Corporate ventures: An alternate source of funding for startups

WHEN corporations invest in privately-held businesses, which are typically startups, either directly or through a separate investment arm, they are engaging in corporate venture capital (or corporate venturing). Unlike a private venture capital (VC), where the general partners of the venture capital fund manage and invest funds raised from external investors known as limited partners, the corporate venture capital is founded and owned by a corporate, which is the owner and lone limited partner.

The origins of corporate funding can be traced back to 1914 when DuPont, a chemical and plastic manufacturer, invested in a 6-year-old startup, General Motors. General Motors proved to be a rainmaker when there was an increase in the demand for automobiles during World War I, resulting in its stocks increasing multi-fold. It can be said that the veterans of American industry such as DuPont, 3M, Boeing, Dow, Ford, GE, Singer and Union Carbide, were the original pioneers of corporate venturing. However, the prime objective of corporate venturing back in the day was certainly not technology or innovation but rather diversification of business.

Despite corporate venture capital setting the tone for private funding, modern-day startups typically look at 3 primary sources of funding (in no particular order of preference): (i) venture capital; (ii) angel investors; and (iii) family funds during early stage funding. With the current dry spell of traditional funding, startups have started facing the new reality of a lack of capital. Global venture funding fell by 23 per cent in the second quarter of 2022. Startups have therefore started exploring a fourth route of funding - corporate venture capital.