The corporate venture capital (CVC) market is booming.
Yesterday, The Exchange dug into the data behind the CVC market’s very busy 2021. With corporate venture fund creation rebounding to near record levels and the value of deals that CVCs participated in soaring, we wanted to look more deeply into why companies are building their own investing arms.
To learn more, we put questions to Arjun Kapur, a managing director at Comcast’s Forecast Labs; Andrés Saborido, a global director at Telefónica’s Wayra; and Serge Tanjga, a finance exec at MongoDB, a company that recently put together its own venture capital arm.
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After parsing the data, it’s clear that CVCs are busy and increasingly common. But that’s just data. We wanted to learn more: How do active CVC investors view what their investment type is for? Which companies are the best candidates for creating their own venture team? How are today’s corporate investors approaching their remit — are CVCs still blending strategic and financial goals as they have in the past, or is the ratio changing?
A key startup narrative in the last few years has been the rising tide of funds aimed at high-growth private companies. But it’s not a pure venture capital story. Crossover funds are busy in the same space, investing earlier and earlier as time passes. CVCs are also in the mix, helping boost round sizes and, perhaps, lining up later M&A and generally providing a tailwind to all the data we’ve seen concerning rising venture totals around the world.
What’s the modern CVC for?
Our perspective heading into our dig into the CVC market was that the pace of technological advancement is increasing, leading to shorter cycles between what we might call product and business-model innovation. Given that, it makes general sense that more corporations are building venture arms. Not because cash-rich companies are in need of balance-sheet enhancement, but because they need more protection than ever from creative destruction; the faster the current way of working and living is torn up, the more that incumbent firms need to have an early-warning system for change that could upset their extant cash flows.
But does our perspective line up with what active corporate investors think? Our collected CVC players stressed the importance of financial returns, arguing that they fit neatly into strategic goals, more closely linking profits to potential strategic returns than we might have anticipated in today’s era of corporate wealth.
Kapur was clear on the point, writing that “unless your investments are philanthropic in nature, there isn’t much distinction between strategic and financial goals of being a CVC.” Why is that the case? In his view, intelligent “strategic investments are also good long-term financial investments” for corporate investors, and it’s uncommon for “an investment that is not financially prudent to be strategically prudent.”
More simply, if you put your money to work in the areas where your company has concerns or optimism – defense and offense, respectively – and you have the right perspective, you should get the strategic benefits while also collecting a worthwhile internal rate of return.