The first wave of CVC investing took shape in the mid-1960s, when corporations entered the venturing game with the primary aim of generating above-average financial returns. (See Exhibit 1.) It was a period of rapid technological advancement, robust corporate profits, a soaring stock market, and widespread management faith in the strategic value of diversification. Mindful of the successes of pioneering venture capitalists and eager to put some of their ample free cash to work, U.S. corporations in technology- and innovation-intensive industries such as technology and pharmaceutical invested in promising new ventures. Many met with at least modest success, but corporations lost their taste for the game in 1973, when the market for initial public offerings, then the primary exit mechanism, collapsed. In the face of wilting share prices and waning profits, most corporations shuttered their VC units, regarding them as a luxury they could no longer afford.
CVC as a broad theme lay dormant until the early 1980s, when a new generation of independent venture capitalists emerged, their coffers bulging with cash from U.S. investors taking advantage of a cut in the capital gains tax and the relaxation of restrictions on pension fund investments. Seeking to match the financial returns achieved by the independent investors, corporations returned to the field. Once again, the most active players were companies in the technology and pharmaceutical industries. For several years, these corporations were buoyed by stock market enthusiasm for anything technology related, but that enthusiasm faded after the stock market crash of 1987. And just as in the early 1970s, CVC went into retreat.
The advent of the Internet in the mid-1990s heralded the beginning of the third CVC cycle. Amid a strong market for stocks, especially dot-com issues, and hungry for above-market returns, corporations returned in force to the game, with more than 400 of them worldwide launching VC programs. In addition to seeking financial returns, many were pursuing disruptive technologies. For the first time, corporations based in Europe and emerging nations entered the market in force. CVC activity reached a high point in 2000, when corporate equity investments in new ventures soared to more than $4.5 billion, according to GCV. The dot-com implosion in 2000 and 2001 and the recession of 2001 and 2002 spelled the end of that cycle, however. In a newly risk-averse business environment and amid high uncertainty over new accounting and governance regulations, corporations wound down their VC operations.
Now that innovation-hungry corporations are flocking to venture investing again, it may appear at first sight that another boom-and-bust cycle is forming. But the extensive evidence we have analyzed indicates that, in fact, history is not repeating itself. (See “The Numbers Behind the Numbers,” below.) Rather, CVC, once an experiment, has entered a new, more mature phase. Companies across the business landscape have embraced venturing. They are reallocating resources from internal R&D toward external innovation and committing those resources for the long term. In many cases, they are looking past the boundaries of their own industries toward adjacent and downstream industries, and they are banding together with companies from other industries to fund promising new ideas. However its growth is measured, corporate venturing is becoming more strategically sophisticated as it spreads to new industries.