With big-name Silicon Valley VC firms grabbing most of the headlines, corporate VCs don’t always get the glory - but often, we do get the biggest rewards. That’s because corporate VCs don’t purely invest for a financial return, but to gain partnerships to better compete in the future.
This has always been true, but never more than in today’s competitive corporate VC investment climate. CVCs rose to prominence in the dot-com era by returning billions in capital to their parent companies. Today, they’ve reemerged as a powerful part of the corporate ecosystem for a very different reason: their strategic investments provide their parent companies with new partners to build ideas. When a corporate VC invests in a startup, the financial return can sometimes matter less than the innovation return for both the parent company and co-investors.
Of course, when CVC firms invest for access to innovation, they have to invest early. Young startups are willing to share their technology, ideas, and data with corporate investors who are willing to take a bet on them early on, whereas mature companies are less apt to provide access to their “trade secrets.” That’s why corporate VCs are now investing heavily at the seed stage. According to CB Insights, in 2014, 54 different corporate venture arms participated in at least one US-based seed round, compared to just 10 such firms in 2010.
This boost in CVC activity in the early stages has contributed to a record average seed deal price, which reached $1.9M in Q4 2014, the highest level in four years and up 25% versus the same quarter a year earlier.
Corporate venturing is on a rapid ascent in large part because it’s getting more difficult and expensive for large corporations to invest in internal R&D. Startups are creating disruptive technologies at a breakneck pace, unhampered by large corporate structures. So if corporations can tap into innovation by investing in these startups vs. spending millions on hiring internal R&D staff, why wouldn’t they?
Apparently, they are. During the past four years more than 475 corporate venture funds have started, bringing the worldwide total to more than 1,100, according to Global Corporate Venturing. A recent Volans report said that CVC accounted for 1,068 investment deals worth $19.6 billion in 2014, comprising nearly 20% of all deals and 40% of transaction value worldwide.
Corporate venture investing isn’t always a flashy affair, with few mega-rounds into billion-dollar startups. But corporate VCs aren’t just in it for the cash, they’re on the lookout for partnerships that deliver both profits and applicable R&D. That’s a win-win for many large corporations.