Corporate venture capitalists return to technology
VCs lose ‘dumb money’ tag after poor investment decisions during dotcom boom
Back in the dotcom boom, when investing in any and every technology start-up seemed to be the road to fast wealth, many large corporations jumped into the venture capital business.
They established VC divisions and ploughed cash into internet start-ups. And then, when the internet bubble burst, many rushed back out of the market, branded – perhaps unfairly, argue some – with having a much poorer success record than traditional, privately-funded VC firms.
CVC investment dropped from a high of 16 per cent of all deals in 2000 to about half that, for the remainder of the decade.
That left the corporate VC (or CVC) with a bit of an image problem; as “dumb money”, a clumsy, big wallet with mediocre awareness of the sectors in which it was investing.
But that has changed significantly. Increasing evidence indicates CVCs are now a powerful and savvy – as well as deep-pocketed – funding source, featuring high-profile players such as Google Ventures and Intel Capital.
A report on CVCs last year from Boston Consulting Group argued: “Venture investing appears well on its way to establishing a firm foothold in the corporate world”, adding that, “once an experiment [for corporations, it] has entered a new, more mature phase.”
A new report this month from the US National Venture Capital Association gives a similar picture: in the second quarter of 2013, it counted 914 VC deals, of which 145, or more than 13 per cent, included CVCs, pushing investments levels back towards the 2000 high.
The return of the CVC is also born out by a recent survey from New York-based analyst CB Insights, which says that CVCs participate in about 25 per cent of overall venture funding.
By its measurements, the analyst said in the second quarter of this year, CVCs pumped $1.7 billion into 126 deals. Deal activity rose 23 per cent year on year, with the number of active CVCs also on the rise, 66 in Q2 2013, up 40 per cent on Q3 2011.
“When we looked at the largest 100 technology financings over the year, going back over the last 10 years, more and more” involved CVCs, says Anand Sanwal, chief executive and co-founder of CB Insights.
But CVCs are not just technology companies looking for acquisitions, but represent a broad sweep of industries. More than 750 corporates have a VC unit or make venture investments, according to the Global Corporate Venturing database.
“Technology is beginning to invade a lot of industries. Even traditional, more old-school industries are being impacted by technology. So folks are trying to stay ahead of that curve, and creating a venture unit gives access to new technologies and innovation,” says Sanwal.
Investment initiatives “fall into the innovation and growth sphere”. CVCs are not just in it for strategic reasons but also “are trying to act more like traditional VCs. They’re actually looking for the best companies for return.”
CVCs also are moving more heavily into an area they traditionally avoided – early-stage funding, either at the very start with seed funding, or with “Series A” funds, the first big influx of venture cash for a company after its seed funding begins to run dry.
Nearly 40 per cent of the deals fell into this area, with one in four deals in the Series A category. CVCs “are now willing to take more risk and invest earlier in the cycle”, says Sanwal. Many, such as Google, like getting in early, and if they like what they see, they’ll invest more, he says.