The premise behind corporate venture capital is simple: Setting up a dedicated vehicle for investing in startups is putting your innovation money where your mouth is. It takes a different path on exploring next-generation products and new commercial opportunities (and threats) and supplements traditional research and development work with a dash of the excitement and promise that comes with startups.
The reality is that things are naturally not that simple. Venture investing comes with a risk appetite and failure rate that many corporate cultures struggle to accept—and will more quickly shun when they burn their fingers. Similarly, C-suites’ different priorities means their VC efforts take a number of different forms and set success targets that are more difficult to benchmark against the market. A Stanford Graduate School of Business research brief published early this year included the finding that more than 60% of the senior corporate VC executives felt their parent organizations “do not understand the norms of venture capital.”
Still, the concept of corporate venture capital—and its value as what Bain & Co. calls “a market-sensing mechanism”—has been gaining a lot of traction and grown far beyond its roots in the high-technology sector and beyond blue-chip names. As more startups take aim at more incumbent business models, a growing number of corporations are realizing they need to be in the market, said Steve Pretre, a partner at the World Innovation Lab venture firm. The need to understand emerging underlying technologies and how they might come to apply to companies’ customers is raising antennae.
The growth numbers are impressive: Researchers at CB Insights say that the volume of venture deals backed at least in part by corporate funds has grown to $169 billion in 2021 from about $20 billion seven years earlier. And the number of deals involving corporate venture capitalists clocked in at 1,317 in the first quarter of this year, up from 961 and 779 in the same periods of 2021 and 2020, respectively.
David Horowitz has been active in corporate venture capital for more than two decades dating back to starting at Comcast Ventures in 2000 and co-founded Touchdown Ventures in 2014. Since then, his team has helped manage the VC funds of more than a dozen companies, including The Kellogg Co., Scotts Miracle-Gro Co. and, starting earlier this year, healthcare distributor AmerisourceBergen Corp. He said there was some resistance in the more nascent days of corporate VC to the idea of companies breaking into the venture sector. Traditional venture investors, he said, were concerned about corporate VCs’ willingness to support startups over longer periods of time—many came late to the dot-com boom only to quickly retreat in the early 2000s—or worried about them being productive board members. At times, they also fretted about corporations investing would limit startups’ strategic options by insisting on a right of first refusal on acquisitions or other strategic moves.
Those concerns have largely faded, Horowitz and Pretre said. The most effective corporate VCs, Horowitz added, look at investments in the same ways traditional venture backers do but also have more to bring to the table from a strategic or product development perspective. And their investments have followed a broader VC trend of coming earlier in a startup’s life and being a little smaller in dollar terms.
Remnants of a culture clash
In some ways, the journey of building materials maker Saint-Gobain reflects the maturation of corporate VC. The first generation of its Nova venture group didn’t invest directly but instead focused on scouting for promising startups to partner with and to help the global manufacturer stay abreast about market trends, said Minas Apelian, the company’s vice president of internal and external venturing. In the middle of last decade, that work intensified and sought to encourage employees to develop investable business plans.
In 2019, Saint-Gobain took the next step and organized a dedicated fund for Apelian and his team to deploy in their chosen areas of pre-seed, seed and sometimes Series A investment rounds. Nova now has more than $100 million in assets under management and in 2021 closed 45 investments or collaborations. The fund’s typical investment is in the hundreds of thousands of dollars and almost always includes a joint development agreement that connects Saint-Gobain operating teams to startups.
Such agreements are key to Nova’s strategy, Apelian said, because they expose many of Saint-Gobain to a startup mindset can act like “a beneficial virus” improving the everyday work of Saint-Gobain teams. That approach also extends to Nova’s lead funnel, which typically includes about 600 proposals in the various stages of evaluation and negotiation. At any point in time, Apelian said, more than 2,500 people across Saint-Gobain’s global network are being exposed to startups’ ideas and methods.
Such a setup can work well, Pretre said, if it doesn’t get in the way of speedy evaluations and investment decisions. Historically, he said, many corporate VCs would first explore strategic partnerships or product development arrangements with startups, a process that could take months for a startup looking to raise growth funding in weeks and would lead to adverse selection for corporate funds. Some of their best prospects would be driven away by that misalignment.
Pretre, who is today working with multinational insurer Tokio Marine Holdings among others, is pushing for what he calls a “reverse polarity” from those ways.
“Let’s find good companies, make quick decisions on investing and then get to thinking about the strategic options,” he said, adding that a benefit to corporate VCs investing earlier in startups’ development means they are more likely to be involved in longer-term development work.
Apelian is aware that, despite his and his team’s best efforts, there can still be times when the ways of thinking among investor and entrepreneur don’t mesh.
“Our dogma may not always be well placed,” he said, noting that Saint-Gobain is an organization with a lineage tracing back more than 350 years. “Sometimes, we’re so confident in our knowledge and experience that expanding our perspectives and bringing in outside views is what we really need.”
Horowitz said he also sometimes sees things that hint at the remnants of a generally more cautious corporate approach. Companies’ point people on giving final approval to investments, he said, can wield a power traditional VC fund partners don’t necessarily have. And, he added, corporate VCs can still tiptoe into an investment when they could/should take the plunge.
“What we do see sometimes is that, once the technical risk and the market risk have been eliminated and all that remains is essentially sales and execution risk, corporate VCs might get more aggressive,” he said.
Set your own benchmarks
So how to make corporate venturing work if you’re thinking of a move? For starters, Horowitz said, don’t think of corporate VC as the exclusive domain of multibillion-dollar and publicly traded corporations: Of the 92 single-backer corporate venture funds launched in 2021, Touchdown Ventures’ research shows 49 were by private companies. And while some funds can reach into the 10-figure range, the average size of new corporate VC funds in 2021 was about $91 million, with the smallest starting life at less than $10 million. Keep in mind that those commitments are over the course of five- or seven-year cycles and the hurdles became more manageable for more businesses.
There are few solid benchmarks to consider when deciding on size. Large public companies often look at tying their VC funds to a percentage of their revenues or EBITDA but even there, variances are large: Booz Allen Hamilton’s recently announced $100 million fund equates to 1.2% of its 2021 revenues while AmerisourceBergen’s $150 million pool amounts to less than 0.1% of its sales.
A key trend going forward, Pretre said, will be corporate VCs’ ability to standardize and track how they add value to their portfolio companies. How many contracts have they opened doors for? How have they helped get the startup make inroads into their corporate parents’ various divisions? Bringing solid data to the table will help it land more deals in the future and at better prices.
Apelian knows that dynamic and says his team is consistently tweaking what it does with and for portfolio investments and how it extends Nova’s reach across Saint-Gobain’s global footprint.
“It’s really important for us to maintain credibility within the company,” he said.
And in that way, corporate venture capital is no different than any other company unit.
