What is corporate venturing?
Corporate venturing takes many forms. At its most basic it can be purely a financial investment with a larger company taking an equity stake in a smaller company. This is often done through a separate fund being set up specifically to invest in startup and growth companies in the same way that a traditional venture capital firm would.
The investment also can be indirect through other venture capital funds or trusts. The larger firm hopes to make a return on its investment when the company is sold or floats on a stock exchange. It can also be much more than purely financial. Some firms will offer a strategic alliance or support to smaller companies helping them to develop products or services that will generate income or cost savings for both parties.
This form of corporate venturing does not have to involve any equity participation or cash injection.
Who does it?
The concept of corporate venturing has existed for many years in the US where many of the top companies have a venture capital fund or offer strategic alliances. While the number of companies involved is much smaller in this country, it has existed for many years and in many sectors.
Traditionally corporate venturing has appealed to high-growth sectors such as pharmaceutical or technology companies. Small, flexible companies in these sectors can challenge industry leaders with new technology that can revolutionise the market place. Among the companies that are involved are Intel and mithKline Beecham. Among the newer entrants are Channel 5, which is offering free advertising airtime to companies in return for an equity stake in the company. Giants of industry such as British Steel and BG, formerly British Gas, also are involved in the sector.
Who benefits?
In an ideal situation both parties benefit. Larger companies often want to take advantage of fresh ideas but it could also be an attempt to knock out the competition before it becomes a threat later on.
Smaller companies often are wary of investments from other companies, conceded Smithkline’s Gavin. This could be because they fear losing their technology or because their involvement with an industry giant could repel other partners. Gavin explained that building the relationship is very important in overcoming that trepidation.
Legal steps might also be appropriate to ensure that your ideas are protected. AEA asks that companies do not send in proposals until an initial discussion has been held and advises companies to seek patents where appropriate to avoid any potential conflict.
Smaller companies, although often reluctant to sell an equity stake, can take advantage of the resources and reputation of a larger company.
Although Geoff Mortimer of Cogsys believes his company would have been successful anyway, he is grateful for some of the international relationships that he has been able to build as a result of his backing by British Gas.
In fact, said Graeme Jones, head of Natwest Bank’s growth and innovation unit, there aren’t many drawbacks. However, alliances work best
where there is an existing relationship as communication is better.
The future
The Confederation for British Industry and Natwest Bank completed a study into corporate venturing in the UK at the end of 1999. Their report, which also has the backing of the DTI, grew out of the recommendations of an industry-wide committee that studied finance for technology companies, Tech Stars.
The report came out strongly in favour of corporate venturing and was coupled with some tax breaks introduced in the November budget. Corporation tax relief at 20% is available on corporate venturing investments if they keep the shareholding for three years.
The tax can also be deferred if the gain is re-invested into another company.
Will it replace other types of finance? Unlikely, according to Jones of Natwest. It is just another product on the wheel of finance. If a company can not raise debt finance or is not eligible for grants, it may want to consider corporate venturing either to take advantage of an equity injection or more general help. “It is not necessarily a panacea but another thing to be considered,” he said.
What’s the deal?
Some companies follow the model of the venture capital industry by setting up investment funds and offer a financial investment.
Smaller companies also are involved and they don’t necessarily have to put up hard cash. AEA Technology, formerly part of the UK Atomic
Energy Authority, offers a variety of agreements from royalty payments to joint ventures. It looks for companies that need additional resources to develop – anything from technical to marketing help – to turn science and engineering ideas into commercial reality.
Why do they do it?
Apart from getting a financial return, there are many different reasons for setting up a venture fund.
For technology companies, the answer is simple. They can either take advantage of a technology that can boost their own product or they can knock out a potential competitor of the future. Small, flexible companies in the biotech or high-tech industries can challenge industry leaders in a short space of time. Intel now has a US venture capital fund designed to help its new computer technology.
SmithKline started its venture capital fund as part of its constant search for new technology, explained Brenda Gavin, president of Smithkline’s fund – SR1. As it searched for new drugs or medicines, Smithkline would either find companies with great ideas that were not developed enough – and therefore any deal would have been risky. Alternatively, Smithkline would find that many of the best technologies already had been patented.
Although SR1 operates separately, Gavin explained that the introductions to SmithKline do happen and can lead to deals.
However, one of the more surprising companies involved in this sector is British Steel which set up British Steel (Industry) in 1975. It invests in small businesses in former steel-producing areas with a view to creating jobs.
British Gas also entered the market in 1988 following its privatisation with a £30 million fund. Although the mandate outlined a desire to make money, it was designed to invest in technologies of interest to the gas industry or technology that could reduce operating costs.
