GSI Blog

Why Corporates are
engaging with Start-ups?

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The last decade witnessed the creation of Corporate Venture Capital (CVC) divisions by hundreds of companies. The participation of CVCs to the overall Venture Capital (VC) ecosystem is growing and VC is no longer strictly associated with financial companies. In fact, in 2018, the average CVC deal size reached an all-time high of $26.3 million, according to CB Insights. Apparently, CVC has emerged as a relevant source of entrepreneurial capital.

But this prompts 2 questions: How does the nature of CVC as a corporate investment differ from the traditional intermediary VC model and why are established companies focusing on venture capital?

Firstly, it is important to clarify that Corporate Venture Capital (CVC) can be defined as an equity investment by an established corporation in an entrepreneurial venture. According to the article Making Sense of Corporate Venture Capital, the definition of  CVC excludes investments made through an external fund managed by a third party, as well as, investments of more general “corporate venturing”.

The nature of CVCs differs from the traditional VC model as the firm seeks to maximize the value for shareholders on both financial and strategic value, contrary to a pure focus on financial return. It seems the essence of Corporate Venture is more than an investment, instead, it consists in bringing up structural collaborations, partnership arrangements and a fantastic marriage with external ventures – start-ups and scaleup companies – benefiting internal corporate innovation and generating a mutual growth.

And we are already halfway to answering the second question - why do companies invest in entrepreneurial ventures? - Previous studies reported that CVC may perform as an instrument to identify potential substitutes for existing corporate offerings such as novel products, services, or technologies. In light of most surveys results, firms have stated key strategic objectives for investing as follows:

  • "gain a window into new technologies and new markets";
  • "import or enhance innovation within existing business units," and
  • "identify potential acquisition opportunities".

“This is the single best time ever for corporations to invest in early stage start-ups because the cost of starting a start-up is the lowest it has ever been (...) we’re in a key moment in time”. Pierre Rogers, Venture Investor and Founder, PuroTrader

Corporations are partnering with start-ups earlier and earlier, and 2018 mirrored a high-flying growth in Global Corporate Venture Capital. CVC groups participated in $52.95B of funding across 2,740 deals and 264 CVC firms invested for the first-time (Maersk Growth, Porsche Ventures, Coinbase Ventures, to name a few).

Google Ventures (GV) once again took first place as the most active CVC, investing in over 70 companies. Salesforce Ventures was the second most active, followed by Intel Capital. Concerning the most active investors in unicorn companies (companies valued at $1B+), the top 3 was occupied by CapitalG (Google Capital), GV and Dell Technologies Capital.

Internet, mobile and healthcare sectors attracted CVCs investment in 2018, showing an increasing number of deals and funding. Regarding emerging industries, AI, Cybersecurity and Digital Health were the trends of Global Corporate Venture Capital.

All that said, we would like to suggest a moment of reflection on your own company's growth path and how corporate finance and innovation policies are perceived within your area of operation.

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