Corporate investment is a powerful strategy for aligning a corporation’s vision with the disruptive innovation that startups offer.
The Challenge of Corporate Innovation
Introducing innovation within a corporate environment is inherently difficult. While many companies have dedicated research and development or corporate development teams, few have specialized innovation teams. The complexity of organizational structures often means that no single team has a comprehensive view of the entire corporate landscape. Intrapreneurship programs can spur internal innovation but are typically expensive and carry significant risk.
The Nature of Corporate Venture Capital
Corporate venture capital (VC) has seen fluctuating popularity over the years. While companies like Boeing and Dell have disbanded their internal VC teams, others have increased their startup investments significantly. For instance, big tech companies increased their startup investments from $7.6 billion in 2019 to $16.7 billion in the first eight months of 2020, according to CB Insights. Successful examples of corporate VC organizations include Google Ventures, Intel Capital, and Qualcomm. Despite these successes, the model is challenging to replicate, with 80% of S&P 500 companies lacking an internal investment team.
Objectives of Corporate Investment
The primary goal of corporate investment is to harness startup innovation to meet corporate objectives. Startups, known for their disruptive capabilities, often fill technology gaps and provide access to new customers and markets. Investing in startups can be a quicker and more efficient method to acquire these resources.
However, identifying well-managed startups with the right solutions is challenging for corporations. Building an internal VC team is equally difficult, as it requires recruiting experienced, smart individuals who are often expensive and hard to retain, especially in competitive markets like Silicon Valley. Corporations may spend millions assembling a small internal team, only to risk losing them to better offers from competitors.
Solving the Problem: Venture Capital-as-a-Service
Outsourcing corporate innovation through a model known as venture capital-as-a-service (VCaaS) offers a flexible and affordable solution. In this arrangement, corporations partner with established VC firms and agree on performance indicators upfront. The VC firm is then responsible for meeting these targets. Given that about 75% of venture-backed firms in the U.S. do not return investors’ capital, relying on experienced venture capitalists makes sense.
Outsourcing can be more cost-effective than building an internal team and allows corporations to pivot their strategies as needed. VC firms, with their extensive research and relationships, can identify startups with the right technology and innovation to benefit their corporate partners. Startups, often protective of their intellectual property, might be more willing to share their technology secrets with a reputable VC firm than with a corporation, fearing that the latter might exploit these secrets without investing.
Benefits of VCaaS
Successful startups attract numerous potential investors. Established VC firms, with their strong relationships, can secure investments more easily. Corporations, in turn, gain almost immediate access to new technology and innovation without the complexities of managing an internal team.
Looking Ahead
Corporate venture capital is expected to continue evolving, with a few firms succeeding while many struggle. Outsourcing investment expertise to knowledgeable VC firms with solid teams is often a smart, cost-effective, and less risky approach. This strategy not only fosters incredible innovation but also benefits people worldwide.
