INTERNATIONAL. There are now approximately 1,300 corporate venture funds worldwide and in 2015 US$28b of corporate venture capital (CVC) flowed into over 1,300 deals across a range of sectors[1].
The growth in the CVC market is explored in a new EY report, The Innovation Paradox, which, through data analysis and in-depth interviews with a range of corporate fund managers, looks at the variety of strategies, approaches and models adopted by mature enterprises to access disruptive innovation.
The report explores some of the reasons why incumbent market leaders often struggle to recognize the changes that can and do negatively affect their business. As the average lifespan of a company is getting shorter – from 35 years in 1980 to 20 years in 2020[2] – companies are investing in the so-called “bleeding edge” of innovation through corporate venture funds.
Uschi Schreiber, EY’s Global Vice Chair ‒ Markets, says: “Innovation is crucial in today’s marketplace, but turning disruptive ideas into reality is not always what large organizations are best at. The conditions that foster it – like small team sizes, cultures that encourage experimentation and failure, and a bias towards non-conformity – are not generally found to be flourishing in multi-billion dollar mature companies. CVC can be a route to bringing the outside in to make innovation real.”
The report looks at why and how companies are investing more than ever in CVC. Some are using it as an M&A pipeline builder, while others use it to invest in innovators who stay at arm’s length but contribute to the larger company’s ecosystem, helping it identify and foster future innovations.
It looks at how CVC can work best, what leadership buy-in it requires, and how it benefits investee companies – from the access it gives them to often large customer bases to the help they get in managing IP rights and navigating regulatory frameworks.
The report identifies four broad categories of CVC:
1. An enabling investment is a CVC approach that focuses on popularizing and extending the parent company’s platform, helping embed the technology in a network of applications and business processes. This type of venture is both low risk and focused on a parent’s current business. It is primarily investment in today, not tomorrow.
2. An emergent investment is a CVC approach that solves an acknowledged customer challenge, applies a new business model to the parent and builds in an adjacent sector or sub-sector to create foreseeable synergies that are nevertheless not part of the current business. Corporates may sponsor companies because they are able to move faster, iterate and create solutions more quickly and cheaply than internal R&D units can. Some corporates invest in emergent solutions outside their own business focus.
3. A driving investment is a CVC approach that categorizes investments that are future-focused but meet strategic needs. A parent enterprise may judge that it can accelerate the speed to market by accessing external innovation.
4. An experimental investment is a CVC approach investing into very speculative lab-based pilots that test blue sky thinking. Startups tend to be at a very early stage and many corporate venture parents invest through an accelerator or incubator, making many small bets in a high failure rate environment.
Bryan Pearce, EY Global Venture Capital Leader, says: “Corporate venturing is not “one size fits all” and there are different motivations and strategies at play. What is clear is that it should be a win-win situation for both the corporate and the start-up, for whom it can provide a real boost. When done right, CVC can be a hugely powerful spur for innovation and growth.
“Corporate venture is an investment in the dynamic forces that are reshaping whole business sectors and the markets they serve. These investments, when managed effectively, can help company leaders identify new opportunities for growth; new ways to find and excite their customers; and new ways to transform a legacy business so that it is future fit.”
Find the full Innovation Paradox report here.
Photo Caption: Bryan Pearce, EY Global Venture Capital Leader
About EY
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.
[1] Data from CB Insights https://www.cbinsights.com/blog/cvc-funding-trends/
[2] Data from “Creative Destruction Whips through Corporate America”, Innosight Executive Briefing, Winter 2012, INNOSIGHT/Richard N. Foster/Standard & Poor’s
