Whereas historically, the bulk of corporate innovation would be via in-house R&D programs, or mergers and acquisitions, the last decade has seen a considerable rise in corporate venturing. Indeed, during 2020, around $70 billion was invested by corporates in startups, which represented around 25% of all VC deals.
How corporate venturing programs work is not always well understood, however, so researchers from Stanford set out to look under the lid and explore the VC units of 74 American companies, who between them account for around 80% of all corporate venturing in the S&P 500.
A mixed bag
The researchers found that there isn’t really a uniform approach to corporate venturing, with many programs operated in an incredibly inefficient way. Indeed, many interviewees complained that their parent company didn’t really “get” corporate venturing or venture capital, and this lack of understanding undermined their efforts.
The study revealed that most corporate venturing programs use a two-tier decision-making process, with approval typically required for any actions from a committee that sits outside of the team itself. This is a marked difference from traditional VC firms, which can act extremely quickly once investment decisions are made.
This bureaucracy is compounded by the lack of uniform reporting structure, with some reporting to the CEO, others to the CFO, and others again the chief strategy officer. Each of these has obviously differing priorities, which can influence the direction of the corporate venturing significantly.
Similarly, while VC firms have their eyes clearly on financial returns, corporate venturing projects often have a mixture of objectives. Indeed, the researchers found that some don’t even track their financial returns. Indeed, it seemed more common for corporate venturing to have strategic rather than financial goals.
Playing the short game
It also emerged that whereas VC firms typically look at investments over a long timeframe, corporate VCs typically get assessed on a much shorter timeframe. This often results in long-term objectives being sacrificed for short-term wins.
While few of those working in corporate venturing were given any profit-sharing incentives, they did nonetheless believe that working in the field represented a good stepping stone into more traditional venture capital firms.
The researchers hope to track the companies and professionals over an extended period to see whether there is any evolution in the operations of corporate venturing programs, while also extending the reach outside of the US.
Given the enormous scope of corporate venturing and its importance in helping startups get to market, studies like this that help us to better understand the strategies deployed and the results achieved can go a long way towards helping the sector mature and secure more consistent results.
“If you design corporate venture capital units imperfectly,” the authors conclude, “then you will not get as many results. Or maybe you will not get any results.”
