Venture capital funds capitalized and run by major corporations are becoming more popular, and are commonly referred to as “venture capital arms” or “corporate venture arms.” For example, companies such as Google, Qualcomm, Comcast, Dell, Microsoft, Nokia and Intel all have professional active venture arms. This is an important development for entrepreneurs and startups, as these corporate venture arms can invest significant capital and provide substantial assistance to a startup.
Companies in many industries, from technology, software and consumer retail to aviation, media and mobile telecommunications, have corporate venture arms that make strategic investments.
In this article, we discuss a number of key points about how corporate venture arms are established and operated, what benefits they bring to startups and the goals of these organizations.
1. Why do companies establish corporate venture arms?
Companies establish venture arms for a variety of reasons, including:
- Financial returns
- Getting exposure to new and disruptive technologies
- Enabling new potential partners
- Getting exposure to new business models
- Gaining market knowledge
- Establishing relationships with innovative entrepreneurs
- Investing in companies strategically important to the parent company
Qualcomm Ventures is the corporate venture fund of Qualcomm, with 180+ active investments and numerous exits, including $6 billion+ in outcomes in the last five years alone. Patrick Eggen, Managing Director of Qualcomm Ventures North America who leads all U.S. investments, says, “We are financially driven but invest in specific areas which represent core, adjacent or future markets for Qualcomm. Think of Qualcomm Ventures as the eyes and ears for Qualcomm to identify future technology trends. Additionally, we still apply the same investment filters as any traditional venture capitalist and don’t require any commercial relationships as a pre-requisite to our investment. You partner with us to get technical value-add and wireless domain expertise.”
2. How are corporate venture arms structured and funded?
Corporate venture arms are typically structured in one of two ways: as a stand-alone limited partnership or as a separate division in the corporate parent, with investment team members operating the venture arm.
There are a variety of ways that corporate venture arms are funded. One way is that if a separate limited partnership vehicle is established, then capital is invested directly into that vehicle for future investments in startups. Another option is for the corporate parent to allocate a certain amount of capital for potential investments.
3. What kinds of investments do corporate venture arms look for?
Corporate venture arms vary as to the types of deals they are looking for, but here are some key elements often sought:
- Startups with high growth potential
- Startups with large addressable target markets
- Startups that may be synergistic with the business of the parent company of the venture arm
- Startups with a big financial upside
- Startups that may make sense for the corporate parent to acquire in the future
Many corporate venture arms look for early stage to mid-stage deal investments and will participate in seed rounds, Series A rounds and Series B rounds.
For example, REV Venture Partners, the successful venture arm of RELX Group (and parent company of LexisNexis), likes to invest in early stage healthcare, IT, data and analytics companies. Kevin Brown and Tony Askew, the Founder Partners of REV Venture Partners, have made successful investments in Palantir, Healthline, Babbel, Recorded Future and many other companies.
4. Do corporate venture arms require a lead institutional investor to lead the company’s financing round?
Historically, many corporate venture arms wanted to see a lead institutional venture capital investor before they participated in a round of investment in a startup. But that is less commonly a requirement among many corporate funds.
For example, John Gardner, a General Partner with Nokia Growth Partners, states that his fund leads the financing round in almost all of their deals. Nokia Growth Partners has more than $1 billion under management and is structured as an independent fund manager sponsored by Nokia. The fund focuses on growth-stage investing in Internet of Things (IoT), digital health and other areas strategic to Nokia, with notable investments in RocketFuel, Ganji, and Heptagon.
5. What value-adds can corporate venture arms provide to startups?
Corporate venture arms can provide meaningful assistance and value to a startup, including:
- Strategic and tactical advice on the startup’s industry and business
- Operating support
- Credibility and validation in the eyes of the public, by having a well-known strategic investor
- Access to the parent company’s information technology talent
- Potential sales of the startup’s products into the parent company
- Access to other customers and distribution
- Giving venture capital investors more confidence in the startup
- Ability for the startup to tap into the global connections and in-house expertise of the parent company
- Providing a potential exit path
Michael Yang, Managing Director for Comcast Ventures, the 18-year-old venture capital arm for Comcast Corporation, says, “There is no shortage of capital for the best startups. The smartest entrepreneurs want the most value-added investors on their cap table. Every VC’s dollar is green, so what differentiates a VC is how they can be most helpful to a portfolio company post-investment.” At Comcast Ventures, there are marketing and business development teams that support its portfolio companies and facilitate discussions with various groups within Comcast Cable, NBCUniversal and Comcast Spectacor.
GV, which launched as Google Ventures and is the venture capital arm of Alphabet, Inc., has invested in over 300 companies. Here is what GV says about the support it provides: “We’ve built a team of world-class engineers, designers, physicians, scientists, marketers and investors who work together to provide these startups exceptional support on the road to success. We help our companies interface with Google, providing unique access to the world’s best technology and talent.”
6. Will the corporate venture arm participate in follow-on rounds of financing?
It’s important for startups to have investors who have the capital and ability to participate in follow-on rounds of financing. Fortunately, many corporate venture arms can and do make follow-on investments.
7. How do corporate venture arms source deals?
Corporate venture arms source potential investments in ways very similar to institutional venture capital funds, including:
- Networking with entrepreneurs
- Networking with venture capital funds
- Using internal investment professionals to research companies and make cold calls
- Connecting with companies pitching the corporate parent for partnerships or product sales
- Networking with incubators and accelerator programs
- Networking with angel investors
- Networking with startup lawyers
Microsoft Ventures, the venture arm of Microsoft, sources its deals from contacts with companies wanting a relationship with Microsoft, from other venture capital funds, and from Microsoft accelerator programs — all through its experienced, San Francisco-based investment team. Microsoft Ventures’ focus areas include: artificial intelligence, big data and analytics, business SaaS, cloud infrastructure, machine learning, productivity and communications and cyber security. Nagraj Kashyap, the Global Head of Microsoft Ventures, says, “We provide both capital and the resources for startups to grow. We have a dedicated team to help our portfolio companies scale their product development, technology, sales and marketing.”
8. How are investment decisions made by a corporate venture arm?
Investment decisions for corporate venture arms are typically made by the managers of the venture arm. In some instances, or for some deals that exceed a certain dollar threshold, approval by the Chief Financial Officer or other officer of the parent company may also be required.
9. What special rights might a corporate venture arm ask for as part of its investment?
Corporate venture arms have learned that asking for special or unusual rights from a startup is counterproductive. So provisions like rights of first refusal or rights of first offer on a sale of the company have become fairly rare. Such provisions can really hurt the startup when trying to sell itself in an M&A transaction.
The corporate venture arm will expect the typical information rights given to other investors (financial statements, budgets, etc.), registration rights, pre-emptive rights on future stock issuances, voting rights and other rights customarily given to financial investors. If the investment results in a meaningful percentage ownership of the startup, the venture arm may ask for a Board seat or observer rights.
At the end of the day, corporate venture arms know that their valuation and terms have to be competitive with traditional venture capitalists, especially for companies that have gained significant traction.
10. How do the managers of the venture arm get compensated and incentivized?
The managers of the corporate venture arm typically are existing employees of the parent company or investment professionals lured to the corporate venture arm from venture capital funds.
The managers of a corporate venture arm will typically get compensated in one or more of the following ways:
- A “management fee” for operating the venture arm (akin to the management fee that general partners of institutional venture capital funds receive).
- A “carried interest,” which is a percentage of the profits made by the venture arm in excess of the invested capital.
- Stock options in the parent company, subject to time-based or milestone-based vesting.
Many corporate venture arms have found that a “carried interest” right is important to attract and retain talented investment professionals.
Strategic investors can provide more than just capital to a startup. Corporate venture arms can be enormously helpful in the growth and success of a startup, and entrepreneurs should welcome their participation in their business.