Corporate venturing has been around for decades, not only in terms of yielding strategic value, but capturing financial returns. Corporate venturing programmes are different from venture capital funds, where performance is purely measured against the financial return of an investment. Corporate venturing funds differ in that they would most likely make strategic investments decisions within the parameters agreed with their funders, similar to how independent venture capital funds make investment decisions within the given investment focus of the different funds they manage for their investors.
This common element between independent venture capital funds and corporate venturing has created shared learning experiences, new innovation opportunities and access to portfolio companies with numerous technology options for corporations, but not without its own dilemmas.
Many corporate funds have found it difficult when it comes to developing a strong alignment between the fund’s investment focus and the corporate parent’s expectations, which could be for the fund to act as a conduit for early adoption of emerging technology. The Xerox corporate fund managed by Xerox Technology Ventures illustrates this point. Though Xerox Technology Ventures secured excellent financial results between the late 1980s and mid-1990s by exploiting the technology and knowledge of its corporate parent, the fund was dissolved earlier than intended. This indicates that although corporate funds may demonstrate financial success as a result of investments made in portfolio companies, an inability to link the fund’s investment focus to the corporate parent’s expectations could be perceived as failure to perform.
Sustaining the core business as well as being positioned to capture value from new business areas is one of the key drivers underlying innovation investments in corporations. This reflects in the quest to be among the first to take advantage of important innovations, and also look for superior financial returns. Hence, we have begun to see corporate funds morph, with these factors in mind, in that they make investments in portfolio companies to enable corporations to improve financial and operating performance.
One of the approaches these companies and their funds are using to resolve this disconnect between the corporation and portfolio company alignment is the venture accelerator. A recent modern accelerator is Y Combinator, a seed-stage incubator that provides finance, advice and connections to start-ups over a three-month period. The aim is to help entrepreneurs refine their business propositions and develop companies able to attract follow-on investments.
A key benefit of the venture accelerator is the role it can play in rapidly scaling startups by reducing industry entry barriers and providing access to corporate investors who could benefit from the venture’s innovation. There have also been cases with significant success where accelerators are used as a conduit to commercialise intellectual property from within the corporation’s portfolio.
However, luring investors to commit seed funds to accelerators has been tricky, as some say it is difficult to see an exit and prefer to focus on ventures that already have funding, paying customers, and are achieving reasonable growth and scale. Two additional concerns that have been highlighted as impeding support for accelerators as described by TechCrunch and the Wall Street Journal, are the perception that 90% of accelerators will fail, and that it is tough for startups to survive, even with the help of top-notch accelerators.
Even if the progress of recent accelerators like Y Combinator is excluded, there is an example of a business incubator that was set up in Batavia, New York, in 1959, which made visible contributions to innovation and economic growth, and there have been others before that time.
While there is some element of truth in the belief that to build a successful business venture you provide incubation space and venture capital to develop and scale an impressive innovation. The reality is slightly different in that commercial contracts placed by corporations and purchases made by customers are also essential pieces of the successful enterprise jigsaw. So some corporate investors are beginning to step in, not just to invest and provide ventures with advice, but also with connections to high-potential customers who could act as a source of much-needed cashflow, the lifeblood of any business.
Corporate investors have an important role to play in providing advice, connections and growth-stage investments. However, before innovative ideas can be commercialised, entrepreneurs require support to help prove the feasibility of ideas and develop their technologies. Only a few future-focused investors have been seen to provide the needed pre-seed and seed-stage support required by entrepreneurs.
As it stands, though the practice of corporate venturing has been around for decades, it is still perceived by some as an emerging field. This perception affects investor confidence and influences the support that ventures receive. So although corporate investors may be tempted to focus mainly on demonstrated technology and innovations, when ideas get tougher to fund, deal flow for investors dry up.