Corporate venture: friend or foe?

In the 14 years since the dotcom bubble burst, European VC fundraising has declined steadily. In 2000, the continent's venture funds raised more than €34bn, according to unquote" data, before dropping drastically to around €2.4bn in 2004. Though there was a brief recovery to €8.3bn the following year, there followed another more gradual decline to €3.5bn in 2011. Fortunately, last year's new venture funds fared better, raising a total of €5.8bn. However, this was still tens of billions below the levels seen at the peak of the market.

Against this backdrop of struggling VC funds, corporate venturing is picking up. Google recently revealed it has set aside $30bn for non-US acquisitions. Having bought Israeli map software producer Waze for €704m last year, it is likely that a sizable amount of this cash will be directed towards European targets.

Furthermore, it appears there is increasing appetite from entrepreneurs for corporate players. In a recent survey by Silicon Valley Bank (SVB), 10% of UK start-up executives interviewed stated they expect to receive corporate venturing investment in 2014, up from 6% the year before. Indeed, PwC last month appointed a dedicated corporate venture specialist, former Unilever Ventures director Mark Muth, to its corporate finance team. With these traditional VC and corporate venture funds investing in the same market place, it is reasonable to ask whether the rise of the latter could be a threat to the former.

Uptick in corporate venture could be taking assets away from traditional VCs

Gerald Brady, head of UK relationship banking at Silicon Valley Bank, believes that the two need not be viewed independently as competing forces. He suggests the recent increase in corporate players' activity will instead "complement and enhance" traditional VC funding. Brady points to the strategic value that corporate venture arms can offer the businesses they invest in, including access to new markets or the potential to ultimately become an acquirer. He adds: "For a number of VCs, corporates can act as a customer and validate the market opportunity for the technology."

Brady also highlights corporate players' increasing activity in "areas that traditional VCs have pulled back from, perhaps because of the capital intensive nature of the industry." He explains that "life sciences companies, hardware businesses or the energy and resources sectors are all capital intensive industries. You're looking at investments north of $50m. That's where the deep pockets of the corporates, the strategic connections and the value they bring definitely matter."

Importance of independence
Scottish Equity Partners (SEP) managing partner Calum Paterson agrees that rather than being a threat to traditional VCs, corporate venturing is "part of the broader market and ecosystem". But while he acknowledges the benefits of corporate backing for certain companies, he also points to other factors that often accompany such investment: "What traditional venture capital investors bring to the table is not only market knowledge but also independence and freedom from bias. One danger potentially with corporate venture investors is that investment may come with more strings attached."

While corporate VCs may invest for a combination of strategic and commercial reasons, Paterson argues traditional players' involvement is purely motivated by the desire to generate returns for their investors. In contrast to the views of SVB's Brady, he adds that corporate backing can actually narrow companies' opportunities for developing trading relationships and exit opportunities: "We've certainly co-invested alongside corporate venture investors in the past. We've always tried to ensure that when doing so they are not able to impose any restrictions on the progression of the company in terms of customers, suppliers and potential exit routes."

Corporate venture funding will arguably become more important in Europe, says SVB's Brady. He cites the Japanese venture capital industry, where around 90% of investment is driven by corporates. Brady points to the relatively low number of European VC firms and the region's many potential corporate players. The increasing prominence of corporate venturing activity is not surprising to SEP's Paterson, though he says their challenge will be to "invest the cash wisely" – a task, he says, they have not always met.

However, there are differences between many new corporate investors and those that left the picture following the dotcom bubble, says Intel Capital's managing director and vice president Marcos Battisti. He acknowledges the continued existence of some corporate players that invest to "complement their strategic assets" and agrees this can have negative effects. However, Battisti also says: "We are seeing more and more professionally managed teams that come from an investment background and are looking to make a financial return. These players affect the ecosystem in a positive way because they provide more funding for mid- to late-stage VC rounds where there's definitely been a problem."

People power
More crucial than the origin of capital – be it corporate or otherwise – are the people involved in funding rounds, according to Battisti. Investors, he says, must have four key attributes: the backing of a healthy and sustainable fund; a willingness to challenge and contribute to the board during the decision-making process; the courage to hold management to account; and the ability to make key introductions that will help a business expand. "If, in addition, they can tap into the contacts of their own corporate parent companies and make introductions via them also, that is incredibly healthy because it comes with a lot of power," he says.

As Battisti points out, regardless of the motivations behind each type of investor, what really matters in the venture market is people. Indeed, Octopus notably backed Lovefilm then supported the same founder, Alex Chesterman, in setting up property website Zoopla – a prime example of the importance of people at every level from entrepreneur, to backer, to institutional investor. This is the heart of venture.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• UK / Ireland
• France
• Benelux
• Nordics
• DACH
• CEE
• Southern Europe
• Venture
• Early-stage
• Scottish Equity Partners
• Silicon Valley Bank (SVB)
• Intel Capital
• Top story
• Octopus Investments