Net results: What do venture capital units offer the start-up?

Investment into technology startups from corporate venture capital (CVCs) continues in a steady rise, as more established companies create venture arms.

CVC units are special divisions within companies such as Cisco, Google and Intel – but also, non-tech sector companies in varied sectors, such as General Mills and NBC Sports – that invest into young companies, providing an alternative funding source.

Why do they invest? Reasons are varied, but perhaps the most frequently cited is that they provide a fast way into understanding or expanding into a promising sector or application of technology, compared to setting up a dedicated in-house R&D project from scratch. And of course, they can provide investment returns – or losses – to the CVC parent company.

CVCs have been around for a while, and haven’t always had a great reputation, in particular during the dotcom era, when many rushed in to make hallucinatory mega-deals, then rushed away in panic after the dotcom crash, some never to return. (Though to be fair, some mainstream VCs and many individual investors were scorched and followed suit.)

CVC investment dropped from a high of 16 per cent of all deals in 2000 to about half that level, for the remainder of the decade. But it has been back on a gradual rise and just hit an all-time high in the first quarter of this year, at 21 per cent.

A report out this week from New York-based venture analyst CB Insights also notes that while the overall number of deals in the first half of 2016 fell slightly – by 6 per cent, to 633 – compared to the same period last year, and is at a nine-quarter low, the dollar value of those deals rose 3 per cent to $12.7 billion.

Record levels

CVCs were involved in about 20 per cent of all deals in the first half of this year, and participation has ranged at 19 per cent and above over the past eight quarters.

In addition, the number of companies with new, active CVC units is on track to reach record levels this year, with 53 making their first investment so far in 2016. Active CVC units have more than doubled in number in the past four years. In the first quarter of 2012, 85 were making deals. In the same quarter of 2016, 188 were on the scene investing.

Globally, CVC deals are also larger than the average VC deal, and this has held true now for 14 quarters in a row. To give an example, in Q1 of this year, CVCs made $27 million in global investments, compared to $16 million from regular VCs. In Q2, the numbers were $19 million v $13 million, respectively.

European deals made up 19 per cent of all CVC investments in Q2 of this year, a five-quarter high.

And CVCs put most of their money into early-stage investments. CVC seed-stage investments are set to hit a new high this year, and 46 per cent of all deals are in seed, angel or series A rounds – which would seem to be a good thing for startups.

Is it? Some think no, perhaps most famously Fred Wilson of the venture capital firm Union Square Ventures, who has been scathing about CVCs for years. He now avoids deals involving any CVCs, which he refers to as "the devil". A few years ago, in one interview at a Pando Daily event, he said he believed corporates should be buying companies, not investing in them. He did single out a few exceptions such as the venture arms at Google and Intel, which he believes function to a higher standard.

On the other hand, such a view is perhaps not astonishing given it comes from a-high profile VC in a major venture firm which competes against CVCs for deals.

Expertise

The attractions of of a CVC investment for a young company, on the other hand, are that investment terms are generally not as onerous as they can be from mainstream VCs. And depending on the CVC, a young company can get high-level business advice and broad business expertise that VCs may not have the time, interest or ability to provide.

In addition, VCs are often looking at a fast exit and shareholder return, not the longer term possibilities of a company. CVCs, by contrast, may be more interested in developing the company, typically with an eventual direct acquisition in mind.

But that creates issues, too. Young companies can be tainted by the association with a CVC, finding it hard to find other investors or buyers when the market assumption is that the CVC parent will acquire them. Young companies may find it awkward to even discuss funding or acquisition issues at board level, given that the CVC will often hold a board position.

Plenty to think about for start-ups, which learn all too quickly that the fundraising landcsape is generally a hazardous strip of prickly land running between a rock and hard place.