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The Great Rise of Corporates for Startup Financing with a Value-add

Last week, my colleague Dominique Megret (Head of Swisscom Ventures) was invited to kick off the Global Corporate Venturing & Innovation Summit in Sonoma Valley in California – the corporate venturing industry’s annual get-together. As chairman of the event, Dominique shared some observations that illustrate the growing relevance and expanding scope of the corporate venture capital (CVC) domain in the last couple of years.

1. Quantity: More CVC units, more money, more deals

Corporate VCs are the fastest growing segment in venture capital (VC):

  • From roughly 500 CVC units in 2011 their number increased 3X to over 1,500 in 2015.
  • Over the same period, the number of deals increased from 763 to 1,841 last year.
  • Due to bigger deal size, the money invested increased even more during this time: While CVCs invested USD 18bn in 2011 in total, they did an impressive USD 75bn investments in 2015.

CVCs are becoming ever more important for startup financing taking a growing share of VC financing: As traditional VC funds have an increasingly hard time to raise capital (due to lack of performance outside of the top 20 Silicon Valley funds), corporate VCs now account for 17% of dollars invested, and there are more than 10,000 professionals working in corporate venturing globally.

Increase of active CVC units, CVC deals, and USD invested by CVCs 2011-15
Increase of active CVC units, CVC deals, and USD invested by CVCs 2011-15. Source: Global Corporate Venturing Analytics, http://gcvanalytics.com/

 

In Switzerland, we’ve seen a rise in CVC activities, too, albeit not that steep: In 2011 there were 8 corporates with a venture arm doing 40 deals. Last year, the number of corporates with venture activities increased to 11 doing over 70 investments. And I know that some big corporates in Switzerland are thinking of setting up new corporate venture funds.

This trend is prevalent in Swisscom Venture’s development, too: Last year, we did a record of 12 new investments and 12 follow-on rounds! And there’s more to come as we’ve been appointed more funds to be invested specifically into Swisscom’s strategic focus areas such as big data.

2. Ambition: Financial performance in addition to strategic value

Typically, a corporate would start a corporate venturing activity in order to combine investing into startups with bringing strategic value into the mother company. This strategic value would often be driven by technology scouting and supported by a positive PR effect. For a startup this strategic benefit would translate into a strong interest from the corporate to collaborate.

As CVC units professionalize over time, many of them can prove that the financial return out of the investments is comparable to that of a typical early-stage VC fund. So their implicit mandate might slightly expand: In addition to strategic value, many CVCs are now expected to be financially successful, too.

Evolving mandate of a CVC unit
Evolving mandate of a CVC unit

 

Why is this good for startups? In the early days, corporate venture capital would not necessarily mean dealing with a professional VC organization. Today, startups can expect from an established CVC that they combine a strategic mandate (Tech scouting and PR) with a strong objective to deliver financial returns and/or create growth options for the parent company. This means stronger financial competence and maturity of organizations: CVCs work more like VCs but with a strategic angle.

3. Scope: From core business to adjacent and remote areas

In many cases, a CVC unit would focus on the industries and technologies they know best—and in which they can add most value: the core business. Over time, CVC can be expanding into adjacent areas or even into more remote areas. This development may be driven by a portfolio view (i.e., balancing the portfolio by investing into other areas than the core) or a corporate’s ambition to generate growth in new areas.

Expansion of investment focus
Expansion of investment focus

 

We could see this evolvement in Swisscom’s corporate venturing activities, too:

  • Initially, Swisscom Venture’s investment criteria would make sure that investments are highly relevant to Swisscom’s core telecommunications business, e.g., investments like Quantenna (wifi chip technology) or Matrixx (Roaming billing software).
  • Then we progressively expanded into IT and Cloud-related technologies, e.g., storage company Amplidata (sold to Western Digital) or Piston Cloud (Openstack orchestration software, sold to Cisco).  
  • Since 2011, we enlarged the scope of investment even further with the launch of our Swiss Early Stage Fund ranging from mobile advertising (Adello), E-Health big data (Sophia Genetics) to remote areas such as wearable technology startup Lempotix (sold to Intel).

Conclusion: Corporate Venturing may be seen a VC-like source of equity with a value add.

CVCs have become a relevant source of financing for startups with their unique ability to contribute strategic value leveraging the corporate parent: Corporate investment teams dedicate time to introducing the startups to the relevant technology platforms or commercial channels, as well as to other industry players worldwide.

We believe that it needs a long-term oriented approach to ensure successful collaboration between a startup and a corporate. CVC act as facilitators of that process.

 


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