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The next evolution of corporate venture capital

Ventures

Posted on December 7, 2016

4 min read

On the release of a new report, Strategic Growth Investing: The Next Evolution of Corporate Venture Capital, Telstra Ventures MD Mark Sherman shares his thoughts on the origins and evolution of large companies running their own venture capital arms.

The rapid rise of new technology led businesses like Facebook, Amazon and Snapchat is well known. Technology companies now dominate not just their sectors but the list of biggest companies in the world like never before.  What’s less well understood is the critical role Venture Capital (VC) investment has played in funding these businesses through their early life.

Funds from traditional VCs like Sequoia, Accel and Andreessen Horowitz have fueled the ability of agile, technology driven start-ups to quickly bring innovative goods and services to market. Today, the heroes of VC are almost market-makers in their own right – their involvement endorses a start-up’s potential, generating further funding opportunities and attracting customers.

One way that large incumbent corporations have responded to the emergence of digital native competitors is by establishing their own Corporate Venture Capital (CVC) arms so they can embrace and extend emerging companies and technologies.  Direct investments in technology start-ups through CVCs is now a common business strategy for driving innovation at large enterprises alongside tradition R&D programs and mergers and acquisitions.

According to the Global Corporate Venturing Leadership Society, there are now over one thousand corporate venture investment teams and the number of CVCs making an investment in the second quarter of 2016 was almost double the same four years earlier.

Traditional VC investors have often criticized, sometimes justifiably, CVCs as “lumbering giants” that move slowly, drive up asset prices and have a poor track record of picking winners. Despite these critiques a group of strategic CVC arms has been steadily developing a strong track record for high quality investments.

My colleague at Telstra Ventures, Albert Bielinko, and I have written a report on the characteristics of successful CVCs.  We found that CVCs are increasing their share of total funds invested from 10-15% in 2000 to 28% today and our expectation is that it will grow to over 35% in the next 5-10 years.

CVC arms that leverage their parent’s distribution channels, large customer bases and technical expertise have proven they can effectively partner with creative entrepreneurs.  We call this group of CVCs Strategic Growth Investors and argue that by opening up these new paths to market and other value-adds to entrepreneurs, these Strategic Growth Investors offer something that traditional VC firms cannot, which is revenues.

That is why we have prepared our new report, Strategic Growth Investing: The Next Evolution of Corporate Venture Capital.

We believe the CVCs that consistently display certain traits, including access to sufficient capital, the long-term support of their parent and the ability to provide genuine commercial value beyond funding, will be best placed to deliver on their full potential.

At Telstra Ventures, we have invested more than A$250 million in a portfolio of more than 30 technology companies from across the United States, Australia and Asia, and we are applying the Strategic Growth Investor approach.  Having generated more than A$100 million in additional revenue for our investment companies by using and reselling their products we believe this approach is starting to pay off.

 

Five characteristics of a Strategic Growth Investor in Corporate Venture Capital

  1. A significant capital commitment (minimum US$50M per annum and likely to keep scaling) so that they can be a regular investor and active participant in the technology ecosystem.
  2. A long term senior commitment from the parent company based on an alignment with company strategy and an appreciation of the dynamics of venture investing.
  3. Offering entrepreneurs genuine commercial value beyond the investment itself – partners for growth through access to sales channels and customers.
  4. Demonstrating their value by generating new revenues and business opportunities for investees as well as the parent company.
  5. Tightly focused on identifying and investing in ventures that are aligned to their parent’s core business.

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