An early experience in Corporate Venturing was being on a Q/A panel at a conference in 2007. What followed rocked me back on my heels as an entrepreneur in the audience shared his harrowing story of how a corporate had “stolen” his IP, leaving only one exit option which effectively shut down his start-up! Unethical behaviour such as this is rare. Industry has reformed in the intervening years, with the corporate venture capital (CVC) model now widely adopted and seldom disregarded. According to PitchBook data the number of units has trebled over the last 20 years and budgets increased to keep pace with innovation cutting across industries, geographies and becoming digitally inter-connected.
All the same, a stream of consciousness is required when introducing this as a win-win approach to technology development and commercialisation. In due diligence for example, strategic alignment is a starting point, basing the CVC unit reward on success and ROI of the venture after a leap forward together.
CVC is not new. In fact, it can be traced to DuPont in 1914 when they invested $25m in a young GM to create market pull-through for their polymers and paints. What followed has been narrated in a formative CB Insights report that identifies four distinct evolutionary phases:
1960 – 1977 Drive for diversification
1978 – 1994 Introduction of the PC
1995 – 2001 Dot com boom and internet
2002 – 2020 R&D additionality and leverage external capital
Examples of leading industry advocates include, Advanced Materials (BASF, Evonik) Agriculture, Biosciences (Syngenta, DSM) Consumer Goods (Unilever) Control Systems (Siemens, Schneider Electric) Electronics (Intel, Robert Bosch, Samsung), Life Sciences (SR One – GSK) Oil and Gas (BP, Chevron, Total) Power (ABB, GE).
Until recently, the model has remained largely the same – after extensive scouting and filtering, direct minority (ca 15 – 25%) equity investment (typically A round) into an early-stage company post-proof of concept and then add value in areas such as strategic direction, governance, market access and pilot opportunities. The main aims for the corporate are three-fold:
- Strategic insight beyond current horizon and reach
- Technology partnership, optionality and advantage without “betting the farm”
- Financial return
in that order of priority. As you might expect this requires balance against the requirements of a pure financial VC co-investor. They are normally the driving force behind meeting milestones and exit decision making which can constrain the venture in building internal function and capability.
What is emerging is a new fifth phase of corporate venturing that removes interfaces between start-ups, corporates, investors and even policy makers. The primary reason is to speed up innovation and solutions to the climate crisis. Start-ups involved in the energy transition typically have higher capital needs and a longer path to market than those developing software and favoured by investors to date.
One of the criticisms justifiably levelled at corporates is slow decision making. Creating an autonomous venture unit separated from and independent to the parent mitigates this through greater organisation and cultural autonomy. With Net Zero being the overriding aim, greater collaboration disrupts convention of linear commercialisation and scale up.
The Oil and Gas Climate Initiative (OGCI) was formed between major companies within this sector. Their aim is to use collective strength to quicken the pace toward a low carbon future and net zero emissions. The US1bn fund invests in technologies and projects to decarbonise oil and gas, industry and commercial transport.
Programs such as Third Derivative, Carbon13 and the incubator Greentown Labs are builders of scalable ventures to tackle the climate emergency, bringing together a range of investors and resources to de-risk the start-up process, increase impact and deliver commercial success.
Breakthrough Energy Ventures is a group that includes Alibaba, Amazon, Gates Foundation, KPCB, Reliance Industries and has vowed to bring “patient capital” in recognition of the longer timeframe to scale innovation in high emission sectors such as agriculture, built environment and transport. They want a return on their investment and believe that helping the world get to net zero emissions holds huge potential to do so.
There are also a number of well-established funds with both corporate and financial Limited Partners (LPs) such as Chrysalix Venture Capital, Emerald Ventures and Energy Impact Partners creating the opportunity for technology validation, faster market access and a direct parallel investment option by the corporate.
CVC has now come of age having navigated the following journey:
- From pioneers to widespread adoption of the CVC model to boost innovation
- Slow moving, risk averse corporate customers to integral development partners
- Divergent to aligned goals and speed to market
- From dubious to substantially improved reputation
- Individual corporate venture units to cross-industry clusters
- Separate to now ingrained part of company’s overall R&D.
John Steedman is a Partner, Greenbackers Investment Capital Limited.