May 11, 2011 originally published in: VentureBeat Entrepreneur Corner
Two years ago, I wrote a column for VentureBeat that warned that America’s innovation engine was running out of gas because American corporations had been slashing long-term research and development for decades and, in more recent years, investments in venture-capital startups. To turn things around, I argued, corporations had to re-invest aggressively in venture capital and rely far more on leading-edge startups for outside R&D.
Today it’s a different story. Corporations are seeing the light and reinvesting in venture capital. They have an incentive to stick with this strategy, and I’m optimistic that they will and materially strengthen the venture capital ecosystem and, for that matter, the U.S. economy.
Last year, corporations invested $1.9 billion in venture capital in America, up 33 percent from $1.35 billion in 2009. That worked out to nearly 9 percent of all VC investing, approaching the historical high-water mark. Corporate venture capitalists also invested in 20 percent of all venture deals. The message is clear: Corporations are moving into the VC world in force.
Driving the trend is unusually strong balance sheets and a tectonic shift in where innovation now occurs – inside small companies. Corporations know they must tap into that.
Startups, of course, are all about innovation and are much more efficient innovators. If you give a dollar to a big corporation and a dollar to a small company for R&D and measure how it is spent in terms of cost and efficiency, the small company will win every time.
The list of companies jumping into venture capital keeps growing. It includes General Motors, Google, Juniper Networks, Kaplan Inc., Nvidia Corp. and Verizon Communications. The latest newcomers include The BMW Group, which this year launched a $100 million New York-based fund to invest in young companies to expand BMW’s expertise in sustainable and mobile technologies.
In addition, in February, EMC Corp. launched EMC Ventures. The EMC corporate development team invested for years in startups related to the company’s core IT infrastructure products. EMC Ventures has a bigger scope, however, and will invest in broader categories of companies. For example, it recently joined a venture syndicate to invest in Aria Systems, a cloud-based billing company.
A fair question, of course, is whether these corporations will stay the course in venture capital investing this time around. They have a history of jumping in and out of the field, often because they have a short-term, quarterly financial results focus, which contrasts with venture capital’s long-term, multi-year focus.
The length of this focus is a challenge, in particular, and not just because of the corporate focus on quarterly results. In a typical 10-year life span of a VC investment, you’re likely to see as many as three different teams of senior management at many corporations. They almost always have different priorities and goals. And, too often, the experience and relationships needed to do VC investing are never developed. Of if they are developed, they tend to get lost.
It is also true that there can be an impedance mismatch between a major corporation and a startup. Large corporations tend to be slow to move and cautious about new technologies. Startups are almost exactly the opposite. They are small, fast, efficient and untethered.
A partnership can create huge frustrations because the startup and the corporate partner operate at different speeds. To be successful, each company must acknowledge what it does well and what it does not.
Personally, I believe the growing partnership between corporate VC arms and startups will prove lasting. Corporations are still relatively cautious, which is good. They are investing far less in VC than they did in 1999-2000 (the last time they revved up significantly in this arena), and there are very few signs of irrational exuberance, at least outside of social media investing. More than ever, corporations need to develop a strong handle on all the rapid-fire innovation underway in small technology companies.