Chatter in impact investment conferences about the role of corporations is getting more serious. In addition to the engagement of traditional corporate species—including corporate social responsibility (CSR), sustainability and corporate foundation teams—we’re starting to see a new group pop their heads up to explore their role in impact: corporate venture capitalists.
So what is corporate venture capital (CVC), and why is it relevant to the impact community?
CVC is generally an equity investment by a corporate fund into external start-up companies with two goals:
- Financial return. CVCs invest cash from the parent company’s balance sheet to take some risk for potentially high rewards. For some CVCs, this is the priority—any other benefit that they accrue as a result of the investment is seen as “gravy.”
- Strategic return. For a growing number of CVCs, this “gravy” is the entire point—and why it holds such huge potential for entrepreneurs. Their second goal is to support—and drive—long-term corporate strategy by building a business ecosystem, developing different capabilities, and accessing new markets, for example. When we interviewed Robert Wells, from GE’s Healthymagination program, he remarked that, “CVC is the tip of the strategy spear.” This is meaningful because GE’s R&D budget for the Healthymagination program will total $3 billion by 2015, driving innovations that deliver high-quality, more affordable healthcare to more people around the world. To amplify synergies between corporations and entrepreneurs, CVCs can provide management skills and access to lead customers, and open up their supply chain to enable rapid scale. The corporation makes this possible by linking up with wider “corporate venturing” initiatives, which can be internal innovation units, incubators or accelerators, or ecosystem-building activities that do not involve an equity stake.
This strategic return is what makes CVC investors different from traditional venture capital investors; they can help entrepreneurs grow quickly through deep corporate partnerships. Some believe engaging with CVCs could open up a brave new world for the impact space.
To help bring a higher level of understanding of CVC and its role in investing in impact, we recently released a report on the CVC investing landscape, “Investing in Breakthrough: Corporate Venture Capital.” We first shared this research with an audience of corporate venture capital investors, representing more than $20 billion in investable assets, at an annual gathering hosted in London by Global Corporate Venturing. Our goal was to build a compelling case for partnership between these corporate investors and impact investors.
During the conference, five stand-out themes emerged that we believe will help enable partnerships as both sectors continue to grow:
1. The Golden Age
James Mawson, founder of Global Corporate Venturing, kicked things off by outlining the state of the market. The beginning of the “golden age,” he asserted, is evident in the growing number of new CVCs launched each year: 41 new CVCs in 2009, 83 in 2010, 118 in 2011, 154 in 2012, and 93 last year. Mawson feels this is an inflection point for CVCs and that we will to see a lot more activity from this sector in the coming years, as they begin to make big bets.
2. Strategic Syndication
There was a feeling that what differentiates the CVC Golden Age from earlier waves is the emphasis on strategy. “We are dialing up the strategy,” claimed one investor in conversation. And this is making its way into the very fabric of how investors are designing and activating CVC funds.
In response to growing market threats from industry disruptors, French national railway operator SNCF, energy company Total and mobile telephone operator Orange joined forces to create a shared CVC fund called Ecomobilité Ventures, which focuses on transportation services, innovative IT, connected vehicles, and intelligent infrastructures. This is significant, as it illustrates a trend: Companies are willing to join forces to enter new and emergent markets together through strategic partnerships. These partnerships capitalize on the individual expertise that each can bring—and the whole is greater than the sum of the parts.
3. Chasing Unicorns
CVCs are looking for a portfolio of strategic and financial returns, and big returns can be elusive even at the best of times. But billion-dollar companies (aka unicorns) are starting to pop up more frequently around the world. Rahul Sood, from Microsoft Ventures, presented the startling fact that every month for the last 90 months, a billion-dollar company has been born somewhere in the world. But it isn’t just about the money—it is about the ecosystems that develop around these businesses. Unicorns attract additional funding, talent pools, and intermediary support to the regions where they are founded.
4. Incubators, Accelerators, or Incinerators?
Since the crash of the dot-com bubble, some investors have questioned the hype surrounding incubators and accelerators—especially because there has been a lot of costly investment in these models globally to generate more deals and support the growth of young entrepreneurs. Do they really create value? Or do they “incinerate” the ventures that run through them? The jury is still out, but the fact that corporate venturing programs are asking these questions is a hopeful signal that this sector is willing to be candid about what works and what doesn’t.
5. Impact: Front of Mind
We were thrilled when Deborah Magid from IBM Ventures, unprompted, talked about her interest in partnering with impact investors in supporting entrepreneurs that have social impact at the core of their models. Sectors where this is most relevant include agriculture (agtech), health informatics, and new education models that improve accessibility and efficacy in both developing and developed markets. At SOCAP14, we convened a panel where Google and Pearson joined the impact discussion in a whole new way—profiling their available resources, and available investment, for disruptive ideas in education across developed and developing contexts. This trend is perhaps the most meaningful for entrepreneurs building businesses that are about more than just making money.
We’ll be watching the CVC space closely over the next few years, and looking for ways to accelerate the collaboration between corporate venturing units, impact investors, and ventures. There are some big players getting ready to drive some breakthroughs across the market, and we’d put our money on them getting to scale—especially if they develop strong partnerships across the ecosystem, with a focus on wider impact for business and community. CVC is an acronym every entrepreneur should know.