Corporate Venture Capital (CVC) – The Empire Strikes Back

08 August 2016,   By   

Those Star Wars aficinados among you may well remember the episode: Darth Vader captures Han Solo and Princess Leia on Cloud City (please note how appropriate the name is in today´s era) to bait Luke Skywalker to come to the rescue which, unsurprisingly, he does. As Luke is a young and unexperienced Jedi, he loses the duel but he manages to escape – finally defeating Vader in the last episode. As morals of stories go, it was the principles, challenge and learning process which made Luke a stronger Jedi. Luckily, CVC can be the Force in our version of Star Wars, providing benefits to both the Empires (corporations) and the Skywalkers (start-ups), allowing them to grow with each other.

So what is CVC? In short, when a corporate fund directly invests in an external start-up, classically by taking an equity stake in the company (through a company-internal or external fund). However, the galaxy of involvement can be very broad: from corporation funded incubators and accelerators, or to start-ups which can even be incubated in the parent company (thus making it an R&D hybrid), to strategic alliances and collaborations, all of which is referred to as “corporate venturing”.

 

Changing times they are
Corporate Venture activities started before the 1970’s as a niche investment strategy with few players who had a strong technological background: however, this never became a market standard, spilling over to other industry sectors. But now, in Yoda’s words, “the time is commander”. The digital revolution or transformation is challenging every field of business, changing the way we collaborate at work, the way we organize and manage company structures and value chains. Demands and habits of employees and clients have been changing as well. The difference to the changes which occurred 20 years ago is the speed behind these developments – innovation was never so fast and companies have never before been forced to be as agile as they need to be today. Start-ups have been at the forefront of this technological evolution, disrupting the established ways how large companies are operating. For instance, it is no surprise that Hewlett Packard recently split its technology business from the PC and printer business, as the latter is expected to fade out eventually. Margins are under pressure, new products are needed and technologies are driving changes in many fields, too many to solve all of them internally, and if so, by assuming considerable opportunity costs. The consequence: large corporates are finally stepping again into the arena of Venture Capital, which means that there is a lot of capital paired with strategic interests on the rise. According to a report by 500 Startups (see Hubspot,  p. 25 and 30), more than half of the 500 largest public companies are engaged in some way of corporate venturing, with three European countries in the lead: France with 23 out of 25 companies, Germany with 15 out of 21 and Switzerland with 10 out of 14. According to Global Corporate Venturing, over 1790 CVC deals were executed in 2015 totalling a worth of 75,4 billion USD, five times the amount executed in in 2012 (see www.globalcorporateventuring.com). The Force is already visibly at work!

 

Corporations – benefit they will
“To be or not to be” – as a company, if someone does more effectively what I do, I seize to be relevant. Alas I can research and try to outrun the others, and or, be involved in the ecosystem of my market by investing in the right start-ups, partake and sponsor the right incubators and accelerators to find the technologies which can enhance my product/ supply chain/ route to market / market infrastructure. That very much depends on the corporate’s investment priorities.

It’s in the numbers: it is well understood that the “next new thing” can happen anywhere within and outside of the corporations as such. Maintaining a long-term investment in the internal R&D not only is costly and might also be risky – they simply might not find that precious next new thing. In comparison, CVC operates under a mid-term perspective, with lower costs and average risks, allowing corporations to essentially externalized their R&D. They can cherry pick whom to invest in and it diversifies the winning options and risks as it can very much be kept independent from the core business without limiting potential high returns. Also, it most certainly may help to keep oversight if your M&A team decides to strike.

Jedi practice: chances are, when you practice something with someone else, you’ll put in more effort. Start-ups are lean – if they have to fail, they better do it fast – being tight on capital means becoming very creative in how to reach targets. Having a younger fitter Jedi partner keeps us in shape simply because we need to adjust to their (faster) speed. Engaging with start-ups, investing in talents and innovations, leads to faster reactions and helps to succeed in direct competition within a sector.

 

 “Unlearn you must, do or not do, there is no try.”

Yoda encourages young Skywalker to undo old paradigms. We have experienced a true rise in acceptance of innovations, understanding of the digital economy and willingness to engage with start-ups. As part of a holistic digital innovation strategy, Corporate Venture Capital has become a must in 2016 with respect to our core markets Austria, Switzerland and Germany (ASG), particularly if we regard the abovementioned numbers. In its recent publication of 10 Big Venture Capital Trends by Inc Magazine, an increase in Corporate Deals and sprouting of Incubators and Accelerators (usually lead or sponsored by corporates) are among the first two most important trends mentioned. Alas, we are already unlearning the old ways: Do you must, may the Force be with you!

For more infos about Corporate Venturing and how we can support you in this area, please contact us directly.