NVCA Today

The recent downturn in VC investing across the board has spurred many to ask the question, "is the venture model broken?".  Many folks asked the same question after the tech bust of 2000.  While several well known venture capitalists have weighed in on the subject, strenuously objecting to the notion that the basic construct is obsolete, relatively little has been written or said about corporate venture capital investing and its future.

Before I lay out my rationale as to why corporate venture capital will survive and thrive again, it is important to face the very real fact that the corporate venture capital world has seen a major downturn over the last 6-9 months.   Some supporting data from the first quarter of 2009[2]:

• Number of venture deals that included a CVC - 79 (down 58% from Q1-08)
• Number of venture deals that included a CVC as a % of total deals - 14% (down 24% from Q1-08)
• Total CVC Investment - $206 mm (down 63% from Q1-08)

On its face, this is a very ugly picture.  Extrapolated, this would imply that CVC activity in 2009 will slow to a pace unseen since 1996.  In 1996, I was a year out of Georgia Tech and trying to get tickets to see basketball at the Summer Olympics in Atlanta.  Clinton had not yet been elected to a 2^nd term.  Dr. Quinn, Medicine Woman was still on CBS, Mike Tyson was #1 on Forbes list of top paid athletes.  Ok, you get the picture - it was a while back.  So, with that reality check, on to my thesis...

As the chairman of NVCA's Corporate Venture Group, I am admittedly biased when it comes to this subject.  But as a former corporate venture professional and now traditional venture capitalist, I would like to believe that I maintain some objectivity on the subject, given that the health of strategic investors does not necessarily impact me or my firm (Noro-Moseley Partners) in any direct way.  So with that preamble, I would posit that corporate venture capital, like traditional venture capital, will continue to be an important part of the high growth ecosystem here in the US and indeed, around the world.  My rationale:

1. Corporate Venture Groups (CVCs), while dormant, will remain in tact.  In many cases, these groups have become an integral part of the company's visibility into emerging market trends impacting their core business.  While some groups have been directed to slow down or take a break, most groups remain in tact and will become active again once macro-economics stabilize.

2. History suggests that the CVC recovery may be more V-shaped.  While the cycle of raising and deploying funds can mean sustained absence from the market for traditional VCs, CVCs, especially those investing off the balance sheet, aren't exposed to these timelines.  They need only the green light from corporate leaders or sponsors to start engaging on new deals.  Yes, CVC activity dropped off a cliff in the first quarter of 2009.  Its recovery could very well be just as steep.

3. Acceleration of change in several industries makes CVC activity more valuable than ever. When CVCs began to emerge in mass in the mid-90s, many corporations justified their existence by pointing to the need to capture value they believed they created for certain start-ups.  Fewer pointed to the need to build greater visibility into the activities of potentially disruptive technology and/or business models.  For those CVCs that persisted through the boom and bust cycle of the late 90s, it became clear that, for many corporations, the long term value of CVC activity actually lay in the strategic market insight gained from maintaining access to fast-moving start-ups endeavoring to disrupt their ordered marketplace.  Through the ups and downs of the last decade, one trend has persisted - it has become much cheaper for start-ups to build competitive offerings.  The proliferation of capable open source code and highly efficient development environments has meant that disruptive offerings hit the market in less time.  This has increased the need for visibility closer to the edge.  Corporations can no longer keep up with disruptive forces around them by scanning the latest VentureWire or TechCrunch update.  CVC is the most efficient way to stay on top of real market forces as they happen.

4. CVC provides unique access to potential corporate growth opportunities. Many corporations have found CVC work to be the best way to build a farm system for potential acquisitions.  Over the next several quarters, large public corporations (and those with the ambition to be large and public) will need to find new areas of growth that allow for differentiation.  In addition to providing potential acquisitive opportunities, CVC work also provides the kind of insight that can inspire internal business line creation geared toward organic growth.

While many corporations will abandon CVC work altogether this year, those with a longer term view on growth and the need to build real competitive advantage will continue to find real value in strategic investments.

For more information on NVCA's Corporate Venture Group, visit www.nvca.org.

[2] Source:  NVCA