Investment by the venture capital arms of big corporations is growing and should reach a little more than a third of all total global venture capital by 2025, a report disseminated by Telstra Ventures claims.
Written by Mark Sherman of Telstra Ventures and Albert Bielenko, the report says corporate venture capital (CVC) providers are assuming a bigger role because, apart from financing, they bring to the table support for a venture that is being financed. Telstra Ventures is the telco's VC arm.
This could come in the shape of marketing, sales or networks that the CVC provider already has.
In some cases, the authors say, venture capital firms have criticised CVC providers for being slow and cumbersome, claims that are often, sadly, true.
{loadposition sam08}"Nonetheless, corporate funding continues to grow and we expect direct corporate and CVC investing to account for 35% of total global VC dollars invested by 2025," Sherman and Bielenko write. The current level is about 28%.
"More importantly... large corporations can be valuable partners in scaling emerging technology companies. When managed properly, CVCs offer start-ups critical access to established channels to market, large customer bases, complementary products, brand endorsement and other capabilities, as well as funding."
The paper says that for many emerging companies, venture capital is a critical factor underpinning growth. Within this community, the role of CVC providers has often earned criticism.
"However, a group of strategic CVC arms has been steadily developing a strong track record for high-quality investments in new businesses that are driving significant changes within their corporate parents," the paper says.
"They provide attractive distribution channels, existing customer bases, access to complementary products and technical expertise for creative entrepreneurs. We call these Strategic Growth Investors."
Sherman and Bielenko say they believe the CVC market will splinter into three types:
Starter efforts – small, new teams making two to five investments each year (US$0.5 million to US$2 million per deal) often with a less mature and predictable investment process and uncertain commercial value-add.
Credible CVC efforts – established for more than five years, greater investment in terms of people and capital, with some predictability of process and value-add.
Strategic Growth Investing groups – world-class efforts with well-established people, processes and value-add that form part of their parent company's long-term strategy and offer thought leadership in relevant technological sectors.
"The last group has the potential to be enormously effective for both corporations and entrepreneurs. They will only reach their potential, however, if they have certain
characteristics, including access to sufficient capital to be an active investor, the ability and incentives to provide genuine commercial value beyond funding and the long-term support of their parent," the authors note.