Inside the Rise of Corporate VC

It's interesting to see the investor dynamic in technology shift given the overall slowdown in venture capital funding right now. And some of these changes might stick around.

For a long time, the story around innovation has been focused on the small, nimble startups that are able to take the big swings that the Fortune 500 can't. Then, when the time is right, those big players swoop in and acquire the innovations that they can't develop internally.

That was the story of Microsoft and Apple in the early days, and companies like Google and Nvidia later on (though all went public rather than be acquired).

But, with traditional VC going cold (for now), will this turn into an opportunity for corporate venture capital (CVC) to take a greater role in the innovation ecosystem given their deeper pockets? And, if that happens, what's left for the rest of VC?

Looks like it’s already starting…

Even omitting Microsoft’s massive “bet the company” $10B stake in OpenAI, this year has been one of the biggest for corporate investors in a long time. Per?Crunchbase, roughly a quarter?of U.S. rounds of $100 million and up this year listed a corporate investor??as lead or co-lead backer.

London Business School professor Gary Dushnitsky called this back in January, saying that “2023 will be the year in which CVC thrives” in an interview with?Tech.eu. “The number and value of CVC deals will rise ahead of those seen in VC generally. In fact, given the nature and scope of CV scouting and their ability to spot innovation trends early, corporate venture may be the key driver of which sectors emerge over the coming year. And thus will influence VC trends, rather than the other way round.”

The reason for this is obvious: Traditional venture investors are continuing to scale back their activity. Global VC funding reached $21 billion USD in April 2023, down a whopping 56% from this time last year when $47.8 billion had been raised. This is the second-lowest monthly total since July 2022.

Where is all this money going? For CVC, it’s the same as it ever was.

Corporations invest in startups and early-stage companies for a lot of reasons, and those reasons haven’t really changed over the years…?

• Strategic Alignment:?CVC investments often align with the core business or strategic objectives of the parent company. They may invest in startups that offer products, technologies, or services that complement or enhance their existing operations. For example, a technology company may invest in startups developing cutting-edge software or hardware solutions.
• Emerging Technologies:?CVC frequently targets investments in startups working on emerging technologies that have the potential to disrupt industries or create new markets. This can include areas such as artificial intelligence, blockchain, virtual reality, augmented reality, robotics, and Internet of Things.
• Industry-Specific Innovation:?CVCs may invest in startups that are innovating within specific industries. This could include sectors like healthcare, biotechnology, clean energy, fintech, transportation, logistics, retail, and telecommunications. The investments aim to gain insights into industry trends, access new markets, or support research and development efforts.
• Market Expansion:?Some CVCs invest in startups that provide access to new markets or geographies. This helps the parent company expand its reach and diversify its operations. It can involve investments in companies operating in different regions or those with expertise in penetrating untapped markets.
• Strategic Partnerships:?Corporate venture capital often seeks opportunities for strategic partnerships with startups. The investments provide not only financial returns but also the potential for collaboration, joint product development, distribution agreements, or access to new customers.
• Talent Acquisition:?CVCs may invest in startups to access innovation and entrepreneurial talent. These investments can serve as a way to keep tabs on emerging trends, attract top talent, or acquire technology or intellectual property developed by the startup.

The twist this time around is that CVC has the potentially to radically transform how innovation is funded and how startups and enterprises work together. Over time, we could see greater alignment between founders and their corporate investors, “enterprise ready” products being developed earlier in the cycle, and even larger exits as startups become more and more closely aligned with their eventual buyers from day one. We can also expect to see truly disruptive technology like AI make faster inroads into the enterprise market as a result.

Time will tell.

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