The venture capital (VC) industry has experienced dramatic growth over the past decade, with major leaps happening in the past few years. For instance, global venture capital investments more than tripled ($48 billion to $161 billion) from 2010-2015 and have almost doubled ($161 billion to $295 billion) from 2015 to the end of 2019.
According to a report from PitchBook and the National Venture Capital Association, investments in U.S.-based companies alone exceeded $130 billion in both 2018 and 2019, which accounted for more than half of all global investments. Plus, U.S. VC exit value reached a new annual record of $256.4 billion across 882 liquidity events last year.
While the current economic climate may temporarily reshape the way we think about VC and the types of startups (e.g. healthcare, tech, remote work solutions) that are financed, the unprecedented flow of capital back to investors is likely to drive continued investment and further allocation to VC in years to come.
If you or your company are new to VC, you may not be familiar with the principles. To start, venture capital is a form of private equity financing that is typically managed by a firm or fund and invested into a portfolio of startups or emerging companies believed to have strong growth potential. The general goal is to back innovative ideas to capture the risk premia (or the expected excess return) associated with high growth enterprises.
Investors can include individuals, institutions or corporate entities, to name a few. In recent years, however, corporations have begun to play a larger role in the VC ecosystem, accounting for 23 percent of all venture activity.
Companies are looking at venture capital from a more strategic lens, recognizing that investing in new relationships and technologies (in addition to generating financial gains) is key to staying ahead of the curve. In fact, some larger corporations like Google and Salesforce have formed their own corporate venture capital (CVC) groups dedicated to managing private portfolios of startups, in addition to investing in venture capital funds.
Corporate venture capital differs from traditional VC in a few key ways. First, CVCs use funds from their parent corporation to invest directly in startups and early-stage companies, which means they vet their own startups and manage their own ventures. Traditional VC funds, on the other hand, typically aggregate capital from multiple institutional investors and manage assets on investors’ behalves.
In addition, CVCs tend to look at the value of investments differently, focusing on opportunities that are likely to benefit the parent corporation in multiple ways. In contrast, traditional VCs are typically made up of financial players who aim to maximize returns. Subsequently, CVCs generally have more flexibility in the targeted duration of their holdings, compared to the 10-year limited partnership structure many VCs use.
While CVC funds allow companies to focus on their specific business objectives, investing in a more traditional VC fund is often the better option for companies just getting started with venture capital or for those that lack the staff and resources needed to be successful with their own CVC. At the same time, companies with established CVCs can complement their efforts by investing in a traditional VC fund.
The venture capital industry has become synonymous with disruption for its ability to finance and grow industry-altering technologies. Whether an organization invests in a CVC, a portfolio of traditional VC funds or some combination of the two, it may derive the following benefits: