The State of Corporate Venture Capital

European Straights, 2020-09-28

Killing Two Birds With One Stone

  • A fantasy of many people, very rare in practice.

  • Tax system (supposedly making most constituents happy) is in fact only focusing on the government revenue. Other goals should be pursued separately.

  • The theory about Corporate Venture Capital (CVC) is that large firms can make small investments to achieve high ROI as well as dip the toes in the new technology / innovations water.

  • Getting market intelligence is nice, but is it the useful and actionable intelligence?

  • And isn’t the corporation’s job generating money via its core business? [MK: the article poses a very vague question; while it’s unlikely that the corporation will shift its business model due to the investment in a promising startup, optimization of some links in the value chain via bought IP / expertise may not be such a bad idea.]

A Single Victory is Not the Entire War

  • Success of a single CVC startup doesn’t make any difference to the share price, but also the management gets compensated for different outcomes.

  • Back to the intelligence: big corporations are not well suited to incorporate the information obtained from outside its core business, and there are limited avenues for distributing this information up and down the information chain.

  • A CVC firm is either wildly successful (in which case its management would ask to divest it, as their compensation will be better linked to the measurable outcomes), or just a zombie investment arm in need to be eventually chopped off.

  • Corporate ownership limits the acquisition potential (competitors won’t buy you), so the CVC startup will be stuck with investors who are more curious than returns-focussed.

  • Corporations in the past started CVC arms due to excess amount of cash (which probably should’ve been given to shareholders) or fear of disruption (insurance policy against retaliation) or obligation-free ways of probing waters in other segments or geographies.

Returns Take the Back Seat

  • Many companies think that paying dividends is an admission of no good ideas (or that you’re no longer a technology company © Peter Thiel). So diverting cash from shareholders to CVC arms is somehow justified.

  • Theoretically, investing into the ecosystem may be beneficial to everyone, including the corporation.

  • But actually it’s better to acquire startups (and get their brains and momentum – if only for a while) to incorporate into the core business – than investing in CVC.

source

Also, Why Corporate Accelerators Suck