The quintessential venture capital (VC) paradigm has been to grow a business from a technology that incubated for a couple of decades in federal, university and corporate labs. There's a lot of R&D investment that has gone into university and federal labs, roughly $100 billion annually. Many of those research projects do have a chance of maturing into consumer markets with the right mix of investment and business direction.
But a New Corporate Venturing Model is nudging things in a new direction. Corporate venturing has begun to write another chapter in the last few years with most of the largest global corporations adopting some type of venturing activity. Many started their programs only in the last couple of years, and it will be very interesting to follow where all this will go. Like other conferences that are designed to bring together the right communities, NCET2 has recently created a new conference series called “Global 1000 Meet | Partner | Deal: Showcase and Conference” to discuss the issues and track some of the corporate venturing trends.
Over the last couple of decades corporate venturing has generally ended badly, but societal benefit comes from making the VC process more efficient, cutting years off the development time and cultivating technologies toward their markets.
Fred Wilson, a critic of the new corporate venturing activity, argues that corporate venture capital structure can become counterproductive if objectives of the entrepreneur and investors are at odds. And witty Sarah Lacy, also a naysayer thinks that:
A 162-year-old company trying to learn from startups is like your grandpa picking up skateboarding from the kids down the street. Best case scenario, it’s going to lead to a broken hip.
Ouch. You can just hear bones breaking. Sarah expects to see a lot of pain.
Still, despite the naysayers, we think this time will be different. Corporate venturing may turn out to be a game changer for the global innovation economy at this point of its evolution. From the corner of the innovation economy littered with startups armed with their federally funded early-stage research, but now cash-starved and facing a very long road before profitably -– the New Corporate Venturing Model is a great new hope.
In an article from Harvard Business Review called “Corporate Venturing,” Josh Lerner found that “the data show that well-managed corporate venture funds can hold their own with independent VC firms, and even outperform them.” While these data are encouraging, we don’t really see the CVC and VC communities competing in the same space. Rather, we see them working, for the most part, in very different parts of the innovation economy, specializing in their own specific niche.
Traditional venture capital is very well suited for companies with 3-7 years before profitably. These companies are well beyond the research stage of innovation and usually passed the development stage too. These companies are most likely in the commercialization, productization and scaling stages. No matter how risky in the eye of investors this is the relatively easy stuff: the low lying fruit in the innovation spectrum. The hard stuff is the research-intensive innovations that can take a decade or two to bring to market, things like nanotech, advanced materials, graphene, genomics, solar, etc.
The new corporate venture model is not an alternative to the VC model as the opponents like to paint it. Rather, it’s an alternative to the old corporate research commercialization model, which has utterly collapsed and failed.
The New Corporate Venturing Model then is not so much about competing with traditional venture capital. Rather it's about 1) cultivating new innovation from entrepreneurial researchers outside of the corporation, and 2) commercializing that R&D in nimble startups managed by commercialization entrepreneurs free from the constraints of corporate bureaucracy.
So how do CVCs complement VCs? As you move closer to the end of the government-funded research lifecycle, there is still a huge gulf before VCs can reasonably pick up and accept the risk. These early stage technologies need very deep pockets that have revenue sources outside an investment portfolio to offset those risks – ah, corporations. This is the competitive advantage for CVCs. When the portfolio company moves closer to the 3-7 years to profitability stage, we would agree with Sarah, Fred and the rest, and put the odds for better performance with the traditional VCs.
Of course, this is just a conceptual framework. It will be interesting to watch over the next decade to see how this all works out. Chances are they will be significant differentiators and pivots. But it will be worth running the experiment with the New Corporate Venturing Model and see where the world ends up.
If you get the chance, join us at the Global 1000 Meet | Partner | Deal conferences and watch the players in action.