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.
Organized retail is the new thing in India, with business houses such as Bharti Enterprises Ltd, Reliance Industries Ltd and Aditya Birla Group venturing into it. Efficient retail businesses are heavily dependent on information technology (IT). Specialists in retail software, the Nasdaq-listed JDA counts leading Indian retailers such as Shoppers’ Stop, Crossword Bookstore, Piramyd, Globus and Hypercity among its clients. Abel Correa, country manager, JDA Software India Pvt. Ltd, spoke to Mint on how IT could make a difference to organized retail in India. Edited excerpts:
Organized retail has seen the entry of big corporate houses such as the Tata group, Reliance Industries, Bharti Enterprises Ltd and Aditya Birla Group. Many of them are talking about a “farm-to-fork” retail strategy. What role does technology play in enabling this?
We are speaking to both Reliance and the Aditya Birla group to provide JDA software for their retail business, which allows companies to get a single view of their entire supply chain and also optimize it. Retailers also need specialist modules for assortment and merchandise planning. India is progressing rapidly in the organized retail business unlike the developed countries, which took two to three decades to develop. The country has hitherto lacked a collaborative initiative between retailers and suppliers because bargaining power has tended to be with suppliers. Very few retailers as a result have scheduled deliveries from suppliers that align with end customer demand. This is despite big retailers being aware technologically of the resources available or best practices worldwide.
Keiron Root looks over the details of Gordon Brown’s final Budget and discusses what it could mean for your taxes and investments. 8 May 2007 So, after much speculation, Gordon Brown delivered what is almost certain to be his final Budget speech on 21 March with his customary mixture of earnest economic theory and theatrical political showmanship. And while the headlines were dominated by the announcement that the basic rate of income tax was going to be cut to 20 per cent (albeit not until next financial year and accompanied by the abolition of the ten per cent starting rate), the devil was, as usual, in the detail.
But once the dust had settled on the forward setting of tax bands and the increases in the prices of petrol, alcohol and tobacco, what were the specific implications of the Budget for investors? Although areas such as VCTs or the taxation of investment gains could not compete for space on the front pages with the 20p tax rate, there are a number of areas within the Budget statement that will affect the way in which we invest.
Inheritance tax
The Chancellor made much of his commitment to increasing the threshold at which inheritance tax (IHT) is paid to £350,000 for the tax year 2010/11, claiming that this would help keep the vast majority of people outside the IHT net. Apart from being one of a number of long-term commitments on taxation that will seriously reduce his successor’s – whoever he or she may be – room for manoeuvre, this well-publicised development is less generous than the Chancellor seems to think.
The main reason that increasing numbers of estates are burdened with IHT is the dramatic rise in property values in many parts of the country, which has occurred over the past 20 years. Brown argues that by increasing the threshold at which IHT becomes payable from the £285,000 that applied in the 2006/07 tax year to £350,000 in four years’ time (an increase of some 22.8 per cent) he is taking more estates out of IHT.
But while this increase may be well ahead of anticipated inflation (even as measured by the Retail Prices Index), it is unlikely to be anywhere near enough to cope with house price inflation. Future movement of house prices is notoriously difficult to predict, and there are a number of different measures of the rate at which house prices have actually risen, but one of the most widely used house price indicators recently has been the monthly index produced by Halifax.
Moreover, in the period before the Budget, the Halifax index was showing one of the more conservative rises, with average house prices increasing at 9.9 per cent per annum for each of the previous three months. Taking this as a basis for future projections – and it doesn’t seem an unreasonable rate of growth for this purpose – the IHT threshold would have to increase to £415,000 in 2010/11 just to keep pace with where it is now, as the table below indicates. It looks like Mr Brown has not been quite so generous after all.
Also, the day after the Budget statement, HMRC confirmed that gifts by parents and grandparents to children under 18 would not be subject to a new IHT charge under the provisions affecting trusts introduced in the 2006 Budget, but would be treated in the same way as gifts to adults.
Provided the gift is outright and not subject to any form of contingency or trust, there is no tax payable if the donor survives seven years from the gift. If the donor dies within seven years, there will still be a charge, as with adults. Emma Chamberlain, chairman of the Chartered Institute of Taxation’s Capital Taxes Sub-Committee, comments, ‘HM Revenue & Customs (HMRC) has given a clear response to the questions that have been raised, and so those who are happy to make outright gifts to children can do so without incurring any extra IHT penalty. The gifted property will, however, be part of the child’s estate, so he or she will be able to take over the property at 18, and if he or she dies the property will pass according to his will or intestacy.’
However, she adds, ‘Parents may of course decide to be careful before allowing a large sum to be held by young children in such an unrestricted way and may prefer to impose some controls so that the child cannot obtain unrestricted access at 18, even if this involves paying more IHT.’
