Corporate Venture Capital: Avoid the Risk, Miss the Rewards

Corporate Venture Capital: Avoid the Risk, Miss the Rewards

Title image

Corporate Venture Capital: Avoid the Risk, Miss the Rewards

  • Add To Interests
  • PDF

  • Related Articles
    Corporate Venturing Is Expanding and Evolving

    A distinguishing feature of the current wave of corporate venturing is that industries such as consumer and construction that for the most part did not engage in CVC activity in earlier decades are entering the arena. Industries with a tradition of venture investing—led by technology, pharmaceutical, telecommunications, and media and publishing—remain the most heavily committed. (See Exhibit 2.) In three of those four industries, most of the top 30 companies (as measured by market capitalization) have venture units in place. Industries that sat out the three previous waves are also positioning themselves in the market, although the absolute numbers of participants are fewer, having started from a lower base. For a deeper analysis, we created two distinct industry groups, on the basis of their historical involvement in CVC, and selected representative industries to examine closely. The first group—comprising technology, pharmaceutical, telecommunications, and media and publishing—represents industries with a long history of corporate venturing. They can be called “CVC first movers.” For comparison, we selected a second group of industries whose CVC activity historically has been much lower but whose involvement has increased significantly over the past ten years. This “CVC follower” group is made up of machinery, power and gas production, consumer, and construction.

    Traditional Players Use Venturing to Complement R&D

    Within traditional industries, the percentage of the 30 largest companies with dedicated CVC units has been climbing steadily since at least 2007. In three of four industries (technology, pharmaceutical, and telecommunications) more than half of the 30 largest companies have CVC units in place—a sign of the growing recognition of CVC’s value as a tool for innovation, corporate development, and competitive advantage.

    Several CVC managers in these industries have reported to us that they regard venturing as an indispensable tool for innovation and development, and, indeed, R&D spending trends in technology and pharmaceuticals reflect that view. Among the 30 largest companies in both industries, internal R&D spending (as a percentage of sales) fell slightly from 2007 through 2011. In technology, R&D spending dropped from about 11.5 percent of sales to roughly 11 percent, and in the pharmaceutical industry, R&D spending fell from about 16.5 percent of sales to approximately 15 percent. Over the same period, CVC penetration in both industries rose, reflecting a growing recognition that venturing is a necessary complement to internal R&D—so necessary, in fact, that companies are beginning to transfer a share of their innovation investment from R&D to their venture units.

    Meet the Newcomers

    The machinery, power-and-gas-production, consumer, and construction industries have been among those that traditionally have not relied on pure innovation to drive growth. In recent years, however, they, like many other industries, have come under growing pressure to innovate in response to demands for cleaner technology, more sustainable operations, and an improved user experience. As a result, they are looking past internal R&D toward other innovation channels; for a growing number, CVC investing is an important additional source of innovation.

    Starting from a very low level, CVC concentration in all four industries increased markedly from 2007 to 2012, although for these industries it remains far below the levels of concentration found in industries with an established history of venture activity. Plainly, facing the unfamiliar pressure to innovate, companies in these industries are taking a familiar route: venture capital.

    Investment Money Is Flowing to New Targets

    As CVC expands beyond its traditional participant strongholds, the investment focus is widening as well. With the notable exceptions of health care and clean technology, which are focusing investment within their own sectors, corporate investors are looking beyond their core businesses toward other sectors. Many are concentrating on clean technology, an “industry overarching” technology that has the potential to disrupt industries ranging from power generation to building materials to transportation. To identify investment patterns, we compared each CVC unit’s industry with the industry of the investment target and totaled the number of transactions per investor and target industry. (See Exhibit 3.)


    Although the focus varies widely by industry, players in many industries are making significant investments in adjacent sectors. Industrial companies, for example, spread their investments widely but maintained a focus on related sectors; they made their investments mostly in clean technology (the target of more than half of industrial CVC investment), IT, health care, and transportation. CVC investors from service industries, for their part, focused much of their investment on targets in the consumer, media, and IT sectors. CVC units in the chemical industry, meanwhile, diversified away from the core toward targets in the clean technology, health care, and industrial sectors, where they are, for example, seeking to exploit the potential for biochemical processes to supplant petrochemical ones. Overall, the most popular investment targets, measured by total number of transactions, were in IT, health care, media and publishing, and clean technology.

    As noted, however, there were a few exceptions from the general trend toward diversification into adjacent industries. Health care companies, for example, poured fully 96 percent of their investments into health care ventures, a focus explained by the rapid pace of change in the industry, spurred by new legislation and strong pressure from payers and national governments to control costs, capture efficiencies, and improve patient outcomes.

    In addition to seeking opportunities outside their industry, corporate investors are deploying their capital outside the U.S. The data reveal that although the geographical target of investment focus varies widely by industry, corporate investors in most industries are, in one fashion or another, directing much of their capital toward emerging markets such as China and India. At the same time, they are de-emphasizing the U.S. and Europe, which historically have attracted the largest share of CVC investment.

    The consumer and IT industries exemplify the shift of investment toward emerging markets, in terms of both the number of deals done and the amounts invested. In the first half of 2012, the dollar value of consumer industry investments in China, for example, was up 18 percentage points, to 63 percent, from the second half of 2010, while U.S.-focused investments shrank by 14 percentage points, to 20 percent. At the same time, the consumer industry’s number of outbound deals to China jumped sharply, while the number of U.S.-focused CVC deals fell by nearly one-third. IT companies are now steering their emerging-market investments primarily toward Israel.

    CVC Investors Are Getting In on the Ground Floor

    CVC units are entering deals at ever-earlier stages of the funding cycle. The number of transactions executed during the earliest funding rounds (seed and Series A) increased sharply, with Series A deals nearly doubling, from July 2010 through June 2012.

    Two trends appear to be driving the move toward earlier-stage deals. The first is the growing sophistication of corporate investors. As they hone their skills at investment screening, due diligence, and risk assessment, they are growing comfortable with funding younger start-ups, whose prospects are uncertain. The second is that companies in industries that live or die by innovation, such as telecommunications and pharmaceutical, are increasingly eager to capture new ideas and thus are willing to shoulder the risk of investing in the dwindling number of start-ups in their sectors.

    Dense Investment Networks Are Taking Shape

    CVC investors are increasingly willing to co-invest with other companies in sectors, such as clean technology, that promise to bring disruptive change to a broad span of industries. (See Exhibit 4.) Companies from many of those industries are banding together to fund promising start-ups, bringing different skills and areas of expertise to bear on targets of common interest. Such cooperation, however, rarely occurs among companies within the same sector. Rather, CVC investors form networks across industry boundaries, partnering with other companies whose plans for development and commercialization of their targets’ innovations complement their own. The proliferation of such networks suggests that CVC units are consciously and intentionally investing alongside companies from other industries that they believe can contribute specialized knowledge or industry-specific expertise to their common ventures. Their preferred investment targets, moreover, are those developing technologies with the potential to transform not just a single industry but a wider business landscape.


    Clean technology has attracted a large share of CVC investment—a total of $1.9 billion—from ten sectors ranging from industrial to service. Not surprisingly, CVC units in the industrial and energy sectors committed the largest share of funds to the largest number of clean-technology-focused deals. But they were hardly the only industries represented in clean-technology investing: IT, financial, telecom, and chemical companies also participated in a significant number of deals, as did other clean-technology companies.

    By far the most active CVC player in clean technology was GE, a status that reflects both the company’s long experience in corporate venturing and its strategic commitment to clean technology in all its operations. GE was also the most active participant in cross-industry networks, partnering with 14 corporate investors, eight of them representing five other industries. For example, on the basis of our data sample, GE was connected with Google through the two companies’ investments in CoolPlanetBioFuels, and with Chevron through common investments in Ember. At the same time, it crossed paths with Intel, its co-investor in Viridity. Meanwhile, Siemens linked with ArcelorMittal through investments in Powerit Solutions, and with Applied Materials through investments in Semprius, an Applied Materials venture investment since 2007.

    CVC Investors Are Making Long-Term Commitments

    The lengthening life spans of CVC units may be the most compelling evidence that venture investing is finding a permanent place in the corporate-development arsenal and has become a must-have innovation tool in many industries. Average lifetimes of corporate venture units are increasing across the board, in industries with a long history of venture activity as well as industries that are relative newcomers to the game. For example, the length of time that CVC units in the pharmaceutical industry have been in continuous existence increased by 50 percent since 2002. The life span of venture units in technology, meanwhile, lengthened by nearly six years from 2002 to 2012.

    Venture units in newcomer industries are also staying in business longer. The average lifetime of CVC units in the machinery industry, for example, has stretched from 3.3 years in 2002 to 10.5 years in 2012. The life spans of consumer industry CVC units, meanwhile, have lengthened to 4.9 years in 2012 from 1.5 in 2002 on average. The same pattern was evident in the power-and-gas-production industry and the construction industry, although average unit lifetimes are still shorter than those in traditional industries.

    The lengthening lifetimes of CVC units are just one indication that corporations have committed more fully and firmly to corporate venturing than ever before. No longer an exotic sideline indulged in by a handful of well-heeled giants in clearly circumscribed industries, it is, we believe, well on its way to becoming a mainstream innovation and corporate-development activity, alongside R&D, M&A, and joint venturing.