How big companies fund innovations through hi tech startups

What is Corporate Venture Capital and How Can It Help Your Start-up?

February 18, 2010

Many established companies have corporate venture capital groups to provide funding to start-ups. Unlike venture capital firms and angel investors, corporate venture capital seeks startups whose products or services align with the established corporation’s objectives. Over the past month, I have spoken with several corporate venture groups and here is a general profile of what they are looking for in a start-up.

There are two broad types of investments. Those aligning with their existing business units, and those in markets that the corporation does not have an existing operation, but wishes to establish a presence in an emerging area. It’s was no surprise that clean tech and green technologies were mentioned as an emerging area that every corporate venture capitalist wanted to get into.

While most corporate venture capitalists will provide funds for seed stage start-ups to later stage companies, most consider the bulk of their funding to be companies seeking series B and C rounds. They weren’t looking for the stellar returns that traditional venture capital firms are expecting because they feel a start-up’s technology will compensate by somehow improving their core business.

All corporate venture capitalists agreed that their ideal start-up would have a technology which fits into their company’s strategic plans. While all venture capitalists would invest in seed rounds, they unanimously agreed that seed funding would only be given to companies whose product perfectly fit into the company’s roadmap and was one of their highest priorities. Most preferred a product or service to be commercially available today, one they could use and evaluate. A few were looking to commercialize technology that had been developed in research institutions or universities. Most wanted companies with existing products that had been validated by the customers and simply needed capital to expand and grow the business.

Why not just do it themselves? Every established business knows that as a company grows, it becomes more bureaucratic and regimented. The growth itself stifles the creative process. When innovations are pursued, they often come with a hefty price tag. Start-ups are more capital efficient and nimble. In my observation, for every dollar spent on development in a start-up, an established company would spend four dollars to do the same. What every corporate venture capitalist mentioned was their strength was in opening up markets and distribution channels to the fledging start-ups product. It seems like the perfect marriage, the start-up develops the product efficiently and the established corporation uses its existing presence in markets to build a customer base more quickly.

All corporate venture capital groups seem to have the same problem. While these groups had available funds to invest, all were having difficulty finding the companies to invest in.

That said, even if you don’t fit the profile for venture capital funding, it not a bad idea to contact them. A startup can obtain funding from a corporation without it being corporate venture capital, and this group knows all the internal R&D organizations. Product development groups will provide funding to start-ups through their own budgets and these deals do not necessarily involve an equity stake. With the intense competition for funding these days, finding a corporate partner with an interest in using your start-up’s product to further their own ambitions may be the only avenue available to a start-up at the seed or early stage.