Corporate VC: A fine balance

Having spent the last eight years backing independent venture capital firms, Singapore's National Research Foundation (NRF) is now supporting corporate VC. Last week, CapitaLand, DeClout, Wilmar International and YCH Group were identified as the recipients of S$40 million ($29 million) in funding under the early stage venture fund program.

The initiative is intended to encourage local enterprises to create VC units and stimulate start-ups in areas beyond the small check, fast-to-market world of information and communication technology - and to everyone's benefit. An entrepreneur can tap into a corporation's customer base, infrastructure and domain knowledge, and perhaps the corporation will end up acquiring the start-up when it is fully-fledged or at least sharing in some of its insights.

This wisdom is not lost on companies globally. A recent Boston Consulting Group (BCG) report observes that the number of venture capital investments nearly doubled between 2010 and 2015, but corporate VC activity grew even faster, increasing from 7% to 9% of the total.

With this growth has come a proliferation in corporate VC tools. The traditional route has been to take minority stakes in start-ups with a view to generating a financial return and obtaining a deeper understanding of new markets and technologies. This remains the broad objective but there are different ways of achieving it.

Accelerators and incubators have become a popular option, offering limited-time, highly structured support to start-ups that want to prove a product or service can achieve market traction but lack the resources to do so. Innovation labs are also highlighted in the BCG report. These are essentially accelerators without external entrepreneurs; in-house innovators - who are not necessarily part of in-house R&D departments - engaging in intensive projects to prove whether a prototype is viable.

Ultimately, it is all about finding the most appropriate mechanisms to meet the corporation's objectives. These may include: hackathons where software developers collaborate on projects; in-house mentoring and start-up competitions; scouting missions in the start-up community or within academia; partnerships with universities or other corporations; licensing deals that allow new technologies to be applied in certain markets; and basic acquisitions of start-ups with commercially sound products.

It is difficult to capture the extent or sophistication of activity in Asia specifically; multinationals may roll-out programs globally with no regional variation, or programs might be developed behind closed doors. However, judging by AVCJ's news coverage from the past three weeks alone, there is plenty of activity, from PayPal setting up a financial technology incubator in Singapore to China-based Lenovo Group creating a dedicated corporate VC unit with a $500 million fund.

A key differentiating factor is the level of autonomy a corporate VC unit is permitted. When establishing a captive team, the parent company must define where it sits on two axes: from wholly strategic objectives to wholly financial objectives, and from pure independence to receiving direction or approval from the parent on what investments can be made.

The corporation wants to access new innovation and recognizes that this is best achieved outside the confines of a corporate structure and bureaucracy, but it may want to retain a degree of control. The investment team may value having access to the corporate network but doesn't necessarily want to follow the same oversight procedures and compensation policies as other units within the same organization. Finding the right balance can be tricky.

While Fosun Kinzon Capital is not a corporate VC unit in the traditional sense - its parent is an investment holding company with multiple divisions - recent developments suggest it is an instructive example of the difficulties presented by corporate culture and integration.

According to a source familiar with the situation, Fosun Group was impressed by Fosun Kinzon's performance and wanted the unit's senior management to be more integrated with other subsidiaries, presumably as a means of cross-breeding innovative thinking. Senior management wasn't keen on the idea and when the two parties were unable to agree a compromise, they decided to spin out, the alignment of interest between corporate and VC unit irretrievably broken.

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• Topics
• Venture
• Technology
• Fundraising
• Asia