Corporates To Increase Venture Investing

Consider this. Venture investors put $21.8 billion into 3,277 deals last year. But money going into new funds came to just $12.3 billion, down from $31.2 billion in 2007.

Unsustainable on the face of it. So who has the money, and is that money interested in venture?

The answer is corporations. And yes, they are interested in startup innovation as in-house R&D has been on the cutting block for decades.

I had a useful conversation yesterday with Robert Ackerman, managing director at Allegis Capital and a keynote speaker at last week’s Annual Corporate Venturing & Innovation Partnering Conference.

Ackerman says strategic, or corporate, investors put $1.9 billion into startups last year, adding up to 8.7% of overall investments. The sum was up 33% from $1.35 billion in 2009.

More importantly, it is likely to increase again in each of the next two years, predicts Ackerman.

Corporates normally account for between 5% and 10% of venture dollars, tossing aside bubble years like 2000, when it spurted to about 15% and companies burned their fingers in the aftermath. It is at the high end of that range now and could climb further.

What that means is corporates are going to become more sought after partners and their influence is going to rise. It also puts startups in the driver’s seat since their innovation is becoming more important to corporate growth rates and competitiveness. (Small companies now spend more dollars on industrial R&D in this country than larger ones, according to the National Science Foundation.)

The challenge is strategics often have less experience in venture than general partners, meaning rookie mistakes are possible. Sure, the longtime players know the ropes: Intel, Motorola, etc. But new players are coming aboard, such as Coca Cola, Adidas and General Motors. BMW just this week launched a $100 million venture fund to support mobility and travel startups.

The challenge facing these entrants is developing the syndication networks and business relationships VCs spent years putting together, says Ackerman. Without this investment discipline, he says, “it is a recipe for excess.”

Let’s hope not.