Corporate Venture Capital

Why are venture capitalists the winners in the startup funding game?  VCs have funded most of the big-name startups that now dominate the NASDAQ and, in a sense, have been the only game in town for high-growth startups needing millions to grow as private companies.  Entrepreneurial finance’s ancillary players – angel investors, venture lenders, and now crowdfunding investors – all depend on VCs to fund and advise startups as they grow and either exit via IPO or sale to a larger company.

But there is one player whose entry into this space can significantly alter that dynamic: the large corporation.  Unlike angels, crowdfunders, and venture lenders, large corporations have sufficient capital to fund startups to a successful exit.  They may also be able to offer superior value-added services to startups.  For example, if the startup’s technology aligns with the parent company’s, as strategic corporate venture capital investments do, that is a big plus to the entrepreneur.  Corporations may also get a first look at the most promising startups, if the would-be entrepreneurs are currently corporate employees. For reasons I explore in a new paper, leading technology companies can and are becoming significant players in Silicon Valley.

Until now, large corporations were not serious challengers to VC dominance in the startup-financing game for several reasons.  First is what Harvard Business School Professor Clayton Christensen dubbed “the innovator’s dilemma” and the problem of developing ideas in a large, bureaucratic organization.[1]  Those issues are being solved by corporations establishing dedicated arms, or corporate venture capital units, that operate independently and more like a traditional VC with only financial support from the parent company.  Second, there is a question of motivation: Why should a large corporation focus on disruptive innovations when, as Christenson determined, their rational preference is for incremental improvements in existing products and services?  As my paper explores, there are financial, strategic, and basic survival reasons to do so.  From a financial perspective, corporate venture capitalists can capture tremendous financial upside for their parent corporation if they fund the next technology breakthrough.  From a strategic perspective, corporate venture capitalists can create synergies for their parent company if they fund complementary technologies to the parent company’s own business, as well as keep abreast of competitive threats to the parent company’s business.  And finally, as Christensen explores, a large corporation that does not own disruptive technologies is likely to someday fall the victim to one.  Thus, corporations have increasing incentives to act as venture capitalists on the side.

Several of the leading technology companies engage in corporate venture capital.  Large corporations such as Google, Salesforce, and Intel are typically among the most active corporate venture capitalists.  By way of example, Google’s corporate venture capital programs consistently rank at the top of corporate venture capitalist activity, most notably through Google Ventures, now GV, a limited partnership with Google’s parent company Alphabet as its sole limited partner. GV invests in life science, healthcare, artificial intelligence, robotics, security, and transportation startups with investments including Uber, Nest, Stripe, Robinhood, and One Medical Group.  If corporations acquiring their smaller competitors begin to raise more plausible antitrust concerns, corporate venture capital may become a more engrained part of a large technology company’s growth strategy.

Corporate venture capital may also offer societal benefits beyond traditional venture capital. It is well documented that VC employees are overwhelmingly male and white. Large corporations, as public entities, may be more concerned with their images and desirous of social progress.  Large corporations are disciplined by public stock markets and perhaps consumer markets in a way that privately-funded VCs are not.  The paper explores these social benefit questions, as well as legal questions regarding disclosure obligations, antitrust concerns, and conflicts of interest in the burgeoning world of corporate venture capital.

ENDNOTE

[1] Clayton M. Christensen, The Innovator’s Dilemma: The Revolutionary Book That Will Change The Way You Do Business (1997).

This post comes to us from Darian Ibrahim, the Tazewell Taylor Professor of Law at William & Mary Law School. It is based on his recent article, “Corporate Venture Capital,” available here.

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