There are 3 distinct types of companies that are getting into venture capital, and I believe that developing economic conditions will affect each a little differently.
Globally, venture capital activity has been very strong for the past few years. Yet a decrease in activity in the fourth quarter of 2015, combined with a sense that valuations have begun to drop, have caused speculation that a slowdown is in the forecast.
Now people are asking, how will a slowdown in venture capital activity affect corporate venture capital (CVC) investment? CVC has been on the rise, recently reaching 25 percent of funding for global deals – which is a level of corporate investment not seen since the dotcom crash. However, I believe that whether a slowdown is in store for CVC depends very much on the individual corporation, their industry and their reasons for creating a venture capital group.
It is no secret that innovation is the critical driving force that is encouraging so many companies to create venture capital groups. Yet there are three distinct types of companies that are getting into venture capital, and I believe that developing economic conditions will affect each – and their investment strategies – a little differently.
For many companies, venture capital investment is a primary way to invest in innovation over and above their R&D activities. Large companies lack the agility of smaller firms and can face difficulties when attempting to develop innovative new products or services, expand into emerging markets or conduct research on a disruptive technology. Investment in startups provides a critical injection of new ideas and products into the corporate sphere.
Corporations in this category are usually in industries like technology or telecommunications and tend to be the firms that come to mind when people think of CVC investment – organizations like Google, Intel, Novartis, Microsoft, Siemens or Salesforce. For such firms, venture capital activity will likely remain steady or continue to grow in 2016, driven by a need to adapt to disruptive changes in their industries and to remain relevant in a rapidly evolving market.
The important thing to keep in mind is that, for many of these companies, the amount invested is a small percentage of their overall revenue. Smaller or short-term financial losses through unsuccessful venture capital investments are an acceptable part of their long-term risk/reward strategy.
Traditional industry managing disruption
While many people think of tech firms as driving much corporate venture capital investment activity, some more unexpected players have been entering the scene. We are now seeing big names in traditional industries banking, energy and industrial products creating venture capital groups. Even convenience retailer 7-Eleven has recently launched a venture capital group, 7-Ventures.
These are firms in industries that are being shaken up by new and evolving technologies. Investment in startup activities relevant to their industry and market are thus not just innovation strategies, but survival strategies – a way to remain relevant and evolve their businesses before the market leaves them behind. These corporations, too, will absolutely continue to make investments and seek out relevant projects to support.
In fact, shifts in the venture capital market may actually increase activity in this area. If VC activity slows, as it has the past quarter, then CVC investors in traditional industries will be honing in on opportunities to invest in or purchase startup businesses at lower prices.
Building value while injecting innovation
As corporate venture capital interest and investment grows, we are starting to see an increase in the number of corporations that look to CVC investment not just as a driver of innovation but also an opportunity to build value based on the smart investment of company profits. This is a “hybrid” approach between the goals of most CVC investors and those of traditional venture capital. Given their hybrid strategy, I believe that it is companies in this category that will be more likely to follow the overall trend set by venture capital investors worldwide. If VC activity slows, then so too will this type of CVC investment.
While some corporate venture capital investment may slow in the next year, it looks that most will remain strong or continue to increase over 2016. While such activity cannot replace that of traditional VC funders, it is clear that – in the next few years, at least – some CVC funders may well be significant players in the marketplace.
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As head of the TMT sector in Central & Eastern Europe, Jerzy has led several strategic and operational consulting projects for clients across nearly 20 countries. He also leads the Digital & Innovation initiative at KPMG in Poland. In this role, he is responsible for developing advisory services for R&D and innovation management, as well as for digital startups. He was also the founder and CEO of a venture capital fund investing into digital startups and has worked in R&D for technology in Poland and the United States.
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Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.