The business venture capital market (CVC) is booming.
Yesterday, The Exchange delved into the data behind the CVC market’s very busy 2021. With corporate venture fund creation returning to near-record levels and the value of deals in which CVCs have participated soaring, we wanted to explore more deeply why companies are investing their own weapons.
For more information, we ask questions to: Arjun Kapuraa director at Comcast’s Forecast Labs; Andres Saborido, a global director at Wayra of Telefónica; and Serge Tanjga, a finance director at MongoDB, a company that recently launched its own venture capital arm.
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After parsing the data, it is clear that CVCs are crowded and increasingly common. But that’s just data. We wanted to know more: how do active CVC investors see what their investment type is for? Which companies are the best candidates for creating their own venture team? How do today’s corporate investors approach their task – are CVCs still combining strategic and financial goals as in the past, or is the ratio changing?
An important startup story in recent years has been the surging flow of funds targeting high-growth private companies. But it is not a pure venture capital story. Crossover funds are in the same space, investing earlier and earlier as time goes on. There are also CVCs in the mix, helping to increase the size of rounds and, perhaps, line up M&A later and generally give a tailwind to all the data we’ve seen regarding rising company totals around the world.
What is the modern CVC for?
Our perspective on our search for the CVC market was that the pace of technological advancement is accelerating, leading to shorter cycles between what we might call product and business model innovation. Given that in general it makes sense for more companies to build venture weapons. Not because cash-rich companies need balance sheet improvement, but because they need protection from creative destruction more than ever; the faster the current way of working and living is being torn apart, the more incumbents need an early warning system for changes that could disrupt their existing cash flows.
But does our perspective match what active corporate investors think? Our assembled CVC players emphasized the importance of financial returns, arguing that they fit neatly into strategic goals, linking profits to potential strategic returns more closely than we might have expected in today’s era of corporate wealth.
Kapur was clearly on the point, writing that “unless your investments are philanthropic in nature, there isn’t much of a distinction between being a CVC’s strategic and financial goals.” Why is that the case? In his view, intelligent “strategic investments are also good long-term financial investments” for business investors, and it is unusual for “an investment that does not make financial sense to make strategic sense”.
In simpler terms, if you put your money to work in the areas where your company is concerned or optimistic — defense and attack, respectively — and you have the right perspective, you should reap the strategic benefits while generating valuable internal returns. .