Areas of Opportunity for Corporate Venture Investing

Mar212013

As originally published in Global Corporate Venturing.

The past two years have seen a significant decline in the number of venture firms making new investments in the Energy Technology and Semiconductor sectors. As a result, it has become increasingly difficult for private companies raising capital in these sectors.

With fewer funds and less money chasing deals, however, there is more opportunity to invest in high-quality companies at attractive valuations.

Increasingly, corporate investors are playing a critical role in financing companies in these sectors, with 54% of energy tech and 24% of semiconductor private financing rounds in 2012 including one or more corporate investors1.

As the funding for energy tech and semiconductor startups from traditional financing sources has weakened, Applied Ventures continues to be a strong supporter of new thinking that will drive these sectors. Applied Materials’ venture capital fund seeks to identify start-ups with new processes, materials, equipment ideas and products that will help these industries address precision materials engineering challenges that are imminent in the next decade.

As clean technology continues to change our world and semiconductor devices become more ubiquitous due to growing consumer mobile demands and the internet-of things concept becoming a reality, we see a need for continuing support of these innovative thought leaders.

In funding new strategic opportunities, Applied Ventures has learned that the best way to ensure the mutual success of a start-up company and corporate investor is to follow a few simple practices.

First, the corporate investor should be able to identify multiple areas within its organisation where the startup’s product can make an important contribution to existing technology and customers. This is often more easily accomplished with platform solutions rather than a point product. Allowing for multiple touch points within its organisation, the corporate investor achieves a higher likelihood of realising strategic value over time.

Second, the corporate investor should focus on start-ups possessing both a strong leadership bench and an innovative product with a likelihood of sales success even without the investor. The question of whether to invest or whether to acquire for the corporate investor depends on a variety of factors, including whether success can be achieved within the start-up’s model or as part of the corporate investors’ business, utilising the full force of its research and development, sales and marketing assets.

Third, the corporate investor should plan for the long-term funding needs of the start-up. The corporate investor should anticipate the start-up’s funding needs, taking into account a variety of milestones and exit scenarios. To help address those needs, the corporate investor often considers involving other financial investors, as well as strategic investors with complementary interests.

Finally, it is always best to understand up front the criteria by which the decision to invest further is made. For example, the corporate investor should be prepared to answer tough questions that include:

  • If the start-up is 10 months behind schedule, should we still provide funding?
  • If we exit the market of the start-up, what is our plan for the investment?
  • What would make us want to buy this start-up? Having up-front alignment between the corporate investor and the start-up avoids future misunderstandings and disappointment on both sides.

Perhaps the most important ingredient for success in corporate investing, however, is patience and long-term commitment. Venture returns can vary dramatically over time. Starting a corporate investment effort at the top of a cycle and exiting at the bottom of a cycle has historically been a formula for disaster.

With the right planning and dialogue, the corporate investor can be a start-up’s golden ticket to market penetration and success.

1 Source: CapIQ, based on AGC Partners’ industry categorisation, for private companies based in North America with disclosed amounts raised of $3m or more and with disclosed participants, and corporate investors defined to include corporate, corporate venturers and multicorporate sponsored fund investors.