The Evolving Role Of Corporate Venture Capital In Innovation And Disruption

Corporate Venture Capital (CVC) refers to any corporation actively investing in the startup ecosystem,  whether through formal structures or informal arrangements. This trend has seen significant growth not only in India but also globally, with India hosting more than 150 CVCs, including some unicorn startups. 

CVCs are gaining popularity as established companies now acknowledge the innovation and disruption that new-age startups can bring, potentially disrupting their industries. Ultimately, their goal is to stay ahead of competitors in the market. 

Some of the benefits that corporations can get by investing in the startup ecosystem – 

• Access to innovation: Companies are increasingly investing in startups that innovate within their areas of expertise. This investment grants them access to new technologies and processes, enhancing their operations and product lines. 
• Value adding technologies: By investing in technologies that offer substantial value across  various sectors, such as productivity enhancements, improved visibility, tracking capabilities,  and automation, corporations can drive significant business improvements. 
• Financial incentives: Early investment in the startup ecosystem offers the potential for substantial long-term returns, making it a financially rewarding strategy for corporations. 

The Role Of CVCs 

The role that corporations can play by launching their own investment vehicles is significant, offering inherent value that startups can leverage. When corporations invest through a  CVC, they utilise their accumulated reserves to support future technologies, signalling a positive  development for a thriving ecosystem. 

Let’s refine the classification into “Strategic Roles” and  “General Roles”:

Strategic Roles 

This primarily occurs when a CVC invests in startups within their industry, sector, or area of expertise, often with a strategic focus. Startups in this scenario can benefit from various  externalities, including: 

1. Industry networks and connections 
2. Introductions to customers and deal closures 
3. Access to domain-specific experts within the corporation 
4. Expertise to enhance technology development and efficiency 

General Role 

These encompass the broader benefits that startups can anticipate from an  enthusiastic CVC investor: 

1. Access to experienced professionals and operators, which can significantly contribute to the startup’s progress and reduce error rates. 
2. Enhanced branding within a mature business ecosystem, as being backed by a reputable corporate entity, can open doors, especially when dealing with large entities.
3. Relaxed return expectations, as CVCs typically operate with more flexible return expectations compared to Angel or VC investors due to their lack of fund maturity timelines and the use of proprietary capital. 

All these benefits provide valuable assistance for startups to ideate and scale effectively within the startup ecosystem. 

Starting A CVC

Starting a CVC is not an easy task, given the myriad of inherent hurdles such as talent acquisition for  capital management, time allocation, dedicated portfolio support, portfolio construction, investment  risks, and meeting shareholder expectations. 

Corporations are actively mitigating these challenges while still benefiting from the startup ecosystem in several ways: 

• Investing in and via venture capital funds: Opting to invest in VC Funds enables corporations to delegate many operational tasks while gaining  exposure to a broader range of startups, both in their current portfolio and in the pipeline. This  approach also takes long-term financial returns into consideration. 
• Investing in and via accelerators: Engaging with accelerators provides companies with access to startups at early stages, facilitating integration of startups, their technology, and talent into the company at favourable terms/prices. 

Conclusion

The significance of corporates investing in the startup ecosystem is continually growing globally, with many Southeast Asian corporations turning their attention to South Asia, particularly India, for capital deployment aimed at both financial gains and fostering innovation. 

Indian corporates have adopted a highly diversified approach, including launching Promoter Family Offices, CVCs, investing in VCs, and supporting accelerators. Time will reveal which strategies prove to be the most holistic,  but it’s certain that the role of Indian corporations will expand over time, with a heightened focus on niche and sector-specific innovations.