One highly correlated indicator of tech bubbles is the size of corporate venture capital market. It’s directly correlated with the size of the investment bubble in my experience. I remember a VC telling me with a sardonic look on his face, that corporate venture gets in when the market is high and abandons it when the market for tech companies slump. “They buy high and sell low,” he said with a smile.
While The Wall Street Journal article Defense Industry Adds Venture Capital to Its Arsenal is nominally about defense companies, its statistics apply to corporate venture as a whole.
The corporate venture-capital market has more than doubled over the past five years. American companies made more than 1,200 deals worth a record $34.3 billion in 2017, according to the National Venture Capital Association and PitchBook.
Corporate venture is an often overlooked source of capital for entrepreneurs. I’ve written about The pros and cons of taking corporate VC money previously and the balance hasn’t changed. However, according to the Journal:
Alongside traditional players such as tech firms and drugmakers, a growing array of manufacturers—from power-tool maker Stanley Black & Decker Inc. toGeneral Motors Co. —is sifting startups for technology that could ensure their future.
What’s interesting about the new entrants is their interest in AI, autonomous vehicles – think General Motors – and other areas that could lead to new manufacturing processes and storage technologies, changing the way companies design and produce. Energy storage is another key area for corporate venture.
“There is an ongoing collision of the tech world with industrials,” said analyst Rob Wertheimer, at Melius Research LLC.
There are three opportunities for startups with respect to the industrial giants joining the venture world: raising capital, joint ventures, and acquisition.
From the viewpoint of the established companies they are looking for innovation and an injection of entrepreneurial culture. But as a founder you need to keep in mind that these companies move at a much slower and more deliberate pace than startups and a far more risk averse. So while joint ventures may look attractive, be prepared to be very patient. Taking their capital can seem advantageous as strategic investors are less price sensitive. But they usually won’t invest beyond a single round and can try to bend your direction to suit their needs.
If you sell your company to one of these large companies be prepared to join their culture.
“Suddenly, I was one of a thousand lab coats,” said a former Lockheed executive whose small firm was acquired by the defense giant before it launched its venture arm.
And be aware that most acquisitions fail. Two former 3M executives advised the leader of Stanley Black & Deck’s board as they developed their venture-capital arm that “3M wrote off half its ventures!”
Your best case in dealing with an acquisition is to sell your technology assets, not your company. That’s a far easier deal to cut with corporate M & A executives as they are not faced with the difficult task of valuing a company and then integrating it into their firm. And you and your team won’t face being strangers in a strange land and can go on to build new breakthrough products.