Corporate venture capital (CVC) investments will grow to 35 per cent of venture capital (VC) dollars invested globally by 2025, according to a study by Telstra Ventures, the venture capital arm of Australian telecommunications major Telstra.
This is a significant increase from the current figure of 28 per cent, according to this report, which explores both direct and VC investments. The study also looks at the role corporations play as venture investors.
CB Insights notes the CVC ecosystem is expanding significantly with corporates in a range of industries – like aviation player JetBlue and FMCG Campbell’s Soup launching their investment arms – even as they seek to diversify and explore new sectors.
For 2016, data compiled by CB Insights suggests the number of new CVC firms making first-time investments is “on track for a record year at the current run-rate”.
According to a media release, Telstra Ventures has invested more than A$250 million in over 30 leading technology businesses that are strategically relevant to Telstra. It reports generating in excess of A$100 million of revenue for its portfolio companies, with 7 liquidity events to date.
Mark Sherman, Managing Director of Telstra Ventures and co-writer of the white paper, said that venture capital is a major driving force behind the technology-led disruption which has been virtually hitting every segment of the economy.
Sherman elaborates: “We expect direct corporate and CVC investing to account for 35 per cent or more of total global VC dollars invested by 2025. Technology disruption, global competition, and corporates seeking access to new revenue streams, products and customers are driving the increase of CVC in both percentage and absolute dollar terms.”
“Apart from funding, emerging private companies can benefit significantly from CVCs if managed properly, including access to established channels to market, large customer bases, complementary products, brand endorsement and other capabilities,” he adds.
In addition, the white paper outlines the concept of Strategic Growth Investment which can bring benefits and create exciting opportunities for corporate parents and the emerging companies with whom they partner.
According to the Global Corporate Venturing Leadership Society, there are now over one thousand CVCs teams and the number of active CVC groups that made an investment in Q2 2016, almost double the same figure four years ago.
CVC acts as a part of the corporate innovation toolkit that generates an earnings impact for corporates. It provides a medium-term solution for corporates, given that the exit event for a startup venture can range from a short-term horizon (2-3 years) to a medium term horizon (4-7 years).
Offering a way for large enterprises to solve problem by accessing new innovations and overcoming the limits of existing channels, products, customers, processes and business models, it also serves to prevent the over-committing of capital that can result from internal research & development, intrapreneurship and the lengthy integrations that can emerge from M&A.
Taking minority equity positions in a portfolio of emerging technology companies allows corporate to monitor market changes in an agile manner while de-risking exercises in innovation, spreading risk and resource allocation across a pool of other investors.
Telstra Ventures cites an example of a startup venture needing $100 million to reach scale over five to 10 years. However, a corporate need only contribute 10 per cent of this (i.e. $10 million) among a pool of investors to prove a 10:1 capital leverage, limiting downside risk to a tenth of the cost of the project.
In terms of the shortcoming, corporate venturing does see corporate lacking control of these ventures, while some will fail from failing to reach a critical scale. A Wall Street Journal report notes that startup ventures have a 75 per cent attrition rate, and with corporate venturing, companies are investing in an illiquid asset that is volatile and operates in a setting of high attrition.
Nevertheless, CVC represents many benefits for corporates, in the form of a talent pipeline, M&A pipeline, and it can serve to aid in expanding and diversifying the business areas that an enterprise operates in. It also provide a tool for intraprenuership, driving both product innovation and serving as an instrument for talent retention, retaining talent within a corporate ecosystem.