Corporate venture fund (CVF) is the investment vehicle created by companies to invest in external companies including startups. A recent CB Insights report mentions that corporate venture funds invested about $12.31 billion in 2014 and they outnumbered traditional VC in many markets including mobile, healthcare, etc. The reasons to set up VC F are many. From an “open innovation” perspective, investing in outside agencies provides more opportunities to benefit from innovation, than investment in their own R&D. Often it may be even cheaper way to access emerging technologies and resources, thus help company gain from faster response. Investment in external agencies can help the corporate to de-risk investment and resources, even if technology changes or market changes happen. Another major advantage unlike the internal R&D which may be plagued by the internal organizational dynamics, a startup can pursue the technology development without any risks of failure or constraints persistent in the parent. Consider the case of research labs that were created under quite a pomp and show by many software companies. While their initial efforts were laudable, they lost steam in the run up. Attrition of key people at top, inability to drive “outside-company” innovations, and risk-averse, process-support nature of their key businesses have thwarted these centres from becoming innovation engines, but poor super-centre of excellence an euphemism for domain heavy/process heavy resources. In software and pharmaceutical industry, CVF is an approach to access to competitive techniques and increasing the heights of patent walls for the parent company. CVF, as companies such as Intel, Eli Lilly discovered could be used to spawn the ecosystem technology development to drive their core product revenues. Similar to corporate diversification strategy, CVF makes sense when: 1) it is a related technology, 2) offers access to state-of-the art technology, 3) provides deeper access to geographic markets, and 4) provides access to a consortia. From an IT service company that has created a CVF, an investment into say a product backed by Irish Baking association or a IoT applications that helps read HMR readings of equipment makes sense. For a CVF to be successful sticking closer to the parent company markets, creating platforms for transfer of knowledge and skill sets from the funded companies and the parent, pruning investment that has gone sour and continuing to check risk averse behaviour is paramount. While CVF provides innovation leverages, parent companies must independently pursue alliance programs as alternate routes to engage other market players where no CVF investment has happened to de-risk themselves from dependency and alienation of other players.
Dr TR Madan Mohan and D. Balasubramaniam