Corporate venture arms are increasingly relied upon as R&D crutches. According to CB Insights in 2015 corporate venture investments totaled $27B globally, or 21% of all VC investments. The strategy makes plenty of sense because it provides big corporations access to nimble teams that can go from idea to proof of concept to product without wading through the inevitable bureaucracy that slows down any process at big, successful (complacent?) companies. Investing in an independent business also provides greater accountability in the form of measurable market value for startups compared to the murkier waters of internal project funding.
However, the problem is that many corporate venture arms don’t seamlessly connect back to decision-making business units in a meaningful way, which results in a spatter of investments that, while potentially relevant to the corporation’s core business, are not actionable. In the first instance the corporate venture arm’s independence to invest with a wide lens is an asset, but that same independence can act as a tall hurdle to core business teams taking advantage of the company’s stake in any given startup.
Recent buzz about Intel, historically the most active corporate VC, divesting a significant chunk of its portfolio demonstrates these dynamics. While VC provides a floor to the downside of many internal R&D investments that otherwise may be pouring cash into the abyss, the fact that Intel has to divest investments to refocus on investments augmenting the core business illustrates a likely inability to translate their backing of potentially valuable technology into nearer term business strategy.
More recent examples of companies trying to tie investments to core product and strategy are the Slack Fund and Amazon’s Alexa Fund. Time will tell whether this platform-specific ecosystem approach to corporate venture investing pays off, but at the outset it does seem to accomplish three things that traditional corporate venture strategies fail to do.
- Marketing – Running the fund in and of itself shows commitment to the core platform (enterprise messaging in Slack’s case and voice interfaces in Amazon’s), and it broadens exposure to one of the platform’s target stakeholders, developers, who can both broaden and profit from the platform and may even be customers of it.
- Direct Customer Benefit – Supporting developers who enhance the platform, whether Slack or Alexa, makes the product better and more feature rich for customers.
- Wide Lens Investing with Attention to Immediate Business Needs – In both Slack and Alexa’s case the funds are set up to build out nascent platforms but with flexibility to invest in a host of technologies to achieve that end. Because both enterprise messaging and voice assistants are platform services that can head in many different directions, there is a greater ability shed preconceived notions of core business teams. At the same time, the fund managers have autonomy with a well-defined investment thesis.
This strategy toward corporate VC aligns better with the evolving role of VCs. VCs are increasingly responsible for providing infrastructure and support services for their portfolio companies (BD, HR, Design, etc.), and operating a fund dedicated to a product platform organically leads to many of the same activities.
I put together the slides below to demonstrate the opportunity for the platform fund approach to corporate VC investing using Slack as the example. I look forward to seeing how these funds play out and have an eye out for more of this focused type of VC investing as the venture crunch begins.