One of the most visible impacts of the financial turmoil of recent years has been the lack of available capital, especially for early-stage companies looking to expand.
This is partly because many venture capital funds are fully invested and need to engineer some exits before they can raise more money, says Simon Walker, UK head of venture capital at international law firm Taylor Wessing.
Because of the turbulent market conditions over the past few years, both the exits and raising new money are more difficult to achieve.
In addition, says Brian Henderson, a director in PwC’s London Assurance practice, VC funds are more risk-averse and are therefore not pursuing the same types of deals as in the past. “VC funds used to take stakes in early-stage, unproven companies. Now they only want to invest in companies with proven business models,” he says.
However, there is one group of investors with plenty of money that is becoming increasingly prominent. Corporate venture firms, funded by large businesses in sectors ranging from telecommunications to consumer goods to engineering, are helping to fill the gap left by the retreat of private investors.
Corporate venturing is not a new idea. It has been around for decades and its prominence ebbs and flows. Last year, corporate venturing groups represented $1.9bn, or 9 per cent, of total venture capital investment in the US, according to data collected on behalf of the National Venture Capital Association.
Andrew Ley, a partner at law firm HBJ Gateley, says there have been three key periods of enthusiasm – the late 1960s, the late 1980s and the late 1990s. This last period coincided with the internet boom and consequent bust, and “a lot of people got their fingers burnt”.
The problem back then, says Mr Walker, was that companies came late to the dotcom boom and thought venture investing was a way of making easy money. The rationale has moved on since then, and the sector has become more strategic in its focus. “We have seen a significant increase in corporate venturing activity because companies are seeing opportunities that were not available in the past because competition from traditional investors pushed valuations out of reach,” he adds.
“However, for the corporates, these investments are not just about financial returns. It is about being at the table and being aware of the best technology that is being developed out there.”
Such investments can act as a proxy R&D function, allow companies to exploit new markets or open new supply channels.
Netherlands-based Yellow and Blue was set up by Dutch utility Nuon, itself owned by Sweden’s Vattenfall, “because it wanted to have independent access to new technologies”, says chief executive Albert Fischer.
The company had made a number of direct investments, but decided this was a field that needed specialist expertise at arms length from the company.
For utilities, the main issue they face is the need to be carbon-neutral by 2050. However, says Mr Fischer, “there is an enormous lack of technology and the only way to accelerate its development is through innovation”. Yellow and Blue is focused on technologies and companies that will help the whole industry, he adds.
“The utilities sector has a very low appetite for risk and no one wants to be the only customer for a new technology. We can test an idea or a concept to see if it attracts other players in the industry,” Mr Fischer says.
However, he adds: “We are not the business development arm of Nuon. We do things that they are not doing but my brief is to create a financial return.”
Marcos Battisti, managing director western Europe and Israel at Intel Capital, one of the most successful corporate venture groups, agrees. “If we were losing money, we would not be around. Obviously, we have to be relevant to Intel, but we are not going to invest in something that will not make a return. This has been a problem for many corporate investors – not a lot of them have that spirit.”
For Intel Capital, which recently announced it had invested more than $10bn since its creation in 1991, being relevant means investing in “ecosystems building”.
“About 10 years ago, we were focused on helping the development of broadband because that increases the need for computing power,” Mr Battisti adds.
“Now we are looking at the smartphone ecosystem.”
For the target of the corporate venturers’ investment, their input has many benefits beyond the financial.
For an early-stage company, the expertise, contacts and mentoring that flows from a large corporation can be invaluable. “Some companies have said that our involvement has saved them two to three years’ work,” says Mr Battisti.
However, warns Mr Ley, “you have to be clear about who you are partnering with and what their aims are”.
Traditionally, corporate venturing has been closely linked to the business cycle so when times are tough, companies tend to retreat from the market, he adds. However, the advent of open innovation platforms suggests corporate investors may remain a prominent part of the investment scene for the foreseeable future, says Mr Ley.
“Previously, companies were very protective of their intellectual property and did everything in-house, but now companies such as Philips, P&G and Daimler Chrysler are using open innovation incubators and venture investing to further their core aims.”
