The Private Market Correction May Correct Corporate VC Models Too!
Early stage investors have become more cautious over the last couple of quarters. Articles have cited decreases in funding since 3Q15 due to limited exits in acquisitions or public offerings. It has been well documented that the valuations in the private market have reached high levels without realized gains for many limited partners of venture capital firms. This has resulted in many in the investing community anticipating a market correction and even caused some late-stage investors like Fidelity to mark down their investments in some high-profile startup unicorns. Entrepreneurs and venture capitalists have written at length about the impact the lack of exits will have on startup valuations, fundraising for early stage companies, and current venture-backed startups growth but I haven’t seen much written about the market conditions impact on the viability of corporate venture capital funds.
In 2014 corporate venture capital arms invested $5.4B in startups. Despite the great opportunity that corporate venture arms have afforded approximately 775 startups in 2014, many corporate VCs have not been able to solidify their investment strategy. We’ve seen corporate investment arms (sometimes coined “innovation centers”) emerge from industry stalwarts such as American Express, Capital One, and Boston Consulting Group. However with news coming out this year that BBVA would be spinning out its venture investment arm to a separate entity and that Intel was shopping its entire venture portfolio, signals that changes should occur within the corporate VC model.
Corporate VCs current display business models that are a spectrum of strategic-focused to financial-focused. Most corporate VCs feature strategic-focused investment models (an example is Amex Ventures) and these funds are focused on investing in early stage startups that provide some strategic advantage to a business unit. Each investment or partnership must be sponsored (meaning a department’s budget must be allocated to the investment) by the head of a business unit. The other end of the spectrum includes firms such as GV (formerly known as Google Ventures) that are essentially autonomous investment firms. They do not have to convince a business unit executive to sign on to an early stage investment. This allows financial-focused corporate VCs to be more nimble and only focus on making promising investments — not worrying about strategic fit.
I believe that with market conditions becoming more constrained with fewer exits formalizing in the next 6–18 months, we will see more large corporations either divesting their VC operations (as BBVA or Intel did) or moving to a more stand-alone financial-focused investment model. The coming private market correction will cause shareholders to question CEOs’ “pet projects” in tech innovation and force them to get near-term value or acquire more experienced VC talent and give them autonomy to make better decisions. Venture Capital can’t remain corporate for long if it doesn’t garner better returns…now.
Earnest Sweat is a Startup Adviser and Business Ops professional for various accelerators. Sweat specializes in sourcing, managing and mentoring startups within the fin tech, ed tech, and real estate tech sectors. If you have any questions, comments or requests please connect with Earnest through LinkedIn, Twitter, or AngelList.
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