According to NVCA , in 2Q’11, VCs invested $7.5B in 966 companies, both up 19% vs. 1Q’11. The funding in the cleantech sector was down 23%, at $942MM, across 81 companies (up 11%). There’s a growing trend of VCs shifting their investment strategies from capital-intensive to capital-light and IT-based cleantech sub-sectors, a theme that’s proposed will gain prominence . However, the need for capital intensive innovative solutions – from energy generation to innovative material solutions, will still remain and need to be filled. Corporations, through their venture or similar groups, are expected to step up, both to fill the void and to develop their growth strategies.
The importance of VC-backed companies to the US economy is no surprise – this group contributes 11% and 21% to nation’s employment and GDP, respectively. In addition to shift away from capital intensive sectors, the R&D spend in energy and related industries is a fraction of other industries, e.g. pharmaceuticals. R&D spend as a fraction of Sales for energy sector was 0.3% (an amount less than the country spends on potato chips), material-focused companies appx. 0.5 – 6%; while pharmaceuticals was reported to be almost 19%. Venture type investments, probably with a different model, will be critical to drive the growth in energy, materials, or similar industries.
At the same time, large corporations have an increased mandate on growth in incumbent or new sectors, while facing ever increasing competition globally. It doesn’t help when large companies share of overall R&D spend decreased from 71% in 1980s to 38% in 2000s . The majority of the innovation is happening outside the confines of large companies. A large company, with a broad growth strategy, can potentially tap into this innovation, fill the funding gap, and position itself for growth. A Corporate Venture Capital (CVC) group is likely to a key element of this growth strategy and to lead to a win-win-win.
For large companies…
An appropriately set CVC group could provide parent company the pulse of the industry, at the minimum, to an option to leap-frog into a new industry, at best. This is highlighted with some of the industry examples, with Google’s quest to find the next Google and a dedicated CVC team at BASF. In numbers, according to data from Synchrony Venture Management , CVC groups invested almost $2B in 2010 across almost 500 companies, while contributing 27% of invested dollars in energy & industrial sectors (vs. VC’s ~15%). Majority of these groups reported investing at least $50 MM annually – an equivalent to ~$350 MM VC fund. To make the most of a CVC group, several things will need to be done right (potentially differently from the current norm), including, having a right risk appetite, dedicated team, and long-term commitment.
For entrepreneurs…
In addition to financing, a CVC group provide access to the parent company and the industry ecosystem to the start-up. These could include providing access to critical elements in the supply-chain, a better understanding of the market, or becoming a potential customer. It can also potentially provide an exit route to the start-up as highlighted by this week’s technology-focused acquisitions by GE and DuPont. An appropriately designed CVC group will likely make the experience of working with an entrepreneur – from speed to execution, seamless.
For the broader economy…
It’s not far-fetched that innovation is the driver of the nation’s economy. Increased participation of large companies in this agenda will enable further economic growth, employment, and reduced reliance on scarce resources (in the energy or materials sectors). Corporate Venture Capital can be an important lever that large companies can use towards these goals and complement existing players.
