Should your company consider creating a corporate venture capital arm?

In 1914 the chemical company DuPont invested in a young start-up called General Motors. It is one of the earliest – and most successful – examples of corporate venture capital, a company investing in a promising start-up or technology. DuPont would own shares in GM for 50 years.  

Today, businesses around the world have set up their own venture capital funds, using it as an opportunity to explore and back promising innovation and businesses, as well as potentially secure lucrative financial returns. Giants like Google, Legal & General, and Pfizer all have well-established venture arms. 

Figures from Bain & Company, the consultancy firm, show corporate venture capital accounted for 21% of all global funding in the first half of this year. But how big should a business be before it considers one? Is it an opportunity to find and encourage innovation within a business, or is it a costly and superficial exercise? 

“You have to be in it to win it” 

Bruno Moraes, managing director at Wayra UK, the corporate venture capital arm of telecoms giant Telefónica, says: “It depends less on the size of the business but more about how much they want to invest, and for how long. It needs a long-term commitment, as the full cycle of investment to exit may take 9-10 years. To be successful, it must build a portfolio of several investments to manage the risks.”  

This sentiment is shared by Pete Budge, who manages a venture capital arm for a FTSE company. “Corporate venturing should be driven by a wider strategy and not solely to make money directly from the investments,” he says. 

Some of the reasons a company should get involved, according to Budge, are to monetise a capability or asset you already own, to learn new capabilities from the companies you invest in, to create a partnership to offer new propositions to your customers or to build a relationship with a business before acquiring it fully. “Better still, your investments will hit several of these reasons,” he says. 

Wayra invests in tech start-ups that can develop a business relationship with the Telefónica group. With many firms deciding to focus on corporate venture capital investing over R&D, Moraes stresses the importance of the ‘why’ in a corporate venture capital strategy. “Clarity on the corporate venture’s priority is paramount,” he comments. “It should either be strategic (need to inject innovation in the core business, have the abilities to cooperate and integrate with start-ups, or defend against disruption) or financial (diversification when there is excess cash, exploring an unrelated or moderately related business). True, an investment can be both strategic and financially viable – but that’s when you need to be sure which is your priority.”  

Should your company consider creating a corporate venture capital arm?

Besides having a laser focus on the true reason behind setting up a fund, it’s worth noting that when the costs of running it are factored in, the returns may be very low. “From about £10m over 3-4 years, a company could start to play in the space,” says Moraes. “However, this could be an initial threshold to experiment in the sector. The company can still benefit from strategic/commercial returns but would have to manage expectations regarding the financial side.”   

Budge concurs, acknowledging that a key challenge of achieving pure financial returns from investments is a potential conflict in accounting priorities. “It is important the SME fully understands how investment finances work before they start investing, and that they understand the limitations they will have on controlling their investment as a minority shareholder. However, if their broader strategy can be delivered through investments and a longer-term view can be supported for the cash, then the activity can be very fruitful.” 

Beware

Sobering new research raises questions about the value of such initiatives. More than half of corporate venture teams haven’t had a single exit in their portfolio over the last 12 months, according to new research. In other words, more than half of the businesses with their own venture capital fund have not raised any money from it in the last year. 

 The research from Counterparty Ventures, Silicon Valley Bank (now a division of First Citizens), and PitchBook proves that this is a long-term play that shouldn’t be taken lightly. However, as with any investment opportunity, if it hits, it could revolutionise your business and open new avenues to major growth opportunities.