companies in these industries are taking a familiar route: venture capital.
First, it can be a rich source of technological advantage and information about potential transformations in companies’ core businesses. By investing in broadly disruptive technologies such as biotechnology, for example, pharmaceutical giants such as GlaxoSmithKline, Novartis, and Pfizer have spotted emerging trends that are reshaping their industry. In financial services, Visa has invested in Square, a mobile-payment start-up whose technology transforms smartphones and tablets into credit card readers.
Venturing also enables corporations to keep a close eye on new developments and potential new markets in adjacent industries. Intel Capital’s investments in downstream start-ups in video and telecommunications, for example, have allowed it to get the jump on the competition in designing application-specific chip sets for those markets. Since 1991, Intel has invested in more than 1,100 companies, 189 of which have gone public. An additional 258 were acquired or participated in a merger. Deutsche Telekom’s T-Venture unit, meanwhile, has concentrated much of its firepower on Internet investments, with a three-year goal of doubling the parent company’s online revenues.
In addition, venturing gives corporations a means to learn more about emerging trends in more-distant industry sectors. Through their investments, they can gain valuable insights into novel technologies and the markets for them and identify new and often unanticipated areas of future growth. For example, Dow Venture Capital, the venture arm of the global chemical company, is focusing on agriculture, consumer and lifestyle, energy, and infrastructure and transportation, where Dow believes it can generate significant revenue growth in the future.
Finally, venturing can yield important information that companies can use to prepare for or facilitate their entry into new businesses. This added capability can be especially valuable to companies that seek to create novel applications for new industries arising from the convergence of two or more established industries. Samsung Venture Investment is following this path to gain early insight into trends that could reshape value chains in its various business lines, for example. Its investments in clean-technology and medical-technology start-ups help it identify novel technologies that it believes will drive its corporate parent’s growth in coming years.
Considering the benefits that venture investing offers when best practices are employed, the real question is whether corporations can afford not to join the game. In an economy where innovation spells the difference between success and failure, corporate venturing can spur tomorrow’s innovations while it helps build an organization in which innovation is business as usual. Some of the world’s most respected and successful corporations are already reaping the benefits of their venture investments, generating profits and growth, and opening up new markets with innovations originally developed by their portfolio companies. They recognize that as competition intensifies and uncertainty increases, CVC opens new strategic avenues. There is no denying that corporate venturing, like any other form of innovation, is a risky activity. But considering its game-changing potential, we believe the greater risk is not to engage in it at all.
Alexander Roos is a senior partner and the global leader of the Corporate Development practice and Michael Brigl is a principal of The Boston Consulting Group, based in Berlin and Munich, respectively. They are among the authors of a new publication, Corporate Venture Capital: Avoid the Risk, Miss the Rewards, available by clicking here.