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Corporate venture capital is the unsung hero of global innovation. The media tends to tout the Sand Hill Road version of Venture Capital, which was built primarily on financial capital not on corporate capital, as the basis for Silicon Valley’s success and the key to high tech innovation. But Silicon Valley would not exist if it weren’t for corporate capital. Hewlett Packard launched on the strength of a deal with Disney. William Shockley set up his company in Mountain View with funding from Beckman. Bob Noyce, Gordon Moore and the rest of the Traitorous Eight put the silicon in Silicon Valley with the launch of Fairchild Semiconductor, funded by Fairchild Camera. Bob Noyce and Gordon Moore went on to start Intel, and the rest is history.
Although the Venture Capital industry takes most of the credit for the success of Silicon Valley, and the creation of a new generation of unicorn tech companies, corporate venture capital is playing an increasingly important role across the innovation ecosystem, reflecting the significant evolution of corporate venture capital over the years.
Cycles of Corporate Venture Capital
In the beginning, CVC 1.0 was simply Corporate Development. Companies would invest directly in smaller companies – or buy them – as a way of getting access to new products or technologies. These investments tended to be opportunistic, like the Beckman and Fairchild investments, and relatively rare. With the rise of Silicon Valley, however, more and more corporations around the globe felt the need to plug into the flow of new technologies that were becoming increasingly important, particularly in the IT sector. Companies like Microsoft and Cisco implemented strategic corporate development programs to invest in startups that might be relevant to their business.
Sand Hill Road venture capital firms took advantage of this and convinced global corporations, like IBM and GE, plus some large European and Japanese corporations, to invest in their funds, promising to give them a window into emerging strategic technologies. This was CVC 2.0. But many corporate investors were not satisfied with being part of a pool of investors in a venture capital fund. Venture capital is intensely focused on financial returns, and is not particularly interested in compromising financial returns to focus on the strategic interests of corporate limited partners.
So corporations began to set up their own venture capital organizations to tap into the creative energy of Silicon Valley and other innovation hubs. This is CVC 3.0, and it is one of the main sources of new capital for the startup ecosystem in the last ten years. Of course, this brand of corporate venture capital started long ago. The most prominent practitioner of this version of corporate investment is Intel Capital, which was set up as a separate group within Intel back in 1991. Intel Capital became one of the most prolific venture capital investors on the planet, surpassing the traditional venture capital firms. Cisco also became one of the most aggressive corporate investors.
The Intel and Cisco examples, and the rise of the Internet, created a boom in corporate venture capital programs. No longer was Silicon Valley narrowly focused on IT products. With the Internet and e-commerce and new media, Silicon Valley was intruding on almost every business sector. Companies as diverse as NBC, Best Buy, Dow Chemical, Nokia and Panasonic all needed to plug into the high tech startup world. Books like Clayton Christenson’s “The Innovator’s Dilemma” put big companies on notice that startups could actually disrupt them out of business. And the concept of “Open Innovation,” popularized by Professor Henry Chesbrough at Berkeley, suggested that closed internal R&D was not the most productive way to invent the future. Corporations were told they have to look outside their buildings to find the most exciting innovations.
The explosion of corporate venture activity took a variety of forms. Many companies decided that getting involved with startups financially was not enough, and so they set up “Innovation Centers” in Silicon Valley and began recruiting talent to do research on future products, in addition to investing in startup companies. But the enthusiasm of corporate boards for these initiatives has waxed and waned over the years. When the business cycle gets tough, corporations frequently retreat from corporate venture capital, slashing budgets, firing teams and closing innovation centers. This has hurt the reputation of the category. Entrepreneurs are warned not to trust corporate investors. They tend to be fickle, abandoning their investments when annual plans shift priorities.
Corporate Venture Capital 4.0
A new evolution in corporate venture capital offers the best of all worlds. This is “corporate venture capital as a service,” to use the current lexicon. The idea is for an experienced, dedicated venture capital team to manage strategic venture capital investments on behalf of corporate investors. This has been done in a variety of ways over the years. Back in the ‘90s, the investment bank Hambrecht & Quist co-managed investment funds for Johnson & Johnson, Adobe, and Texas Instruments. Atrium Capital has taken a similar approach, managing dedicated funds for its corporate partners. More recently, Pegasus Tech Ventures has taken this model to global scale, managing dedicated funds for over 20 global multinational corporations.
The virtues of the CVC 4.0 are several. For the corporations, the operating cost is much lower. They don’t have to recruit, train and pay a team of venture capital investors. Plus an organization structured as a traditional venture capital firm has much broader and deeper access to startup companies. Few entrepreneurs are interested in hooking their wagons to a single corporate investor. Instead, entrepreneurs want to deal with venture investors who can give them access to a broader base of capital and, ideally, to a broad base of business development opportunities. Many traditional venture firms claim to offer value-add in the form of business development, but their connections tend to be more inconsistent than a firm with active strategic investors focused on finding strategic investment opportunities. For traditional venture firms, bringing a multi-fund co-manager into a deal as a syndicate partner is much more appealing than bringing in a single corporate investor. VCs don’t want their portfolio companies to appear captive to corporate investors, and the CVC 4.0 model provides comfort that a single corporate investor won’t try to bend the startup’s strategy to their needs.
The CVC 4.0 approach promises to stabilize the participation of corporate capital in the venture ecosystem. These funds are much less likely to be abandoned when corporate budgets get tight, because the money comes from the balance sheet not through the income statement. And the external venture teams managing these funds are much more agile than internal corporate venture teams, which tend to be tightly tied to the current needs of the operating divisions.
With the success of large global firms like Pegasus Tech Ventures, more and more similar firms are likely to emerge to take advantage of this model of corporate venture capital as a service. Recently, a team out of Intel Capital has announced such a fund, U First Capital. These funds should benefit the overall ecosystem, bringing more money and business development opportunities to startups, while accelerating innovation within corporations. With more large corporations becoming active investors in the startup ecosystem through firms like Pegasus, the role of corporate capital in high tech innovation should increase, and the pathway to market, and eventually to exit, for entrepreneurs and investors should improve.
Once again, Silicon Valley is generating innovation: Corporate venture capital as a service.
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