Corporate venture capital (CVC) — equity investments in startups made by corporate entities — is steadily rising in the market. In 2018, the number of active CVC business units rose to 773, a 35% increase over the previous year. These CVC units participated in 32% more deals and invested 47% more funding over the same period. While technology giants like Google, Intel, and Salesforce were the most active investors, CVC units have been established by corporations across the globe in many industries beyond tech. Johnson & Johnson, Mitsubishi, Robert Bosch, Unilever, Novartis, and Airbus are just a sample of corporations that recently established CVC activities.
As CVC researchers and practitioners, we’ve studied hundreds of CVC operations and deals across the world to identify a portfolio of better and worse practices. In theory, CVC provides a win-win for both established corporations and startups. In addition to capital, startups gain access to valuable corporate resources, industry know-how, advice, and, perhaps most important, contacts and sales leads. For corporations, the benefits include the possibility of above-average financial returns connected with any venture capital investment, and strategic benefits such as access to new technologies or insights that may otherwise be unavailable.
Studying many CVC cycles, however, has taught us that the worlds of venture capitalism and corporate investing are not always easy to combine. After a period of initial enthusiasm, many CVC units falter or close, failing to achieve either financial or strategic returns.
Our research illuminates the main reason for such failures: Many corporations struggle to find the balance between traditional venture capital and internal corporate investment. These two investing approaches differ in important ways, from how portfolios are evaluated and managed to how executives are compensated. The combination of these risks leads to what we call the “stuck in the middle” syndrome, which tends to weaken benefits of both approaches rather than reinforce their strengths.
To overcome this syndrome, we’ve identified three simple rules that may increase the rate of CVC success.
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Rule No. 1: Start With a Traditional VC Approach, Then Adapt
Most corporations already have departments that evaluate new investment opportunities, such as merger and acquisition (M&A) teams, innovation units, and business plan competitions. It’s tempting to integrate CVC activity into these entities. But, investing in startups is substantially different from other corporate investment activities.