Corporate Venturing - Why Start-ups Prefer Corporate Funds

When we imagine the term venture capital, we typically think about a fund that has been created by taking money from several high-net-worth individuals. It is true that most venture capital funds in the world are created this way.

However, there are some other types of venture capital funds that are not a collection of pooled resources. Instead, these venture capital funds are funded by a single large corporation. This is called corporate venturing.

In this article, we will have a closer look at what corporate venturing is and what are its pros and cons.

What is Corporate Venturing?

When large corporations invest significant sums of money to buy stakes in external start-up corporations, it is called corporate venturing. Many times, corporations want to invest in other companies that may be smaller in size but may have a technologically advanced products.

Corporate venturing is different from traditional venture capital. This is because the objectives of corporate venturing are quite different from that of regular venture capital.

Venture capitalists want to maximize their returns. However, corporate venturing is done for two major reasons. The first reason is that the company wants to gain control over advanced technology that might make its product obsolete in the future.

Corporate venturing is done by large companies trying to hedge their bets. Alternatively, it is done to invest a small amount of money in an investment, which if successful, allows the company to gain a sustainable competitive advantage over its competitors.

The aim of corporate venturing is not purely financial. Instead, these objectives can be strategically inclined with the current business of the firm.

Why do Start-Up Firms Prefer Corporate Funds?

Many start-up founders find corporate venturing to be restrictive. This is because the investors always view the start-up through the lens of their existing business. They are not interested in understanding the value that the start-up can create as a standalone enterprise. Despite this major obstacle, many start-up firms prefer to raise funds using this route. This is because there are several advantages to doing so. Some of the important advantages have been listed below:

  • Large corporations have widely known brand names. When a large corporation invests their money in a start-up, they provide validation to the start-up. Founders of such start-up companies are able to leverage this brand name in order to increase the valuation and even sales of their company

  • Large corporations are not short of funds. In general, they have large cash reserves. Even if they do want to raise money from the market, they can do so very quickly and at lower costs.

    Hence, if a start-up company raises funds from such a company and is on track to achieving its goals, it does not need to worry about raising subsequent funds. The same corporation will be willing to provide a generous valuation. Hence, founders are able to focus on their core tasks which include setting up a business.

  • Large corporations have a wide network of connections in many places. For instance, they can guide the start-up in building the best marketing plan within their budget. They can also help the start-up get a better deal using economies of scale.

  • It is also important to note that large corporations tend to have industry expertise. Even though the start-up may have newer technology, larger corporations tend to understand the business and the consumer better. Hence, the mentorship provided by such businesses can be invaluable to a start-up firm.

  • Start-ups look forward to working under this model because it allows them to get the best of both worlds. On the one hand, they can collaborate with multinational corporations and learn from them but on the other hand, they continue to retain their independence.

Why do Corporations Want to Invest in Start-Ups?

Even though start-ups are considered to be risky investments, they are still widely preferred by a large number of corporations. Companies like Google, Intel, Salesforce, and Qualcomm are active participants in corporate venturing. The benefits which commonly accrue to such corporations have been listed below:

  • There are many corporations that have lost their supremacy to smaller start-ups with advanced technology in their field.

    Larger companies view these small investments as insurance policies. If the experiment is successful, they end up in control of industry-leading technology. If it does not work out, then they can simply write off the costs.

  • Also, investing in start-ups helps companies maintain their market leadership over the industry.

  • Investing in early-stage start-ups also creates positive publicity for the corporation. The corporation is viewed as collaborating with the general community and improving the lives of people whom it interacts with.

  • A lot of corporate venturing is done with the intention of building a large-scale ecosystem of cooperative companies which support the business of the main company. Corporate venturing allows a company to have a significant influence over its ancillary business partners.

Corporate venturing has worked out fine for a lot of businesses. However, it is important that both parties respect the boundaries of the agreement.

The start-up must ensure that they achieve operational excellence so that they can justify the investment made by the corporation. On the other hand, the corporation must ensure that it does not interfere too much with the day-to-day business of the start-up firm.

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