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As a result, entrepreneurship became a buzzword for the first time. Nearly schools now offer courses in entrepreneurship — up from 16 in Some of the people are going into business not because they have a fundamental belief in American capitalism, but because they have a social mission. None of this would sound unusual in or — but this article was written in As is often the case in the history of CVC, corporate investors largely followed the lead of private venture capital, which was reinvigorated by favorable regulatory changes in the late seventies.
This increased the pool of capital available to entrepreneurs, incentivizing entrepreneurship, and creating a positive feedback loop. Companies employed several models in pursuing corporate venture capital programs during this period, often pursuing multiple strategies at once. Executives focused on enterprise innovation and growth have a tough job because there is no playbook for how to be successful.
The motivations behind the second wave of corporate venture capital largely mirrored those of the first: Access to technology could also mean protecting or hedging against existing technologies.
While the second wave of CVC was largely focused on the technology industry, this was not exclusively the case. General Electric still had its CVC fund from the first wave and invested in a number of successful tech startups.
In addition, the second wave of CVC was when, for the first time, foreign companies, especially from Japan, instituted CVC programs as well, although the investment was still largely confined to the US.
By , there were corporate investors in European VC funds, although only a few European corporates had internally managed CVC funds. There was also some investment flowing in the opposite direction. Xerox had had an active CVC program since the s, operating an internally managed fund that invested in some of the most legendary figures in Silicon Valley, including Raymond Kurzweil and Steve Jobs.
Kurzweil got his start in technology when Xerox invested in his first company, Kurzweil Applied Intelligence Inc. If some of the innovation results fall off the wagon, so what?
XTV was modeled on the structure and practices of independent VC firms, one of the earliest examples of a quasi-independent CVC unit like what we see today: The companies were staffed with outside employees and allowed to make their own technological decisions, and Xerox never intended to maintain control of the companies, and involved outside VCs as the companies grew.
Nonetheless, XTV was terminated early and replaced with Xerox New Enterprises, which did not relinquish control of firms or allow for outside investment, and likewise used a more standard corporate investment compensation scheme.
Why was it scrapped despite the successes? The average lifespan of a CVC program between and was 2. The stock market crash is widely considered to have brought the second wave of corporate venture capital to an end. Nonetheless, some CVC indicators continued to rise after the crash. On August 9, , Netscape Communications Inc.
The dot com boom had begun. If the personal computer was the breakthrough technology that drove the second wave of corporate venture capital, the internet was undoubtedly the impetus behind the third wave, which far outpaced its predecessors in scope and size. Nearly CVCs made their first investments in the years between and CVC also continued to internationalize during this period, even as the US remained the most important market.
Part of the reason for this enormous growth in CVC activity was, as always, hype building on hype. Pharmaceutical companies and freshly ascendant tech mega-companies emerged as major CVC investors during this period.
Media and advertising companies, for example, rushed into CVC for the first time. The growth of CVC also accentuated some of its internal contradictions, notably around issues of compensation. Independent VCs were minting fortunes during the tech boom, seemingly overnight, far exceeding anything that had occurred prior. Despite this tension, this period saw closer collaboration between corporate and private venture capital investors than in any of the previous waves.
This occurred because the VC market was overcrowded, and partnerships with corporations offered independent VCs a competitive advantage, according to Gompers and Lerner.
These partnerships often went beyond investment syndicates. Kleiner Perkins, for example, set up a Java Fund as a way for companies to stimulate demand for the technology by investing in companies creating Java-based applications, which held the promise of being compatible with multiple operating systems.
Others sought to benefit from the advantages of bringing private and corporate venture capital together. The fund was directed to invest in strategic companies for TI, but within that, Granite focused on maximizing financial returns.
Approaches to CVC also began to change during this period. CVC was once about entering new markets or expanding product lines, but this new third wave of CVC focused on defending and supporting existing product lines by fostering a healthy business environment and ecosystem around those products. No company better exemplifies this strategy than Intel Capital, arguably the most successful longstanding CVC program. But Intel was more committed to stimulating emerging technologies and market sectors rather than the success of any individual company.
Intel took a similar strategy in October when it wanted to encourage the adoption of wireless technologies using the Intel Capital was founded at a time when most other VC investors, independent and corporate, were pulling back. Vadasz, the president of Intel Capital, said at the time. Intel overcame the compensation issue internally by putting senior employees who were already deeply invested in the company in charge at Intel Capital. It also, crucially, had the support of management.
All of this meant that Intel was uniquely well-positioned when the inevitable downturn arrived. The third wave finally ended with massive declines in the stock market. Many public tech companies went bust, as well as many tech startups that depended on a robust financing and IPO market to finance their expansion.
Because most CVC units are funded through the balance sheet, CVC investors are often required to use mark-to-market accounting, and as a result had to write down enormous losses during this period. While this method of accounting does not necessarily reflect real gains or losses, it can produce jaw-dropping headlines that nonetheless scare off executives and shareholders. As a result of the losses and write-downs, some companies faced pressure from large shareholders and activist investors who questioned the propriety and wisdom of CVC programs.
After the bust, the company largely ignored the program. By , when it was finally winding down, no one at the company even knew if its portfolio companies were still in business, or had gone bust, or if they were earning the company strong returns — a team from the strategy and corporate development had to call around and find out. However, not all companies pulled out of the market. Biotech and pharmaceutical companies, in particular, retained robust CVC programs throughout the early part of the decade.
Even if CVC was momentarily discredited in the eyes of many, the boom in CVC investing had given observers a broader set of data than ever before to provide insights about the phenomenon, to understand its successes and failures.
Some of the data was encouraging. However, CVC investments did not, in general, outperform those of independent VCs, unless there was a strategic tie between the investing corporation and the startup. On the other hand, CVCs also paid significantly more for their investments. CVCs also invested less frequently over a more abbreviated period of time. The average CVC made 1. What doomed many CVC programs of the period, most researchers agree, was a lack of strategic focus and clearly defined objectives.
Many companies started CVC programs because it seemed, at the time, that any serious company had a CVC program, and everyone was doing it, not because they carefully thought through how such a program could improve their business — a problem compounded when outside investors were brought in to run the program.
Companies wanted access to Silicon Valley without really knowing how Silicon Valley could be of service to them. Then they were caught off-guard when everything went bust. Even if CVC garnered a bad reputation in some corners, though, there were still enough successes to convincingly demonstrate its importance and vitality in the right hands.
It was always clear that CVC investing would one day make a comeback with the improved fortunes of the tech industry — but would it return again only to get caught up in the hype? While corporate venture capital fell off substantially after the bubble burst, it by no means disappeared.
This trend reflects the broader increase in venture capital investment, which has more than doubled since and saw significant gains between and and and At this point, though, CVC is actually growing at a faster rate than venture capital investment in general. But it only captures part of the picture: With the new rise of CVC, critics have again surfaced.
Healthcare now also regularly tops software and hardware, both tech boom darlings, as a destination for CVC dollars. Another factor encouraging CVC activity is that corporations are sitting on historically large piles of cash and global interest rates are historically low. With the benefit of hindsight, two other events may have played a small role in nudging companies back into corporate venture capital. Nonetheless, hype and exuberance have undoubtedly contributed to the enormous growth in CVC in the past few years, buoyed by the triumphant press surrounding new technologies, a rash of new buzzwords, and the omnipresent fear of disruption.
The recent expansion of CVC investment is impressive. There are now, as we saw, roughly CVC units active in any given quarter, a number that is more than 2x what it was just five years ago.
Some companies that ditched their CVC units after the bubble burst have decided to give it another go. Microsoft, likewise, is revamping its CVC efforts. While Microsoft had an ad hoc corporate venture capital program in the s, making minority investments in startups without a formalized CVC program, the new Microsoft Ventures unit represents an example of a mature model for corporate VC, pioneered by large technology companies and since adopted beyond the industry.
At the beginning of , however, Microsoft decided it was time to ramp up their investing activities and founded their first structured CVC program, Microsoft Ventures. Nagraj Kashyap, formerly the head of Qualcomm Ventures, was brought on to spearhead the effort, and he has hit the ground running.
Kashyap came from Qualcomm Ventures, which like Intel Capital, emulates many independent VC firms and is focused on maximizing its financial returns. The best financial companies make for the best strategic returns. That does not mean, of course, that Microsoft Ventures will be investing in coffee startups or lifestyle brands.
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