The following is a guest post by Rita Waite (@ritacwaite), senior analyst in growth strategy and investments at Juniper Networks.
The venture capital ecosystem deployed $74.2B across North America in 2015, making it the second highest funding year in the last 20 years, according to CB Insights data. In 2015, corporate venture groups participated in 17% of all North American deals, accounting for 24% of the total venture dollars deployed to VC-backed startups. This reflects an increase in corporate VC activity, since CVCs only participated in 12% of deals in 2011.
This growing investor type has quickly become an alternative source of funding and support for entrepreneurs raising capital — but what is corporate VC and how does it differ from institutional VC?
Corporate VCs can be organized as an independent arm of a company or a designated investment team off their company’s balance sheet. The goal of a corporate VC is largely the same as an institutional VC: to invest in high-growth companies that drive value for the company. Technology and healthcare giants have held a venture presence in the industry for a long time. Google Ventures, Cisco Investments, Dell Ventures, Intel Capital, and Johnson & Johnson Innovation are all marquee names in the space. It is the recent influx of new corporate VCs, ranging from convenience stores (7-Eleven) to financial firms and car manufacturers (GM invests $500M in Lyft) that stand out as the new entrants to the market.
Much of the growth in corporate VC activity can be attributed to the slow economic recovery, driving companies to seek alternatives to traditional R&D to boost growth. Corporate venture investments are a vehicle for the company to go into riskier and more disruptive R&D. Since most invest off the balance sheet, it gives the company more scale in R&D than just its P&L would allow — while providing companies with access to market and talent not otherwise available.
Institutional venture capital — i.e. the firms usually referred to as VCs — are managed funds with $25M to $1B under management to invest in companies with high-growth potential. This capital comes from limited partners, the fund’s investors, and are managed by general partners, who are the fund’s partners, run the fund and make investment decisions. While 80% of all venture funding is deployed by institutional VCs, a small percentage of the firms raise the bulk of the total venture capital. Understanding the dynamics of the industry should help frame the economics of institutional VCs.
Corporate VC versus Institutional VC
- Corporate VCs tend to have strategic objectives. In the short-term, they invest in partners that drive closer alignment and tighter relationships to the company; while in the long-term, invest more strategically.
- Institutional VCs invest for financial returns. These groups are running a business predicated on above average financial returns. Success, however, is not universal. The top firms are known to generate the lion’s share of the industry’s returns.
TL;DR: Corporate and institutional VCs complement each other. Corporate VCs provide startups with in-depth industry knowledge and access to potential customers, while Institutional VCs are experts in building companies and driving financial results.
Investment stage: seed, early stage, mid-stage, late stage
- Corporate VCs prefer to invest in early to mid-stage companies. Deal flow is much more accessible at this point and access to a large, established customer base, along with credibility through brand association is most valuable to a company. This creates a mutually beneficial arrangement that lets Corporate VCs make better use of its strengths in the investment.
- Institutional VCs vary in investment stage preference, from idea to late stage companies. Regardless of the stage, Institutional VCs have the know-how to build strong teams for financial success.
TL;DR: When it comes to investment stage, Institutional VCs are a consistent source of capital throughout the company lifecycle. Corporate VCs can be more strategic in enabling growth for early- to mid-stage companies.
- Corporate VCs are subject to the strength of their balance sheet and the leadership of their companies. When economic conditions or leadership change, so may the objectives of the fund. This is a potential risk of taking capital from corporate VCs.
- Institutional VC funds are often structured as 10-year commitments, where initial investments are made in the first three years. After the portfolio has been established, the fund will typically make follow-on investments over the remainder of the fund’s life-cycle.
TL;DR: Corporate VCs have a spotty track record for follow up investment as strategy and leadership change during the lifetime of a startup. As a rule of thumb, an institutional investor should always be the largest investor with the commitment to see the startup through an exit.
- Corporate VCs do not seek tight control due in part to fiduciary responsibilities and accounting implications. They typically prefer a board observer role rather than a seating role with a vote, which implies less control over the company while still being an active partner.
- Institutional VCs want control over their portfolio investments. In an effort to help companies grow and achieve greater return on the investment, investors typically require a board seat and work closely with a startup’s leadership team.
TL;DR: Venture capital investment should be seen as a partnership. Institutional VC tend to demand a more active partnership that lends itself to control more of the company’s decisions than corporate VC.
- Corporate VCs look for a wide range of outcomes from an investment. While financial returns are a great perk, they are not the only exit opportunity. A Corporate VC would find value in an investment becoming an acquisition target, an OEM partner, a channel for additional company product sales, or even a product integration that would drive sales for the investing company.
- Institutional VCs are looking for one type of exit: a strong financial return. Targeting a 20% annual return on their portfolio implies that investors will likely look to block a sale or IPO of a company, unless the price offers the VC an adequate return.
TL;DR: When assessing a financing partner, it comes down to growth trajectory and exit potential, but neither choice is mutually exclusive. Corporate VCs are open to various exit opportunities while Institutional VC are bound to prioritize high financial return.
Rita Waite is a senior analyst in growth strategy and investments at Juniper Networks. Juniper’s venture capital arm is a strategic fund with the objective to invest in technologies that will drive value for Juniper.