With corporate venture investing now approaching levels not seen since the dot-com boom, a key question remains: “Is it different this time?”
There are good reasons to think the answer may be “yes.”
By many measures, corporates seem better focused on innovation that will bring their parent companies long-term value.
And in a departure from the past, the practice of the craft has changed, suggesting that this investment cycle could last longer. More creativity is being applied, with corporate investors going earlier, hiring more experienced managers and structuring programs with the stability of dedicated funds.
They also are investing broadly, pouring money into out-of-favor sectors and drawing the interest of not just big hitters, but scores of smaller companies. Some programs have gone so far as to build accelerators, mirroring the recent trend in seed investing.
“I think there has been an awakening,” said Robert Ackerman, a managing director at Allegis Capital. “Corporations generally have gotten smarter about what they know and how they invest. That’s essential for these programs to be successful and sustaining.”
The impact on venture could be profound. Corporates represent a welcome source of new money for promising companies at a time when traditional venture is shrinking. Global Corporate Venturing now tracks 1,133 active corporates, with 227 new organizations opening their doors since the start of 2010, including Dell Ventures, Bloomberg Beta, German energy company E.ON and Nielsen-backed Pereg Ventures. Just 841 traditional venture firms existed in 2012, according to the National Venture Capital Association.
The potential is considerable. If each of the corporate programs were to draw $100 million of capital over the next five years, their available resources could add up to $113 billion – well more than the $66 billion of capital overhang estimated to be held by traditional firms in North America. Even half of that sum could turn corporate venture into an indispensible source of startup funding.
The explanation for the new interest isn’t hard to find. Technology cycles are compressing and internal R&D efforts can’t keep up. Manufacturers used to update smart phones every two years. Now new models come out in a matter of months. New Web-based upstarts topple long established businesses. Companies have to look outside for inspiration.
By many measures, the present corporate cycle already looks different than those of the past. For one, corporate venture investing is on pace for its biggest year since the dot-com boom, with corporations and corporate venture arms investing $2.36 billion through the first three quarters of the year, according to an analysis of the MoneyTree Survey from the NVCA and PricewaterhouseCoopers, based on data from Thomson Reuters. If the fourth quarter is the average of the first three, the year will close at $3.1 billion, the largest annual total since 2001, when corporates invested $4.6 billion.
As a percentage of venture capital deployed, that’s 11.3% so far this year, matching 2001 and exceeding every year since.
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