Venture capital is essentially the process of investing money in another company. Corporate venture capital differs from conventional venture capital, in that the corporation making the investment is not generally organized for the express purpose of investing in other firms. This is often organized by creating a separate division of a corporation, and this allows the corporation to invest generously in an up and coming business without risking the corporation’s core funds. This is because its subsidiary is making the investment on the corporation’s behalf and is considered as a separate entity.
At present, corporate venture capital is facing something of a crisis. The amount invested in companies by these corporations has fallen by 40% since 2000. The current economic strife has only heightened the problem. This is bad news for new companies who need venture capital backing to succeed. It has been statistically proven that businesses backed by venture capital are 150 times more likely to create jobs. Angel funding is not an option for new businesses with big budgets as their average investment in 2008 was $275,000 compared to an average of $7.4 million invested by venture capital firms.
Corporate venture capital’s main objective is not only to generate a generous and swift return on investment, it also hopes to achieve a strategic advantage to the parent company. In fact, some CVCs actually make investments solely for strategic benefits. This may sound strange but the whole point of the investment in this instance is to find out more about new technologies and thus come up with new ideas. More than half of CVCs that were surveyed in 2007 stated that strategic objectives were their primary focus. In that respect, many such investments are the foundation of an extensive network of mutual benefit; for example, a funded start-up will look to the investor’s own network of resources to find distribution channels, partners or manufacturing facilities.
Many well-known large corporations have created corporate venture capital divisions. The biotech industry is particularly well known for this activity, and Eli Lilly, Johnson & Johnson, and Dow Chemical all have active corporate venture capital divisions.
The technology industry is somewhat different than biotech, and often non-tech companies are anxious to get a piece of the action, and are engaging in corporate venture capital investing in technology companies. Of course, some of the larger and more established tech companies are themselves creating corporate venture capital divisions, including Samsung (Korea), Legend Holdings (China), and companies including Dow Chemical and Chevron. During the dotcom boom period of the ’90s, several major US-based tech companies launched corporate venture capital arms, most notably Microsoft and IBM, although in recent years, these companies have focused more on establishing partnerships rather than funding new companies through venture investments.
Naturally, the financial sector itself is always interested in an opportunity, and banks and other financial institutions are active in corporate venture financing, often to gain access to a company with great success prior to its IPO. However, an increasing number of restrictions on banks has limited this activity.
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