The irresistible rise of corporate VC

While they all manage pools of capital largely if not solely drawn from the balance sheet of corporations, the size of fund vehicles and the remits for deploying capital vary hugely. The original corporate VC players sent out into the market by US technology heavyweights were tasked with identifying emerging tech solutions that could in some way benefit the parent firms. Startups were the principal focus.

Now a corporate VC unit might be financially independent of its parent but still invest within the parent's areas of expertise, as is the case with Intel Capital. At the other extreme, it might be prohibited from entering it parent company's domain. Richemont affiliates Reinet and Remgro, for example, are not allowed to target luxury goods deals.

Similarly, startups are not the only option, with growth capital and occasionally control deals also permitted. And just as the burgeoning internet space has seen tech-focused VCs branch out into what are essentially consumer plays with an online presence, corporations from other sectors - notably energy - are deploying VC capital where their businesses intersect with the technology.

Meanwhile, the corporate VC incumbents from Europe and the US, keen to increase their exposure to Asia, face competition from emerging local players. For example, Chinese internet firms Tencent and Alibaba both launched separate venture capital vehicles last year aimed at financing third-party developers that create applications that utilize the companies' products and technology.

What does this mean for the investment environment? For target companies, deciding whose capital to take may become harder. An independent venture capital firm's purely financial agenda must be weighed against that corporate VC investor's strategic imperative. Will the former allow them to retain a sense of autonomy or push them to grow too rapidly, with one eye on an IPO? Will the latter transform their R&D capabilities or constrain growth options by forcing them to toe the corporate line, with the ultimate objective of absorbing them and their intellectual property?

There is also the possibility of taking on investors from both sides. A company may benefit from having a combination of financial and strategic expertise on its board or it could struggle to satisfy parties that operate at different speeds and perhaps with conflicting objectives.

On the other side of transactions, independent VCs will at different times see their corporate counterparts as co-investors and competitors. An interesting trend to watch over the next few years will be how this dynamic changes in response to developments within the technology sector.

While independent VCs, with their appetite for risk and well defined business models, may retain an edge in the consumer segment, the prospects are less certain elsewhere. This week's cover story tracks the evolving cleantech sector, and several industry participants suggested that venture capitalists might find themselves at a disadvantage to corporate VCs - as well as pure strategic investors - as investment opportunities become more specialized.

It is often said that corporate VC units are less likely to fund revolutionary business models because these may threaten their parent companies' existing operations. The counter argument is that a business model is only revolutionary when you know what to do with it.

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