After Downturn, Corporate VC is Poised to Step Up…and Grow Up

Sometimes, hard times provide opportunities that good times can not.

Take the corporate venture capital sector. In 2009, at the depth of the recession, corporate VCs experienced one of their toughest years in more than a decade in terms of deal participation, falling to an 11-year low of 13.3% of all deals according to the MoneyTree Survey from the National Venture Capital Association and PricewaterhouseCoopers, based on Thomson Reuters data.

While the MoneyTree numbers for 2010 suggest that corporate venture investing is on the rebound (a 1% increase in deal participation and 1.3% bump in total dollars invested), these statistics tell only a fraction of the story.

As the number of firms and size of funds in the overall venture space continue to shrink, corporate VCs are positioning themselves to fill the void—in terms of capital and leadership.

From a dollars standpoint, corporate VCs are already playing larger roles in the deals they do. In deals that included corporate venture capital, the corporate VC dollars money made up 33.1% of that deal on average, according to the 2010 numbers.

The cleantech sector could see the most growth going forward. In 2010, corporate VCs invested $549 million in the sector, three times 2009 levels and the most since 1995. Given the exceptional capital amounts required for scale and continued energy policy uncertainty, it’s likely that traditional venture firms will continue to look for partners with deep pockets and for potential acquirers in earlier stages of deals.

More than money, however, corporate VCs are bringing a sophisticated sensibility to investing to capitalize on today’s opportunities. For example, for the first time in my career, I saw two corporate funds in an existing syndicate—yet competitors in the marketplace—pull together to continue funding a company after the initial venture firms abandoned their investment.

In another recent early stage deal, three large corporate investors came together to help a struggling company’s technology, validate its value proposition and fund a fairly aggressive plan to bring it to market. In these cases, the opportunity was simply too compelling, even when risk drove traditional VCs out.

These deals demonstrate how corporate VCs are challenging past perceptions of their savvy and bringing good citizenship and added value to the table.

Eyeing Incubation

Another trend in this new environment is that more corporate funds are looking at incubation and reaching out to their institutional brethren to understand early stage investing. Many are expanding their competencies and increasing their bench strength by recruiting quality investment professionals that have fallen victim to the consolidation of traditional venture firms. I can’t recall a time when so many qualified people were available in the marketplace. For some, the increased stability of a corporate position has simply grown more attractive in recent years.

Corporate VCs are also communicating the non-dilutive value they bring to deals better. In turn, entrepreneurs are starting to take advantage not only of the market perspectives that corporations bring, but also the increased access to technology and other resources. When “hard” science is being developed, big companies often have the most to offer.

In tighter times, corporate VCs may provide a more pragmatic view of markets, development timelines and costs than their institutional counterparts. If things start to get frothy, corporate investors may be the first ones to pull back, providing an invaluable check on the larger marketplace.

Would corporate VCs be following these paths if the economy and the venture market had spent the last few years booming instead of shrinking?

Hard to say. But one thing is certain: Plenty of corporate VCs are seizing the opportunities that the current environment has created. Many will remain major players and compete for deals even after the larger VC industry reaches its “new normal.”

In short, it may be corporate venture’s time to shine.

Annette Finsterbusch is a senior investment director of Applied Ventures, the venture capital fund of Applied Materials. She is also a member of the NVCA Corporate Venture Capital Group Advisory Board and can be reached at Annette_Finsterbusch@amat.com.