Corporates make dramatic move into venture capital

Investment by corporate venture capital arms has more than tripled in the last five years.

In 2017, they invested more than $30 billion, up from $25 billion in 2016, according to data provider CB Insights. Before 2014, the amount invested per year always stood below $10 billion.

The sector has historically been seen as focusing on making a quick buck, rather than finding emerging technologies. The exception was traditional tech companies such as Intel, which has had a VC arm since the early 1990s.

But over the last decade the focus has evolved. The big tech corporations are still the biggest, but companies in other areas such as food, retail and entertainment launching venture capital arms, says Joe Marks, a managing director at Capital Dynamics in San Francisco.

Bryan Pearce, a global entrepreneurship and start-up leader at EY, agrees: “The real driver this time around is getting external innovation. In the last couple of cycles, some were doing it for that reason, but many were doing it because they thought it was a nice get-rich-quick scheme from a financial return on investment perspective.”

There is still a heavy concentration of tech firms in the top 10 or 20 corporate VC investors, but the growth has come from corporations that were not traditionally focused on technology.

From Sesame Workshop, which produces educational children’s TV series Sesame Street, to meat and protein company Tyson Foods, it’s hard to find a company that hasn’t set up a venture arm in the past few years.

Since the start of 2018, confectionery and pet food maker Mars has started a $100 million fund focused solely on backing pet care products, tech and services, while the world’s largest automaker Renault-Nissan-Mitsubishi has launched a $1 billion fund.

“What we are seeing is that because of the industry convergence that’s happening — technology and business models that are found in the tech world are now coming to all industries — you see a variety of other businesses that are not traditional tech firms that are trying to access that,” Pearce says.

Change in perception

Mainstream venture capitalists are beginning to realise the benefits corporates provide. Since they often take minority investments, corporate VCs had been seen as only supplying money.

Corporate VCs are now much more hands on – although still not taking seats on boards. They can become a start-up’s first customer and help with the commercialisation of a product, which benefits regular VCs.

While Marks sees corporate VC investing as cyclical, reaching a high at the top of the economic cycle, Pearce sees a structural change as an increasingly broad pool of corporations sees the benefits of launching investment arms.

“I don’t think innovation is going to go away anytime soon, that’s why I think it’s important to look at the drivers of this,” Pearce says. “I don’t see any change in the fundamental drivers. Most companies have just scratched the surface on how to use those. The trend is not going away anytime soon.”