Venture capital funds capitalized and operated by major corporations are becoming more popular, and are commonly cited as “venture capital arms” or “corporate venture arms.” As an example, corporations like Google, Microsoft, Nokia, and Intel all have professionally active venture arms. This is often a crucial development for entrepreneurs and startups, as these venture arms can invest significant capital and supply substantial assistance to a startup.
As growing digital technologies transform the world we live in, most corporations will find it scary to keep up with the pace, however startups and entrepreneurs see it nothing less than an opportunity. But can CVC really help corporations be more innovative? (YES, they can!).
You can think of a CVC as a (VC); but, while the money that traditional VC firms invest often comes from many limited partners (LPs), CVCs only have one LP which is their parent company. Also, the point of a CVC is to add strategic value to their parent company in addition to returns while VCs are trying to maximize financial returns.
To understand CVCs and their role in the innovation ecosystem the idea of having a “strategic” goal is very vital. The strategic value, at a high level, is to fill a gap between Research & Development (too slow, too expensive) and Mergers And Acquisitions (expensive, messy, and limited impact on bottom line).
CVCs traditionally tried to realize strategic value by making equity investments into startups: Coming to the table with capital got them a front row seat to the activities of other investors and entrepreneurs. However these days, the range of CVC activities is broadening to include:
● Creating in-house incubators
● Investing or partnering with Venture Development Organizations
● Forming strategic partnerships
● Sponsoring prizes, conferences or competitions
● Supporting and/or funding accelerators
In the technology sector it’s too early to tell and there are many unanswered questions: Will equity investing, an in-house incubator, sponsoring a prize, or some combination be most effective? Can companies find a way to add value to their parent company and startups? Will other investors continue to welcome CVCs to the table as the environment gets more competitive?
I think it’s clear, that corporate involvement in the early-stage tech innovation ecosystem is critical to building the tech of the future. You can’t change a system you don’t understand. And who knows the technology sector better than the corporate giants that built and benefit from it?
Startups involved in the venture collaboration model of acceleration gain access to unrivalled, mindshare from corporate partners, venture partner and the customers. An overwhelming increased and enthusiastic corporate involvement is evidence of the growing interest in demand-driven investment. This smarter investment model is a force-multiplier that is poised to become the future of corporate Research & Development and innovation. One can classify the motives for CVC investments in two categories: motives from the venture’s perspective and motives from the corporation’s perspective.
Besides financial motives, strategic goals play an essential role, as CVC is also classified as an element of the corporation’s innovation strategy. First of all, attractive technological developments are more likely to be discovered by small ventures, it points out that ground-breaking innovations are mostly generated by relatively new firms entering the market. Thus, these young ventures could be used by the corporation for monitoring and scanning technological developments in the market, for which its internal R&D is not sufficiently available due to a lack of capacity. Secondly, potential for new product development is enhanced and the identification of potential new markets is enabled. CVC activity can be seen as a supplement of a corporation’s R&D facility. A company’s growth is herewith potentially encouraged. Thirdly, engagement in CVC means supporting employees in their entrepreneurial spirits. Furthermore, ventures themselves have several motives for engaging in CVC fundraising.
Corporate venture arms can provide both “value add” and meaningful assistance to a startup, including:
● Tactical and strategic advice on the startup’s industry and business
● Operational support
● Validation and credibility in the eyes of the public, by having a well-known strategic investor
● Accessibility to the parent company’s information technology talent
● Sales of the startup’s products into the parent company
● Access to other forms of distribution and customers
● Giving venture capital investors more confidence in the startup
● Ability for the startup to tap into the world-wide connections of the parent company
● Ability for the startup to tap into the in-house expertise of the parent company
● Providing a potential exit path
The moral hazard however that is the parent company might absorb the venture’s know-how without sharing the benefits and providing access to their resources. Hence Corporate Venture Capital and startups go hand in hand complementing and taking away from each other. Since large firms are built for stability, not radical innovation, they depend on the startups they work with to bring the out of box thinking. A lack in capital markets is always seen as an argument for innovations. Dubai has seen an exponential growth in innovative startups over the last few years, and with this tremendous growth comes the necessity to rely on corporations that can on one hand benefit in many ways and on the other hand help these startups become the next unicorns that emerge from the region. Since the region lacks a history of innovation and CVC’s it’s crucial now more than ever to take form. VC’s should see this as an opportunity to up their game and be on top of the competition. The future of the CVC scene in the Middle East is one of coexistence and being able to invest into bigger corporates.
Kamal Hassan “There is no shortage of capital for the deserving startups. The intelligent entrepreneurs wish the the most value-added investors on their cap table. Each VC’s dollar is green therefore what differentiates a VC is how they'll be most useful to a portfolio company post-investment.”