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The Rise of Corporate Venture Capital

The Rise of Corporate Venture Capital

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Corporate venture capital (CVC) is – in essence – a straightforward concept. The model allows successful companies to invest in promising businesses whose success will be advantageous for both parties. Unlike traditional venture capital investments, CVCs give startups unique guidance from experienced company leaders who can develop efficient strategies. In return, investors receive exclusive access to new markets and technology, gaining an inside scoop onto the fresh ideas that excite their customers. Data shows that this system does – in fact – show returns. According to Ernst & Young, CVC investors consistently outperform their competition by around 4% over the short and long term.

     

Source: Ernst & Young

There is now an accelerated focus on future technologies – such as clean energy, digital food services, online healthcare – that seem to be gripping CVC investments.

The global fascination with CVCs started in the 1960s when key companies – such as Ford, GE, Mobil, and 3M – began investing in internal and external startups. At the time, there were two primary motivations: diversifying markets and putting their flush of cash to good use. In fact, 3M famously invested in an internal project that produced Post-it Notes, a brand that is now an industry of its own.  

After the oil crisis of 1973, the first wave of CVC had ended mainly due to more antitrust legislation and a collapse of the IPO market. However, with the release of personal computers in the late 1970s, CVC investments started to spike again. The age was defined by newly declared idols like Bill Gates and Steve Jobs, encouraging the modern entrepreneurship movement. Corporates – like Xerox, Johnson & Johnson, Dow, WR Grace, Motorola, GE – wanted products for diversifying and expanding product lines.

In 2000 alone, more than 20 new corporates made their first CVC investments, with an increasing number expanding outside of the United States. During this period, CVC became a way for companies to access alternative R&D projects, allowing them to outsource smaller projects to develop new technology. 

CVC investments have now become increasingly driven by the rise of technology and the digitalization of various industries, such as finance and healthcare. Companies are currently looking for ways to understand modern value systems and markets. According to CB Insights, 79% of CVCs hope to “strategically align with relevant and emerging companies,” while only 12% have an aim of internal improvements, one of the vital motivations for early investors. CVC investments are currently seeing a spike in interest, with US investors participating in 1,065 deals in 2018, almost double that of the previous year. The model has also traveled further east as more ventures arise in Asia.

Source: CB Insights

America, of course, continues to see CVCs spring up around the country, often associated with the world’s biggest brands. Citi Ventures – the venture arm of Citigroup – believes they have a responsibility to understand global trends and collaborate with international partners in order to build new products. Their Chief Innovation Officer Vannessa Colella echoed this mindset, sharing that “bringing a range of perspectives and experiences to the table is not just the right thing to do, it’s simply better for business.” Citi Ventures has developed four programs to provide entrepreneurs the resources for a successful startup: Citi University Partnerships in Innovation & Discovery (CUPID), City Builder by Citi, Emerging Technology, Worthi by Citi. Together, the programs have been able to support over 100 companies, notably mobile payment company Square and coupon company Honey. 

Heading over to Europe, the British insurance company Aviva has also started to show interest in CVC investments. Aviva Ventures is relatively new to the world of corporate venture capital, having been founded in just 2015. Regardless, today, the group hopes to introduce opportunities, ideas, and technology that “transform [..] the exciting insurance model, accelerate [their] strategy, [and] provide insights into how Aviva will need to adapt to the changing landscape.” So far, the group has invested in three healthcare-related companies; Owlstone Medical, Shepper, and Carpe Data. All three companies have developed technology to improve the healthcare system, whether that be through accelerated detection technology or unique data collection methods.  

Source: www.owlstonemedical.com

Today, with East Asia experiencing the rise of CVC investments, Japan has seen several companies incorporate the model into their strategy. CyberAgent Capital – established in 2006 as the capital arm of CyberAgent – has already invested in more than 80 companies, several of which were listed on the Tokyo Stock Exchange. Established eight years after its parent company, CyberAgent Capital is committed to “Change the World, from Asia.” Just like Aviva, CyberAgent Capital aims to revolutionize its own industry by supporting startups with similar missions. And, for CyberAgent Capital, that translates to providing incubation support for internet-related startups to reach international markets. Mixi Group Inc.– a leading Japanese social networking service – was founded in 1999 and has become one of CyberAgent Capital’s most successful investments. As of March 2020, the company shared that they already have a total capital of 9.69 billion yen.

And, India is not far behind. In 2005, The Times Group – an Indian media conglomerate that owns India’s leading publishing and television – established its strategic investment arm. Brand Capital aims to harness the growing GDP and youth population, both of which provide an excellent environment for entrepreneurship. The group has already invested in more than 850 companies in 16 years. However, unlike the model of CyberAgent Capital and Aviva, Brand Capital does not focus on the industry of its parent company. From Re’Equil in skincare to Indian Idol Academy (a music program based on the singing competition), Brand Capital has worked to improve the brand-building of companies in over 20 different industries. In fact, it promises to invest twice the money an investee uses in brand building, encouraging several more companies to apply for Brand Capital’s investments. 

Source: Re’Equil Instagram

Mobile Virtual Network Operator MTS has launched the MTS AI VC fund. Set up as a US-listed entity, MTS is the largest mobile carrier between Armenia, Russia, and Belarus. With a fund size of $100M, the MTS Fund invests in Late Seed, Round A, and Round B companies. Its geographic focus consists of key locations such as the US, Israel, Germany, UK, France, China and Singapore. The fund’s investments include $10M in edge AI chip developer Kneron, and $2.54M in Just AI, which produces conversational AI technology. 

However, Salesforce Ventures seems to be swimming against the tide. Until recently, the investment arm of Salesforce was the ideal image of a corporate venture capitalist. It had become one of the leading tech investors, having almost $2.17 billion worth of gains from investments in 2020. Now, Alex Kayyal – the new SVP & Managing Partner at Salesforce Ventures – is pushing Sales Ventures to rebrand itself. Now, he believes the group should be thought of as a software investor – removing the “corporate” – for a potentially more successful investment group. 

Even with the international success of CVCs, the chaos of the Covid-19 pandemic made many investors question their investments. And yet, the past few years have shown potential for new industries. There is now an accelerated focus on future technologies – such as clean energy, digital food services, online healthcare – that seem to be gripping CVC investments. According to Ernst & Young, big tech companies have already increased their investments in startups by $9.1b in the first eight months of 2020, often preferring entrepreneurs within their sector. Even as the CVC model continues to evolve and adapt to societal trends, it is clear that corporates are still fascinated by start-ups. 

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