At the peak of the last bubble corporate venturing (where companies invest in startups in the same way as VCs) had gotten so big that there was a trade magazine devoted to it. Then during the tech nuclear winter those investment dollars all but disappeared. Now they are back!
Take a look at the numbers in this Business Week article:
Companies that aren’t full-time investors pumped $1.3 billion into 390 venture capital deals in the first half of 2007, up 30% from the $1 billion invested in about 350 deals a year earlier, according to an Aug. 30 report by PricewaterhouseCoopers and the National Venture Capital Assn. (NVCA), based on data from Thompson Financial (TOC).
(Thanks to Alan for the pointer.)
Ever presents Intel and Cisco are the still biggest players, but companies like Google and Yahoo! are also getting in on the act. Yahoo! is also setting up an internal incubator called Brickhouse as a way to bring some of this stuff completely in house.
I have mixed feelings about these developments. Having big and powerful companies invest in your business sends out a public message of endorsement which can be helpful and if you are also doing business with them having a second line of communication in through the investment arm can be extremely useful when navigating corporate roadblocks. We recently invested alongside Intel and Cisco at VirtualLogix on exactly this model.
But it can also go wrong.
My first observation is that corporate venturing is very difficult to scale, but it is also difficult to retain staff if you keep a corporate venturing unit small. I have first hand experience of this from my time with Reuters Venture Capital. We made an awful lot of money there in the early years but then ran into difficulties as we grew the investment rate. As individuals we all wanted to grow the portfolio as fast as possible to build our track record and venture capital careers – understandable. As we increased our investment rate though we, almost by necessity, took less guidance from the business on which investments we should make. The strategic link became weaker and it became more difficult to get the company to help the portfolio.
At the same time the cash requirement keeps rising and the venture unit can start to make enough of an impact to move the share price, which results in renewed focus on the strategic benefits.
This is a problem which lies at the heart of corporate venturing and is difficult to manage. Intel and Cisco have done a great job in this area, although they have not always found it easy. Many others, including Reuters, end up giving up.
My second observation is to make sure there is no conflict between the agenda of the investee and the corporate venturer – both at the time of the investment and looking into the future. It is an obvious point, but I have seen many examples of corporates using their position as a shareholder to force a course of action that isn’t in the interests of all shareholders. That can be from the fairly trivial – not working with competitors, through to the very serious – the corporate investor buying the investee company at below market price (this happens surprisingly often, the most recent example I heard about was a UK wedding site earlier this year).
Remember that corporates exist to run their core businesses and investing is only ever a sideline, so if they need to bend the investment unit out of shape to help the mothership they will.
Remember also that corporate venturing is pretty cyclical – in a downturn the personnel often change and the money can disappear. Either of which can also create problems.
I guess my message is that taking corporate money can be a good idea. But think twice about it. And three times. Make sure you consider the points I mention, and don’t let their interest flatter you or cloud your judgement.