By Peter Hildrew

Corporate venturing has been a part of the investment scene for many years, however, declines in the funds they invest indicate that corporate investors may have lost the stomach for risky technology investments. Yet co-investment the mixing of traditional venture capital and corporate funding seems set to regain favour.

Most corporate investment funds aim to establish an advantage for the parent organisation by investment in emerging technologies. Most popular are new and "disruptive" technologies, where the intention is to gain insight, and control without funding speculative R&D work. Corporate investors can provide not just the funds, but access to industry thinking. When the idea is launched, the inroads to the parent organisation's sales channels and suppliers ensure the success of the new venture.

Considering the options

For CEOs with corporate venturing arms it is vital to prioritise between making strategic investments and getting a return on capital. Who runs the venturing arm, makes the investment decisions; and decides how much the operating divisions need consulting - the board or the venturing arm? Recent evidence shows that corporate venturing has changed from focusing on strategic investments to an emphasis on shepherding, adoption by business units and financial accountability.

Also for consideration is the speed at which corporate investors can work, compared with corporate venturers. Being parts of larger organisations with more complex decision making processes, corporate investors can be slower to commit to investments than VCs. Yet the ability to attract corporate money sends a strong signal to the company's customers and partners.

Co-Investment

VCs are enthusiastic about co-investing with corporate investors. If a corporate investor, with greater market insight agrees to invest, then uncertainty is reduced. Also, the corporate investor could accelerate the path to growth and profitability by providing complementary resources.

In these days of risk avoidance, co-investment will become increasingly popular. But the issue of exit strategy can still pose problems. In the absence of an IPO market, what other options are open? If the technology is genuinely interesting to the corporate investor's parent , then everything should be relatively straightforward. However, over dependence on the parent organisation, combined with an unwillingness by the parent to pay an acceptable price, can place the portfolio company in a very difficult position.

Companies heading for an exit cul-de-sac should be identified before an exit becomes necessary. Over-reliance on the ultimate parent organisation needs to be tempered by a strategy that broadens the market and possibly the technological base of the venture. A build-and-exit strategy is becoming an attractive precursor to an exit.

The indications are that corporate venturers will return to the market after a year of hasty retreat. The return will be cautious, and the opportunities will be based on more sensible valuations and sounder business principles. With substantial funds as yet uninvested, VCs will be on the search for similar opportunities. To reduce risk they will be looking for co-investment opportunities with corporate investors. We can't say what the market for IPOs will be in the next three to five years, but it's as well to consider build-and-exit strategies in advance.

M & A magazine, Vol 3 issue 11, April 2002