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Corporate Venture Capital: Boom, Bust, or Here to Stay?

Corporate Venture Capital has traditionally had a cyclical journey of ups and downs since the mid-1960s. Although its history has had three distinct boom and bust cycles, corporate venture investing has always presented significant advantages to both corporations and start-up companies. Entrepreneurs have often benefited from corporate venture capitalists’ expertise of bringing products to global markets, as well as from their additional funding and customer base.[1] Corporations have also been eager to invest in external start-up companies not only to generate financial returns, but also to develop new products and supplement its own activities.[2]

On October 31, 2012, Boston Consulting Group (“BCG”) released a report that makes a case for corporate venture capital’s permanent tenure in the corporate landscape. BCG points to data gathered by the Global Corporate Venturing, which lists 756 corporations that have corporate venture capital units.[3] The analysis separated the corporations by industry, and focused on the thirty largest corporations in seventeen industries.[4]

The first major trend garnered from the analysis shows a steady growth of CVC within the traditional industries of technology, pharmaceutical, telecommunications, and media and publishing.[5] Within the industries of technology, pharmaceutical, and telecommunications, over half of the thirty largest companies in each industry maintain CVC units.[6] This reflects the increasing corporate acknowledgement of the need to invest into start-ups to supplement their corporate development, research, and competitive advantage. Concurrent with this increase in CVC penetration, the numbers demonstrate a decrease in internal R&D.[7] These trends may indicate that companies are “transferring a share of the innovation investment from R&D into their venture units.”[8]

The second major trend demonstrates that there is a sharp increase in CVC investing within industries that have not traditionally engaged in CVC activity, such as machinery, power and gas production, consumer, and construction.[9] As a response to increasing pressure for “cleaner technology, more sustainable operations, and an improved user experience,” these industries are looking to CVC investing as a way to supplement their own internal R&D and find avenues for innovation.[10]

The third major trend demonstrates that investments are broadening beyond core business sectors towards adjacent sectors that have the potential to disrupt existing industries.[11] For example, the chemical industry diversified from its typical focuses and instead invested in clean technology.[12] This may lead to the discovery of innovative processes to supplant petrochemical processes with biochemical ones.[13] Such discoveries are essential not only to sustainable operations, but also to meet consumer demand and future efficiency.

The last major trend demonstrates that corporate venturing is occurring at earlier stages with many transactions occurring in the seed and Series A funding rounds.[14] Although investing in start-ups is inherently risky, industries such as the pharmaceutical industry rely on innovation in order to maintain a competitive advantage. Also, with the increase in CVC activity, investors are becoming more experienced, and thus, more comfortable with funding risky start-ups.[15]

These trends support the argument that corporate venture capital has changed from what it once was to an attractive and potentially permanent fixture in venture capital. With CVC emerging as an attractive avenue for supplementing R&D and discovering new innovative products and processes, CVC may indeed be able to avoid its typical decline. Thus, the mutually beneficial relationship between entrepreneurs and corporations may become a long-standing one for years to come.

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[1] Deborah Gage, Corporations Refocus on Venture Investing, Wall Street Journal (March 21, 2012), http://online.wsj.com/article/SB10001424052702304636404577291982192150956.html.

[2] Kent Bernhard, Jr., Why Corporate Venture Capital is a Good Thing for Startups, Upstart Business Journal (November 1, 2012), http://upstart.bizjournals.com/money/loot/2012/11/01/corporate-vc-is-here-to-stay.html.

[3] Falk Bielesch, Michael Brigl, Dinesh Khanna, Alexander Roos, & Florian Schmieg, Corporate Venture Capital: Avoid the Risk, Miss the Rewards, BCG Perspectives by the Boston Consulting Group (Oct. 31, 2012), https://www.bcgperspectives.com/content/articles/innovation_growth_mergers_acquisitions_corporate_venture_capital/.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

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Christina Kim

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