Corporate venture capital

CVC refers to the investment of corporate funds directly in external startup companies. The definition of CVC may also be outlined by explaining what it is not. An investment made through an external fund managed by a third party, even when the investment vehicle is funded by a single investing company, is not considered CVC. Most importantly, CVC is not synonymous with venture capital (VC); rather, it is a specific subset of venture capital. These external ventures are startups (early stage companies) or scaleup company (companies that have found product/market fit) that come from outside the organization. Due to its hybrid nature involving both elements of corporate rigidity and startup culture, managing a successful CVC unit is a difficult task that involves a number of hurdles and often fails to deliver the expected outcomes. ==Objectives==

As Henry Chesbrough, professor at Haas School of Business at UC Berkeley, explains in his "Making Sense of Corporate Venture Capital" article, CVC has two hallmarks: (1) its objective; and (2) the degree to which the operations of the start up and investing company are connected. CVC is unique from private VC in that instead or aside from financial return, it also commonly strives to advance strategic objectives. Strategically driven CVC investments are made primarily to increase, directly or indirectly, the sales and profits of the incumbent firm's business. A well established firm making a strategic CVC investment seeks to identify and exploit synergies between itself and the new venture. The Goal is to exploit the potential for additional growth within the parent firm. For instance, investing firms may want to obtain a window on new technologies, to enter new markets, to identify acquisition targets and/or to access new resources. Financially-driven CVC investments are investments where parent firms are looking for leverage on returns. The full potential of leverage is often achieved through exits such as initial public offering (IPO) or sales of stakes to third parties. The objective is to exploit the independent revenue and profit in the new venture itself. Specifically for CVC, the parent company seeks to do as well as if not better than private VC investors, hence the motivation to keep its VC efforts "in house". The CVC division often believes it has a competitive advantage over private VC firms due to what it considers to be superior knowledge of markets and technologies, its strong balance sheet, and its ability to be a patient investor. In the long run, all strategic investments produce financial added value. This is not to say that, occasionally the short-term concordance between financial and strategic objectives might be questionable. For instance, a strong focus on achieving short-term financial goals might have a counterproductive impact on the ability to achieve long-term strategic objectives, which would in turn reduce long-term financial returns. In lieu of this dilemma, parent firms first screen venture proposals for strategic rationales. Then when an investment proposal fits strategic objectives, corporate firms analyze it according to financial investment standards, using methods analogous to independent venture capitalists. As a rule, incumbent firms, whether European or American, invest primarily for strategic reasons. The second hallmark of corporate VC investments is the extent to which companies in the investment portfolio are linked to the investing company's current operational abilities. For example, a start-up with strong links to the investing company might make use of that company's manufacturing plants, distribution channels, technology, or brand. It might adopt the investing company's business practices to build, sell, or service its products. An external venture may offer the investing company an opportunity to build new and different capabilities—ones that could threaten the viability of current corporate capabilities. Housing these capabilities in a separate legal entity can insulate them from internal efforts to undermine them. If the venture and its processes fare well, the corporation can then evaluate whether and how to adapt its own processes to be more like those of the start-up. Although it happens far less than commonly thought, the CVC parent company may attempt to acquire the new venture. (1969~99) 20 Largest venturing firms (from Dushnitsky, 2006) 1. Intel 2. Cisco 3. Microsoft 4. Comdisco 5. Dell 6. MCIworld.com 7. AOL 8. Motorola 9. Sony 10. Qualcomm 11. Safeguard 12. Sun Micro 13. J&J 14. Global-Tech 15. Yahoo 16. Xerox 17. Compaq 18. Citigroup 19. Ford Motor 20. Comcast ==Investing and Financing==

Types of Investing By combining the two dimensions of CVC investing - strategic and financial objectives - four distinct investment motivations and strategies can be outlined. A. Driving Investments This type of CVC investing pertains to the investment that involves a strategic driver. Driving investments are pursued by CVCs for strategic alignment that is tightly linked between the investment company's operations and the startup company that is being invested in. The purpose of this investing option is to advance the strategy of the current business. The CVC looks for key growth areas within the startup companies and then hopes to combine them with the company's initiatives. Appropriately selected investing and alignment can benefit the investing company by furthering the corporate strategy. On the other hand, this could result in failure. Closely linked investments essentially roll into the current strategy in place. This would not be useful in dealing with already disruptive strategies in place, or in finding new ones when the investing company needs to update processes when trying to keep up with a changing environment. Thus, if CVCs are looking to “transcend current strategies and processes,” A. Early-stage financing In this stage, the startup company basically has a concept. Capital is used to carry out market research and product development. Startup financing can be used to establish management, research and development, marketing, and quality management teams and buy additional equipment and resources. An extension of early-stage financing is First-Stage Financing, where companies can start manufacturing and sales processes to initiate a product launch. Investment firms only expect 20% of companies to succeed, moving to second round of financing. In this stage, the company can often be moved to another round of funding or even a series of funds that take over the management of the investment. Investing firms expect a high percentage of the business and often provide funding in stages that is dependent on the startup company reaching set milestones. For example, a venture capital may agree to $5 million during this phase, but may pay out the funding in 1/3 installments based on the startup meeting set milestones. Finally, CVCs often look to promote or insist on specific executives to manage the startup at this time. ==In the healthcare industry==

Introduction This section discusses venture capital activities of healthcare providers such as Ascension Health, biotech firms such as Biogen Idec, and pharmaceutical companies such as GlaxoSmithKline, all of which are healthcare-related companies and have internal venture capital units or wholly owned subsidiaries focused on venture capital. The structure of corporate venture capital within the healthcare arena; the most common types of investments made; and the main reasons for which healthcare companies invest will be addressed, as well as the current trends and some predictions for the industry. Structure By definition, the corporate venture capital field is made up of organizations whose primary activities are not investing in other firms (see above). Since that definition rules out freestanding healthcare venture capital firms such as De Novo Ventures, as well as publicly traded firms, what remains are a limited number of organizational structure types used by healthcare corporate venture capital. The two main types are: 1) divisions within a larger healthcare company; and 2) wholly owned subsidiaries of larger healthcare companies. CVC units of both of these types often engage in partnerships with other firms. In most cases the other firms are limited partners and the primary company manages the fund and is the only general partner. Types of investments The largest segment of healthcare-related venture capital investments are made by the venture arms of firms who focus on biotechnology and pharmaceutical products, such as Eli Lilly and Company, GlaxoSmithKline, Takeda Pharmaceutical Company (TCP), Biogen Idec, and Roche. Because the top priority of many of these venture capital units or divisions is to fund ventures that may result in scientific and technological discoveries and advancements that may benefit their parent companies, most tend to invest in companies whose products or proposed products are similar to their own. However, the healthcare industry is seen as somewhat recession-resistant and this has encouraged some investors within the field. As such, while most major corporations with venture capital arms are keeping cash close to home, some of the first positive movement within corporate venture capital as a whole is coming from healthcare. The new venture fund recently opened by Merck Serono and the fund just closed by Ascension Health Ventures are just a few examples of the optimism that is slowly reentering venture capital within healthcare. The latest survey on the top 75 most influential healthcare corporate venture capital divisions shows they are increasingly influential and larger than many independent VCs. Another trend that may see more action as venture capital funds continue to be scarce is an increasing number of strategic partnerships between firms that are based not on exchange of funds, but rather on exchange of technologies or process information. These types of partnerships, also known as corporate in-kind investments, may become increasingly common as liquid funds become less available but technologies that have been developed are readily shareable. One specific example of this sort of information exchange is a partnership between a large, well-established company and a small, developing company who have complementary technologies or processes. Such 'David and Goliath' partnerships are already starting to emerge outside of the healthcare industry and will likely emerge within healthcare soon. Sectors Investments from venture capital firms and CVC in 1998 were mostly in software and telecommunications sectors. By 2006 the biotechnology and medical devices became the sectors with the most investments from both, venture capital firms and CVC. However, there has not been significant investments in health services and have actually decreased through these periods. Biotechnology CVC's investments in biotechnology are higher than those from VC firms. However, medical devices and health services had a is not a top sector for CVC investments as it is for VC firms. Other top sectors for CVC investments are software, telecommunications, semiconductors, and media/entertainment. Top sectors for CVC investment: • Biotechnology, • Software, • Telecommunications, • Semiconductors, and • Media/entertainment. Top sectors for VC investment: • Software, • Biotechnology, • Medical devices, and • Telecommunications. In the life sciences Many of today's well known companies in life sciences have been backed with billions of dollars by venture capital investments. Some of these are: Boston Scientific, Amgen, Genentech, Genzyme, Gilead Sciences, Kyphon, Intuitive Surgical, and Scimed Life Systems. From the $25.5 billion in total venture capital investments, there were $7.2 billion targeted to the life sciences industry. The life sciences include sectors in biotechnology and medical devices and equipment. Venture capital investments within biotechnology accounted for $4.5 billion and within medical devices and equipment for $2.7 billion. Venture capital investments have gone toward specific disease. For example, there was venture capital support during the past 20 years of $14.9 billion in cardiovascular/heart diseases, $14.7 billion in cancer, and $4.9 billion in diabetes. Examples Eli Lilly Corporate Business Development Eli Lilly Corporate Business Development (CBD), CVC division from Eli Lilly and Company: Johnson & Johnson Development Corporation JJDC is the venture capital subsidiary of Johnson & Johnson. Dow Venture Capital Dow Venture Capital (DVC), CVC division from Dow Chemical, invests in start-up companies in North America, Europe and Asia. DVC is located in company headquarters in Midland, MI; in European headquarters in Zurich; and in Gotemba, Japan. Siemens Venture Capital Siemens Venture Capital (SVC) is the corporate venture organization for Siemens AG. Its focus is on growth segments in the energy, industry and healthcare sectors. To date, SVC has invested over 800 million euros in more than 150 startup companies and 40 venture capital funds. SVC is located in Germany (Munich), in the U.S. (Palo Alto, CA and Boston, MA), in China (Beijing), in India (Mumbai), and is active through Siemens´ regional unit in Israel. Kaiser Permanente Ventures Kaiser Permanente Ventures (KPV) the corporate venture capital arm of Kaiser Permanente. KPV invests in medical devices, health care services and health care information technology companies. Geisinger Ventures Geisinger Ventures is the corporate venture arm of Geisinger Health System. GV invests resources in healthcare technology, information technology, medical devices, medical diagnostics and therapeutics. GV utilizes funds from its balance sheet. Ascension Health Ventures Ascension Health Ventures was established in 2001 by Ascension Health with a commitment of $125 million to invest in expansion- to late-stage healthcare companies. The University of Texas Horizon Fund The UT Horizon Fund (UTHF) is the strategic corporate venture arm of The University of Texas. The UTHF's goals are to: (1) Improve commercialization of UT technologies, and (2) Improve sustainability through a positive return on investment. The Fund is evergreen where a significant portion of gains are re-invested back into the Horizon Fund for future growth. Phase I of the Fund has been capitalized at $10M through the Available University Fund of the University of Texas. The two primary programs of the fund are: • Existing Ventures Program. Many university startups have difficulty raising desired levels of funding to continue development of technologies through to the final stages of commercialization. University equity positions may become diluted with preferred rights to new investors. The UT Horizon Fund co-invests with new investors to continue university equity participation all the way through to commercialization. By doing so, UT System can increase its return on investment both in terms of delivering real products and services beneficial to society as well as to providing financial return. • New Ventures Program. The biggest bottleneck at the earliest stages of commercialization is access to entrepreneurial talent. Seasoned entrepreneurs are necessary to help facilitate effective business planning critical for growth and development and to seek regulatory approval and other activities. About UT System: • Established by the Texas Constitution in 1876, The University of Texas System consists of nine academic universities and six health institutions, including UT Austin, UT MD Anderson Cancer Center and UT Southwestern Medical Center, along with 12 other institutions. The mission of The University of Texas System is to provide high-quality educational opportunities for the enhancement of the human resources of Texas, the nation, and the world through intellectual and personal growth. System administration is based in Austin, Texas. Offices are also located in Midland, Texas (University Lands/West Texas Operations) and Washington, D.C. (Federal Relations). These offices are responsible for the central management and coordination of the academic and health institutions. • The UT System has a special responsibility for managing the Permanent University Fund (PUF), the Available University Fund (AUF), other endowments, managing university lands, carrying out the Board of Regents' policies, collaborating with the Board of Regents on strategic planning, and serving as consultants to the institutions on issues ranging from academic programs to fund raising. In addition, the System provides a wide range of centralized, cost-effective, and value-added services on behalf of the UT institutions and the public. Investment criteria by provider (Ascension Health example) Opportunities are evaluated for potential clinical, operational and financial benefits to our limited partner health systems in addition to the financial return to the venture fund. Diversification is also a consideration; AHV seeks to balance the portfolio across sectors and stages to mitigate investment risk. Every opportunity is evaluated against the following criteria: • Industry - Healthcare segments including medical devices, medical and information technology and services. AHV has also selectively invested in other healthcare venture funds. • Investment Size - Approximately $5 million per round; up to $10 million per company. • Company Stage - Expansion- to late-stage within three to five years of a potential liquidating event. • Adoption Potential - Sustainable competitive advantage with compelling benefit sufficient to influence market adoption. • Management Team - Established team with demonstrated relevant experience, depth and capability to build the business to scale and attract customers. • Other - AHV typically requests a Board observer seat for each portfolio company. ==In information and communication technology companies==

A decade after the NASDAQ stock exchange peaked at 5,132 on March 10, 2000, the index was 2,358 - less half its high point. This fall affected technology investing as the NASDAQ was an important market to sell venture capital-backed companies, often with business models based on using the internet. Technology companies with corporate venturing divisions were even more cyclical investors at the top of the market than independent venture capital firms and then many of the last funds to be raised before the peak were subsequently closed, such as EDS/AT Kearney (in 2002–2003, according to AT Kearney), or sold, such as Comdisco. However, non-technology firms have continued to invest their corporate venture capital in information and communication technology businesses and in recent years a number of non-US-based technology companies have expanded or started their corporate venturing units, according to the July 2010 issue of Global Corporate Venturing. The non-technology firms interested in buying stakes includes global advertising agency WPP, oil major Chevron and Dow Chemical, while non-US companies include Korean conglomerate Samsung and Chinese computer maker Legend Holdings. However, a number of US-based technology companies with corporate venture capital units in the 1990s, such as IBM and Microsoft, have concentrated more on other forms of finding external innovation, such as partnering or competitions. == In the utilities sector, including telecom operators ==

Utilities have traditionally been businesses where the customer is the regulator rather than the rate-payer using the service. This has traditionally meant innovation, including through the use of corporate venturing, has been of lower priority than gaining market share and pricing power unless required by regulatory action. Corporate venturing at utilities, therefore, has historically been more pro-cyclical to the economic than other industry sectors. However, telecom operators in particular, such as Deutsche Telekom's T-Venture and formerly France Telecom's Innovacom, have built up a successful track record through at least one economic cycle and an increasing number of utilities across the electric, gas and phone industries have started to increase their use of external innovation and corporate venturing. Korea Telecom in July 2010 set up a KRW1 trillion (US$830m) corporate venturing fund, the largest announced fund since the technology, media and telecoms bubble burst in 2000 and 2001. ==In the media sector==

Media companies have found their business model being transformed by the internet and digitalisation of information. The invention of the printing press in Germany about 1440 is widely regarded as the most important event of the second Christian millennium, which reflects the role wider and faster dissemination of information has in society. The evolution to web-based storage and transfer of media content and control being passed from media owners to people more broadly is affecting business models and established communication companies are using corporate venturing as a tool to help understand the changes. This role can be powerful both for the venturing parent and economies where they operate. The two most influential corporate venturing units in the media sector, South Africa-based Naspers and US-based Interactive Data Group, have chosen to primarily operate in emerging markets away from established mainstream media groups. Their success has allowed Naspers to survive and become the largest media group in emerging markets operating in more than 127 countries and IDG to create one of China's largest venture capital groups and a model to expand across Asia, including India. The success and fears for the future of other groups has encouraged a host of expansion and new media units to be set up, including Kaplan. ==In the energy and clean-tech sector==

Clean technology, the application of digital or wireless products to the energy or other industries to reduce power consumption or improve efficiency, has been described as the "first global technological revolution", according to consultants at Cleantech Group. Since 2005, Cleantech Group has tracked a +50% increase in corporate venturing in clean-tech and energy from 79 to about 199 in 2009. Global Corporate Venturing selected US oil major Chevron as the most influential corporate venturing unit among the energy and natural resource companies. Other large companies with Corporate Venture Capital or Corporate Strategic Partnership arms include: Dow Venture Capital Invests in several cleantech sectors including: materials science, alternative energy technologies, and water technologies. Saint Gobain External Venturing The largest construction products manufacturer in the world, this is the Saint-Gobain unit dedicated to developing strategic partnerships between the Group and start-up companies all over the world in the green building, energy, and advanced materials spaces. MAHLE Corporate Venture Capital MAHLE Corporate Venture Capital (MVC) is the corporate venture arm of MAHLE GmbH. MVC invests in funds as well as start-up companies related to the cleantech- and automotive sector, respectively drive-train and mechatronics solutions. MVC is located in Germany. Energy Technology Ventures A joint venture involving General Electric, NRG Energy, and ConocoPhillips focused on the development of next-generation energy technologies. The JV will invest in, and offer commercial collaboration opportunities to venture- and growth-stage energy technology companies in the renewable power generation, smart grid, energy efficiency, oil, natural gas, coal and nuclear energy, emission controls, water and biofuels sectors, primarily in North America, Europe and Israel. ==In the financial sector==

Financial services companies have long been interested corporate venturers. Banks and insurers have been active limited partners in independent venture capital funds, albeit with below-average returns. According to this academic paper, "banks have long been important private equity investors. The motivations for their investment activity, however, are frequently more complex than those of other LPs". Banks have sometimes invested in venture capital to gain early access to companies before their flotation (initial public offering, IPO). With the decrease in number of IPOs after the dot.com boom, poor financial returns from investing in venture capital over the past decade, regulatory restrictions and relative better performance in using debt-backed securities, there are fewer banks and other financial services investors active in the sector, according to research by Global Corporate Venturing. The remaining financial services investors are more likely to be boutique merchant banks, such as Burrill & Co., than mainstream universal banks or bancassurers. However, a nascent class of large firms, such as insurer The Hartford and bank Citigroup, has started to emerge using corporate venturing, i.e. investing in VC funds or directly in third parties for a minority equity position, as a tool to help their business with product development or understand new technologies/services. This model is similar to the approach taken in other economic sectors and led to Citigroup being ranked the most influential corporate venturing unit in financial services in November 2010. ==In the transport and logistics sector==

Companies in the transport and logistics sector have been occasional sponsors of corporate venturing units, with an increase in technology starting to see further resurgence. Volvo group has been an active investor in this sector since 1997 through its VC company Volvo Technology Transfer. US-listed General Motors set up a $100m fund in June 2010 while post and logistics group Deutsche Post DHL set up DHL Innovation Center into its DHL Solutions & Innovations unit in late 2009. However, other established groups cut back on their corporate venturing activities during the 2008 financial crisis, with Netherlands-based TNT winding up the Logispring II fund where it was a majority investor in late 2009. JetBlue Technology Ventures has been an example of a corporate venture capital unit that has been active in investing in the airline and transportation business. ==Professional organizations==

Global Corporate Venturing Global Corporate Venturing is a media group providing news, data and comment for the industry and the wider entrepreneurial and venture community. The flagship title is Global Corporate Venturing, a monthly PDF magazine, along with daily news updates online and a LinkedIn community message and discussion group. Strategic Venture Association The Strategic Venture Association is an organization dedicated to the needs of the corporate investing and strategic partnering community. The Association's goal is to bring together professionals to educate, inform and collaborate with each other around topics core to the group's interests. Given the current market conditions, the importance of working with external organizations to seek innovation, partnerships and investment opportunities has never been greater. National Venture Capital Association Mission: the National Venture Capital Association (NVCA), comprising more than 450 member firms, is the premier trade association that represents the U.S. venture capital industry. NVCA's mission is to foster greater understanding of the importance of venture capital to the U.S. economy, and support entrepreneurial activity and innovation. The NVCA represents the public policy interests of the venture capital community, strives to maintain high professional standards, provides reliable industry data, sponsors professional development, and facilitates interaction among its members. ICEX Corporate Venturing Knowledge Exchange Community This is a membership group made up solely of CV executives at large global companies. It is a private, confidential exchange where members share advice and experience on common challenges to improve their strategic investment and business model innovation activities in the large corporate setting. Limited to 12 companies, the community meets in-person and virtually to discuss current issues and share lessons learned. ICEX facilitates executive exchange for business and technology leaders at large global companies in areas of innovation, transformation, infrastructure, and enterprise architecture. ==References==