Corporate venture capital is a win-win
Savvy corporations realize they need innovation, and relationships with startups are the most efficient way of bringing fresh entrepreneurial spirit into ageing behemoths. It can be the making of a small company
CORPORATIONS ARE INVESTING more in venture capital than ever before. Startup funding backed by corporate venture capital — CVC — hit an all-time high of $73.1 billion in 2020, soaring 24 percent from the previous year, according to the CB Insights Global CVC Report.
The influence of corporate venture capital is also growing relative to other funding sources. CVC participation in venture-backed deals rose to 24 percent of the total, up from 20 percent in 2017.
The relationship between large corporations and startups is complicated.
In the world of the internet, startups whose only product is software can bypass the need for partnerships.
Companies like Facebook and Twitter were able to launch their service directly onto the web where it could be shared and grow exponentially without the need for physical manufacturing, stock, distribution or sales. These social media platforms then enabled other startups to take root and thrive, spreading their virtual wares organically throughout the planet. Companies like Zoom and Lemonade needed no help from bigger brothers to develop or monetize their product. They just needed to hone their offering so that consumers would love it, perfect their technology so the platform wouldn’t crash beneath a flood of users, and raise a ton of money so they could execute and scale.
However, startups with physical products like drugs or semiconductors can only get so far on code and small-scale R&D. BioNTech could create a vaccine against Covid-19, but it could not large-scale test, mass manufacture, distribute or market it effectively without the resources and experience of Pfizer. Startups like Hailo, Arbe, Foretellix and Innoviz can create cutting-edge chips, safety systems, testing verification and LiDar for the automotive industry, but they cannot scale without major car or other manufacturers as customers and often as strategic partners.
Some software-only startups may also prefer to partner instead of going it alone. Tel Aviv startup Anobit might have been able to market its revolutionary flash memory storage technology, but it made more sense to the founders and shareholders to be acquired by Apple for $400 million and become the core of the tech giant’s first R&D center outside the US.
Before the web evolved, software companies had more chance of growth by winning major corporate customers rather than trying to market their wares to consumers. The idea of a Firewall might never have entered everyday use if a group of ex-Israeli military intelligence whizzkids had not signed an OEM agreement with Sun Microsystems in 1994 and a distribution agreement with HP the following year, catapulting Check Point into the forefront of global cybersecurity.
Large businesses have always bought products from smaller companies, but the creation of strategic relationships used to be the reserve of a handful of corporations. By 2012, according to CB Insights, there were less than 100 active corporate VC investors, including Intel Capital, Cisco Investments and Motorola Solutions — all founded in the 1990s. By 2019, there were 984 active CVC firms. Equinox Ventures, Goodyear Ventures and Snowflake Ventures all made their first investment in 2020.
Corporate investors give startups more than just cash. For a small supplier of advanced vehicle technology, a strategic investment by a large automaker can provide access to huge markets and industrial and business expertise that might take years to develop while a competitor overtakes. Corporate investments, in theory, should have a long-term strategic value for the investor and can often lead to an acquisition.
But the relationship is complicated. Often, the startup is disrupting the larger partner and its business. Tech giants have occasionally even been accused of acquiring promising young companies in order to remove them from the market and stifle competition, though I have not seen much evidence.
But the savviest corporations realize they need innovation, and relationships with startups are the most efficient way of bringing fresh entrepreneurial spirit into ageing behemoths. Hidebound companies are hiring Chief Innovation Officers in unprecedented numbers, bringing innovation directly to the boardroom.
Through investing in entrepreneurs and their ideas, corporations can move quickly forward into areas of disruptive technology and hang out with the next generation of talent, according to Zack Weisfeld, Vice President of Intel Ignite: Intel for Startups, an accelerator now welcoming its fourth oversubscribed cohort.
“Intel employees engaging with the startups in Ignite are challenged to work more nimbly and creatively, and they gain perspective on how other companies and entrepreneurs operate, producing fast results and significant business outcomes,” says Weisfeld, who previously ran startup engagement teams for Microsoft in 110 countries and created Microsoft’s first accelerator.
“Corporate innovation is dead,” Weisfeld told MIT Technology Review in 2019. “There is more innovation happening outside than inside.” Everyone, he said, needs “skunk works” — offsite, visionary innovation teams of the kind initiated by Lockheed Martin in the 1930s and now practiced by businesses like Alphabet’s X. “The organizations that are smart enough to understand they have to have that kind of magic are doing wonders.”
But startups can get lost in large corporations. There is often a culture clash between corporate bureaucracy and go-getting entrepreneurs. Corporations can suck up enormous amounts of attention from small companies, which sometimes die because they focus on making a big corporation happy instead of selling broadly, missing their market opportunity. Or a startup can lose its champion inside a vast multinational and suddenly finds it has no address or resources.
Weisfeld says the benefits outweigh the negatives.
“Large corporations have made such significant progress working with startups that they have become, in the most successful cases, an integral player in the local high-tech ecosystem and a valuable partner to the entrepreneurs building new technologies,” he says.
Most effective
A corporate M&A is also the most effective and common startup exit. With all the excitement about SPACs and IPOs, M&A is still the primary route to liquidity in venture capital, and that very often starts with an investment or a proof of concept.
Like any relationship, nurturing the connection between two unequal partners can be a delicate process. Most startups need some degree of critical mass before they can partner with a big corporation. Large companies are not usually looking for seed or early-stage companies — it is rare that they can work with such tiny operations.
But the long-term value can be the making of a small company.
In 2019, Stifel invested $25 million in OurCrowd, as reported at the time. It has been a significant win-win. For us, it has been transformational. Stifel is involved on our advisory board, they are distributing our products, they are providing investment banking advice for us and our companies, and we are breaking new ground together in terms of democratizing investment, creating a model that we hope to replicate in many parts of the world with other distributors, including Orix in Japan, who last year invested $60 million in OurCrowd.
We have 1,000 corporations signed up to the OurCrowd platform alongside our individual investors. When Laly David and her business development team introduce companies in our portfolio to major players, they do not just hand over a name and wish them good luck. The best relationships and introductions occur when, like Laly and her colleagues, you have a deep understanding of the corporate partner and can provide know-how and advice on how to structure the conversation. The corporations will typically look to strategically acquire or invest in startups and commercialize their technology by becoming their customers, channel partners or distributors.
Corporations now understand how important innovation is and that it does not happen in a vacuum — a lone entrepreneur against the world using the internet to reach millions of disintermediated customers. As VC moves back into deep tech — semiconductors, quantum, AI — the significance of the relationships between startups and corporates will continue to increase, to the benefit of both.
