References:

1. Venture Catalyst, Donald L. Laurie

3. "When Does VC Investment Create Firm Value," Dushnitsky and Lenox

Why Do Corporations Invest in External Start-Ups?

Corporations are a major – and rapidly growing – source of funds for new ventures. In today's → new entrepreneurial economy, the real shareholder value is created by companies whose corporate strategies include well-developed venture strategies.

→ 3Ws of Venture Investing

Partnership between small innovative firms and large corporations is mutually beneficial. While entrepreneurial companies can identify technology and market opportunities and move faster to capitalize on them, they can achieve enormous leverage through technology and distribution agreements with large global corporations. Large corporations, on their part, gain insight into emerging markets and next-generation technologies, for most innovative products and technologies are coming from start-ups. Venture capital is an essential tool available to a corporation to increase its → innovativeness ... More

Birth of Corporate Venture Investing

According to Venture Economics and the National Venture Capital Association, in United States in 1994, only 2% of venture capital investments was corporate venture capital, but in 2000, corporate venture capital accounted for 17%, nearly $20 billion. In four years, from 1996 through the end of 1999, the number of companies that were investing in outside ideas increased elevenfold, from 30 to 330. During the same period, corporate venture capital spending rose from $100 million to $ 17 billion annually. That number had dropped to slightly over $1 billion as of 2003, according to the NVCA. Why? After the dot-com bubble burst, investing in startup technology companies – thought to be a quick way to beef up the corporate bottom line and look technologically hip while doing so – suddenly didn't seem like such a smart idea.

A Strategic Investment

Corporations that have stayed the course with venture investing tend to make equity investments in innovative startup companies with strategic rather than simply financial motives. They exploit synergies between what they are doing and what the investee companies are doing. In time, they reap both strategic and financial benefits as they create actual value that in turn is translated into superior financial performance.

→ 3 Strategies of Market Leaders 

Direct Investing through In-company Venture Capital Funds

You need to develop well-disciplined decision making processes and management systems that would support your investment strategies. In fact, many companies lack them and rely on informal investment approaches which lead to poor performance of their in-company venture capital funds. As opposite, companies with rigor investment management system make thorough research and have healthy discussions about whether or not to make an investment.

 Mitsubishi Corp.

In 2002, Japanese general trading firm Mitsubishi Corp. has set up a venture capital unit, Captech Corp., to invest in startups specializing in high-tech metals products. Captech focuses on three sectors: solar batteries, solar catalysts and electronics materials. Mitsubishi owns 100% of Captech's shares and provides the bulk of investment funds. Captech is an extension of the business of Mitsubishi's non-ferrous metals trading department, which will choose the investment targets and provide management aid. Mitsubishi has been an active venture capital investor for more than a decade but has so far kept such forays separate from its mainstream trading business. Captech invests in Japanese but also in U.S. and European companies.