Venture Strategies:

Venture Investing

Corporate Venture Investing

Gaining Insight into Emerging Markets and Next-Generation Technologies Coming from Start-Ups

Why Corporations Invest in External Start-Ups?

Corporations are a major – and rapidly growing – source of funds for new ventures. In today's new entrepreneurial economy, the real shareholder value is created by companies whose corporate strategies include well-developed venture strategies.

Partnership between small innovative firms and large corporation is mutually beneficial. While entrepreneurial companies can identify technology and market opportunities and move faster to capitalize on them, they can achieve enormous leverage through technology and distribution agreements with large global corporations. Large corporations, on their part, gain insight into emerging markets and next-generation technologies, for most innovative products and technologies are coming from start-ups.

Birth of Corporate Venture Investing

According to Venture Economics and the National Venture Capital Association, in United States in 1994, only 2% of venture capital investments was corporate venture capital, but in 2000, corporate venture capital accounted for 17%, nearly $20 billion. In four years, from 1996 through the end of 1999, the number of companies that were investing in outside ideas increased elevenfold, from 30 to 330. During the same period, corporate venture capital spending rose from $100 million to $ 17 billion annually.

Strategic Benefits of Corporate Venture Investing

Strategic benefits of corporate venture investing may include:

Passion-driven

• Discovery of unmet customer needs and unserved emerging markets

• Potentially high return on investment

• Supplements to internal research and product/service development investments

• Improved efficiency of the value chain management, in particular supply chain and customer relationships

• Development of new business relationships

• Preparing potential candidates for strategic alliance or acquisition

Fear-driven

• Reducing the risk of missing a new turn in technological development

• Preventing competitors from acquiring a breakthrough technology

• Motivating internal talents to outperform outside ventures

Direct Investing: In-company Venture Capital Funds

You need to develop well-disciplined decision making processes and management systems that would support your investment strategies. In fact, many companies lack them and rely on informal investment approaches which lead to poor performance of their in-company venture capital funds. As opposite, companies with rigor investment management system make thorough research and have healthy discussions about whether or not to make an investment. General Electric Equity, for instance, as a result of such research, develops a "tornado" diagram, which systematically ranks, from top to bottom, the risk variables that matter the most, including such uncertainties as future margins, market share, and market growth.¹

 Case in Point  Mitsubishi Corp.

In 2002, Japanese general trading firm Mitsubishi Corp. has set up a venture capital unit, Captech Corp., to invest in startups specializing in high-tech metals products. Captech focuses on three sectors: solar batteries, solar catalysts and electronics materials. Mitsubishi owns 100% of Captech's shares and provides the bulk of investment funds. Captech is capitalized at  Yen 15 billion ($121 million) and is expected to invest Yen 3 billion to  Yen 5 billion over the next three years. Captech is an extension of the business of Mitsubishi's non-ferrous metals trading department, which will choose the investment targets and provide management aid. Mitsubishi has been an active venture capital investor for more than a decade but has so far kept such forays separate from its mainstream trading business. Captech invests in Japanese but also in U.S. and European companies.