Mobile startups provide a clever venture capital strategy for corporates

By , 2 April 2013 at 12:24
Mobile startups provide a clever venture capital strategy for corporates
Business

Mobile startups provide a clever venture capital strategy for corporates

By , 2 April 2013 at 12:24

By Jack Leeney (@leeneyjack), Telefonica Ventures (pictured speaking above)

Corporations are finding big profits in venture capital.

They’re playing an active role in this space, with an estimated $4.5 billion share of about a $24 billion total in VC investments. Now that’s something to talk about.

Panelists at nestCON

I recently sat on a panel of heavy-hitting VCs (nestCON Winter 2013: Mobilizing the Connected World) that focused on contrasting traditional VCs with strategic (corporate) venture arms to uncover the friction points as well as collaboration opportunities.

CEOs from nine different companies shared their early stage investments with the audience. Forbes’ San Francisco Bureau Chief Eric Savitz moderated the discussion. Here are a few successful strategies that were discussed by our panel…

Intel Capital has been working in venture capital since 1991. Their strategy includes focusing on investments within certain geographical areas as they build local economic systems around products with promise.

Swisscom is a smaller carrier that caters to smaller geographical areas with specific solutions.

– We (Telefónica Digital) look to make investments at the ground level by investing in tandem with strong partnerships, which dramatically increases the speed of products to market by collaborating at an engineering level. We often invests in the US to globalize rapidly growing technologies.

Our panel estimated that there are about 170 active VC funds in the US and approximately another 200 funds that have been set up by corporate ventures over the past two years.

We agreed that corporate VCs are finding healthy returns by fulfilling innovation needs. A Harvard Business School study shows that an efficient corporate VC programme costs only one-fourth of running an internal R&D organization, and VC can leverage the efforts of external winners.

We identified four clear models of corporation-based VC programmes:

• Financial: Operates as a dedicated fund and independent innovation tank as option for business units, e.g. Google Ventures and SAP Ventures.

• Strategic: Operates a cashless model, e.g. IBM Venture Capital Group.

• Blended: A mix of operating with financial motivation and alignment with business unit goals.

• Multi-Corporate: Enacts a themed investment approach with multiple corporations invested as LPs interested in a common objective, i.e. an independently managed fund focusing on clean technology.

Most importantly, our panel of VC experts agreed that corporations need to maintain a solid direction with an alignment of expectations between administration of the corporation, the corporation’s VC fund, and the portfolio company. A corporation needs to know what its interests are in the startup company, what resources will be allocated, and what kinds of terms or exclusivity is requested of the investment company.

We know that strategic investors are necessary for the lifecycle of the investment. Depending on a corporate investor’s core competencies, they can bring value even at the seed stage. The value of strategic investment is often made apparent at the Series B stage or later, when the company is commercializing its product.

Corporate VCs are not in the business of using investments and advising strategy as a path to M&A, unless specifically stating this in advance (e.g. Cisco and Broadcom).

Everyone on our panel has seen how investment programmes are constantly changing and can come and go. The traditional VC landscape business doesn’t look at the growing number of corporate VC investors as competition. Traditional financial investors generally view VC activities of corporations with the potential for collaboration, while providing additional market validation for the technology of interest. Our VC investors’ panel finds that collaboration can take place within a complimentary market approach or as a shared geographical perspective, especially with regards to mobile carriers.

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