by anabananasplit

Corporate Venture Capital 101

Corporations, much like individual investors, take risks, earn the rewards of profitable investing and pay the penalties for insufficient or incorrect analysis or foolish behavior. That is only to be expected. After all, corporations are considered as individual entities in law. The legal entity is nonetheless, made up of real people.

Assuming venture capital risk is one of the functions for corporate management. Most often, such investment is closely allied to the company’s key business. The funds invested are coupled with complementary strengths and experience of management to augment the growth of the new risk venture.

Investments in entrepreneurial enterprises are subject to the same requirements as individual investments. Return on investment, acceptance of the entrepreneur’s venture in the marketplace, timing and desired amount of subsequent capital stages and a solid exit strategy are equally as important for corporate venture capital. Many studies have shown that both corporate and individual investments share roughly equal failures and successes.

The strategic focus of a corporate investment is key to providing a relatively stable base for continued long-term investment.

Some suggestions for guidance.

Adding mutual value as with any investment is the overall goal of corporate venture capital.

To reach that goal, it is beneficial from a U.S. tax and legal liability standpoint to establish a wholly owned corporate subsidiary, such a Siemens Venture Capital (SVC). The subsidiary should be exclusively devoted to managing corporate venture capital activities.

In a perfect example of corporate venturing, Siemens Venture Capital, founded in1999, specializes in investments in emerging technologies that are compatible with and enhance Siemens AG’s overall structure.

According to its website, SVC states that “Our goal is to identify and finance young companies worldwide during their start-up phase and to provide established companies with additional capital for their growth plans during the expansion phase. Through our portfolio companies, we offer our customers new technological solutions and tap new markets. Our focus is on growth segments in the energy, industry and healthcare sectors.”

Simultaneously, Siemens Power Transmission and Distribution, Inc, (SPTD) headquartered in Raleigh, N.C., is one of the world’s largest suppliers of voltage power delivery equipment. It provided an opportunity for joint marketing of products and service to help prevent power outages by integrating Siemens’ transformer diagnostic solutions by identifying the appropriate strategic partner.

After careful research and due diligence, SVC arranged for an agreement to be signed in 2006 between SPTD and Serveron Corporation. Headquartered in Hillsboro, OR Serveron manufactures online transformer and other products complementary to those of Siemens. It serves major electric utilities in the United States and worldwide,

Siemens Venture Capital also made a private investment in Serveron in addition the marketing agreement between SPTD and Serveron.

The example shows clearly the desirability of corporate venturing to explore and penetrate new marketing niches and opportunities. It is a useful example of corporate leveraging, where the startup can obtain necessary marketing assistance or technological support.

Other opportunities may exist for the corporate venture to fund the operational costs of startup or to provide loan or equity for expansion of new facilities or products by the entrepreneur.

While corporate venturing sounds like an ideal win-win situation for both established corporation and small entrepreneur startup, it can be fraught with unseen pitfalls.

The major drawback can be a difference in the perception of time required.

A bourgeoning startup tends to be focused on a much shorter time frame than an established corporation. The difference is almost diametrically opposed to an approach by the normal venture capitalist who will try to maximize quick corporate returns or an IPO to reflect positively on his balance sheet.

Furthermore, difficulties may arise between established corporate managers to whom the entrepreneurial upstart is perceived as an interference, detrimental to the corporate tradition. This is especially true during a time of economic change when mid-level corporate managers may not understand or share the need for change.

The biggest drawback for corporate venture capital may be the time required for internal or external decision making. Where a startup or young business is focused on the opportunity presented by a “first mover” opportunity, a large, stable corporation with greater experience may miss the “first mover” opportunity by design or happenstance.

Whatever the actual reason, corporate venture capital continues to decline as part of the overall pool of venture capital sources. Compared to the fifteen percent invested in corporate venture capital at the millennium, that amount has been nearly halved to eight percent per year.

Is corporate venture capital too inflexible or too tradition bound?

Only time will tell as the current political and economic conditions unravel.

For entrepreneurs looking to raise capital, venture capitalists and angel investors continue to be the preferred path.

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