Editor's Note: Even if you don’t agree that U.S. tech firms are overvalued, you can’t argue that billion-dollar valuations are increasingly common. This article is part of a series examining signs of a bubble.
Big businesses know this all too well, which helps explain what's driving an increase in the number of corporate venture capital arms cropping up in the past few years. If the old chestnut is correct, a rising tide floats all boats. So as the economy recovers and some sectors like technology seem like they're heading toward irrational exuberance, corporate VC firms are eager to get in on the action.
While historically these firms have tended to invest for financial returns, the trend these days is to invest strategically in startups whose goals align closely with their own business directives--and hopefully to acquire talent and innovative products and services more cheaply than their own research and development. And like the broader venture capital world, corporate venture capital investing is accelerating to levels not seen since the Dotcom era.
Corporate VC Boom
In addition to some well-known names that have been around for a while, including Google Ventures, and Dell Ventures, the renewed interest by corporate venture capital has spawned some unexpected fund launches, including chain store 7-Eleven, performance clothier Patagonia, and even the drugstore chain Walgreens.
"They are looking to get new products and serices out into the market," says Jeff Kadlic, managing partner of private equity firm Evolution Capital, in Cleveland, Ohio. "And [venture capital investment] is how they supplement their own innovation."
By the numbers, corporate venture funds transacted 2,100 deals in the first half of 2014. That's compared to 4,100 deals for the full year of 2013, which was a six percent increase over 2012, but a 30 percent increase over 2009, the height of the financial crisis. Nevertheless, the total percentage of venture capital dollars coming from corporate firms is still relatively small: about 10 percent of $30 billion invested in 2013, according to the National Venture Capital Association.
Plugging a Gap
Investment experts say such funds are filling a vital gap--for startup seed financing, which venture capital firms have all but abandoned in recent years. The statistics bear that out. NVCA reports 229 seed deals collectively worth under $1 bilion, about one-tenth of the amount invested in early-stage companies. But it's also true that big, mature businesses like 7-Eleven and Walgreens want to plug their own innovation gap and stay relevant in the marketplace. So they're investing in companies that are likely to help them broaden their offerings.
For example, 7-Ventures has invested in two companies since its launch last year. One investment is reportedly in a coffee startup, and the other, a startup known as Belly, produces a customer loyalty marketing software. Walgreen's portfolio companies include such ventures as the creator of a consumer sleep apnea device, and a solar energy company that specializes in the energy needs of multi-site retailers.
"One thing that venture startups have that's unique to them is their speed--they can sell fast--and speed of experimentation as well as insight into the consumers and usage models," says Claudia Fan Munce, managing director of IBM Venture Capital Group.
At the same time, research indicates corporate venture arms aren't terribly long-lived, lasting only about one year on average, according to a recent report on corporate venture capital by the Harvard Business Review.
And for investors like David Zilberman, partner at Comcast Ventures, the investment arm of Comcast Corporation, he's seen this cycle before.
"The market is doing well, so large corporations have capital and they are looking to invest that capital," Zilberman says. "We saw this in 2000, with large corporations getting into venture capital, and when the market collapsed, they pulled out. I hope this time around they are doing it with a much larger time frame in mind."