For some time now, large companies have shied away from corporate venturing, unsure of returns and/or efficiency of capital usage. Enterprises have seen their venture initiatives fail, and many give up hope quickly after initial enthusiasm. Even corporates that have managed to run successful funds have struggled to monetize their leveraged investments as they scale up. Given these challenges, it’s not surprising that enterprises with large, under-utilized cash piles chose to maintain the status quo, rather than invest in an emerging startup economy.
However, we’re starting to see a significant change in the funding landscape. This week, Google announced plans for a new operating structure that effectively makes the eponymous search engine giant a subsidiary of a new holding company, Alphabet. One of the main driving rationales for this decision was to delink Google from other ventures in which the parent organization is involved, and give it more room to experiment with new ideas. After all, Google has diversified into areas including life sciences, drone delivery, space research, and home automation.
Last month, Workday, the enterprise SaaS poster boy, announced Workday Ventures, the company’s first strategic fund focused on identifying, investing, and partnering with early to growth stage companies that place data science and machine learning at the core of their approach to enterprise technology. In June 2015, Intel Capital led a US$40 million Series D investment in Onefinestay, best described as a luxury Airbnb competitor. And other corporate venture funding efforts have figured prominently in the recent hyper-competitive boom in the deals landscape.
Corporate VCs don a new avatar
Corporate venture funding has taken a new lease on life, and aroused widespread interest, notably in The Economist and Harvard Business Review. This is not without reason. AMD, Dell, and Google are technology giants with early venture funds, and firms such as Microsoft and Salesforce made similar moves later. A CB Insights study on corporate venture investment trend found that corporate venture capital activity witnessed a significant uptick in 2014, with deals by corporate venture arms jumping 25 percent YoY and funding rising 76 percent. The most active corporate venture investors in 2014 among technology companies were Cisco, Comcast, Google, Intel, Salesforce, Qualcomm, and Samsung, underscoring the attention being paid to this route.
In terms of exits by corporate venture investors, technology players again emerged on top, led by Google Ventures (OnDeck Capital, Hubspot, and Nest Labs), Intel Capital (Yodlee, [x+1], and Prolexic Technologies), and Samsung Ventures (Fixmo, Cloudant, and Engrade), and Qualcomm (Divide, MoboTap, and Location Labs). The marquee corporate venture deals in 2014 were Cloudera (US$900 million, led by Intel Capital), Tango (US$280 million, led Alibaba), and Uber (US$1.2 billion, led by Google Ventures). The chief areas of investment include Internet of Things, analytics, security, and platform technologies.
|Differences between corporate venture funding and conventional VCs
- While VCs tend to focus on growing portfolio companies and time their exit from a ROI standpoint, corporate venture funds take a strategic view of investments, and look to use their expertise to guide start-ups
- Acquisition of portfolio companies is not uncommon for corporate venture funds (e.g., Google Ventures – Nest Labs). Funding a startup and acquiring it later, rather than building one organically, makes for a stronger business case. Traditional VCs frequently work with the intention of taking investments public
- Corporate venture funds are less risk-averse than conventional VCs, given their deep pockets and long-term position. This is also reflected in their higher involvement in seed funding rounds
- Typical VCs tend to lag corporate venture funds in terms of average deal size or term, also due to corporates’ deep pockets and long-term holdings
- Corporate venture funded start-ups tend to go public more often than their VC portfolio peers
Strategic technology investment or desperate spend?
Given improved macroeconomic confidence, there is a lot of “easy money” floating around the technology continuum. And this is beginning to result in a “perpetual investment bubble.” While this isn’t to say that doomsday is just round the corner, with everything and anything getting funded (does anyone remember Yo?), utility, monetization models, and future relevance seem to be the last things on investors’ agenda. More often than not, there is a fine line between a blunder and a brilliant bet. Everyone and anyone in this easy dollar-fueled utopia tend to be under the messianic illusion that the next multi-billion dollar bet is around the corner and will change the world. Most players tend to add incremental value over existing processes, systems, and interfaces, rather than changing them as we know it, which is the reality of investing.
Given their tremendous business acumen, corporate funds have talent, skill set, pedigree, and, ultimately, deep pockets to exist and thrive in a volatile knowledge economy as they look to identify and nurture a truly revolutionary idea beyond just incremental technology value. That said, there is likely to be significant churn once the rose-tinted glasses come off. Still and all, with the strategic depth and domain guidance large enterprises can provide, their portfolio companies are likely to be better positioned to ride the wave.