Corporate Venturing is the concept of large industrial organisations either developing, sponsoring, or investing in startup companies in order to develop innovative products or services.
Typically, Corporate Venturing takes place within the core industry where the corporation operates. An energy giant such as BP is likely to back energy tech ventures via its corporate venturing unit, while a large pharmaceutical firm such as Merck or Pfizer would concentrate their venturing efforts in the pharma & healthcare sectors.
However, some corporate venturing units will operate like venture capitalists or private equity funds, investing in opportunities where they can add value regardless of the industry. An example of one such company is Japan’s DOCOMO Innovations.
Corporate Venturing vs. Research and Development (R&D)
While there is considerable overlap between corporate venturing and R&D in terms of product development, the key differentiation is that corporate venturing will typically involve a separate “startup” company, funded by the corporate parent.
Advantages of this approach include more freedom to operate without corporate bureaucracy, and the ability of the startup to also become a self-sustaining business in its own right (not just selling the product or service to the corporate parent, but also to other firms, even sometimes to the competition).
However, it is not without controversy, and a key challenge has been fostering collaboration between corporate venturing and R&D departments without either group feeling marginalised.
Corporate Venturing vs. Venture Capital
There is also considerable overlap between how corporate venturing and traditional venture capital firms operate. Many times, corporate venturing units and VC firms will compete for deals, but the growing trend is collaboration between them.
The corporate venturing team gets access to the capital, valuation expertise and business building skills of the VC firm, while the VC can benefit from the industry expertise the corporate unit provides, as well as their capital. One example of a VC firm that has embraced corporate venturing partnerships is Andreessen Horowitz, who have successfully partnered with GE Ventures on a recent deal.
What does this mean for entrepreneurs?
Firstly, entrepreneurs can gain access to resources and markets. This is particularly important in sectors such as energy, where a small number of large players dominate the market, so partnering with them enables instant access to a customer base. For example, Fotech Solutions, a company that pioneered distributed acoustic sensing for the oil & gas industry, was acquired and developed by BP ventures. The acquisition provided the financial means to refine the technology and the ability to sell the product to one of the world’s largest upstream oil & gas conglomerates.
Secondly, if an entrepreneur has successfully developed a business and secured VC funding, corporate venturing units provide an effective exit for both the founder and the VC investor. The corporate venturing unit can take a successful startup in their relevant industry and integrate it into their core business, achieving the economies of scale needed for future growth.
Lastly, as we’re all too aware, many startups and entrepreneurial projects fail. For a lot of these entrepreneurs, a job with a corporate venturing unit can offer the same exciting startup environment with the security of a large corporation. Recruiters for corporate venturing will value the skill set that comes from starting a company, even if that company has failed.