Why it’s time to unleash corporate venture capital to spur on startup growth
The Bank of England’s small business lending figures disappointed again last week. Access to finance – especially for small firms – has been a perennial problem, exacerbated by the financial crisis and downturn. It’s therefore surprising that, amid all the ways government has tried to increase access to finance over the last few years, it has overlooked a key potential source of cash for startups: corporate venture capital, or venturing.
Corporate venturing involves a company making an equity investment in a smaller firm. Examples include Google Ventures’s investment in Uber; Qualcomm Ventures and Fon, now one of the world’s largest wifi hotspot providers; and BMW and JustPark. Many smaller startups are on the big global corporate venturers’ books too.
The UK government used to encourage corporate venturing through tax reliefs under the Corporate Venturing Scheme. In 2010, however, the scheme was cancelled. Since then, government has continued to offer tax reliefs on other sources of finance, but the role of corporate venturing has been studiously ignored. This is despite a substantial increase in the size of the cash piles big companies have been sitting on since the crisis.
Small wonder, then, that this week both the Centre for Entrepreneurs and Coadec joined the Social Market Foundation in a call to reinstate the Corporate Venturing Scheme. As Coadec points out, the UK lags well behind the US when it comes to corporate venturing. And the sums being missed out on are not small. Intel’s corporate venturing arm, Intel Capital, has alone invested billions.
Now that the economy is recovering, raising capital is likely to start to get easier. But the experience of the years prior to the downturn suggest that there will continue to be a structural financing gap for newer firms that have the potential to be high-growth. And as the Social Market Foundation set out in its Venturing Forth report, corporate venturing means more than just money for startups.
Having access to skills, knowledge and expertise is vital for new businesses looking to grow. The state has tried to provide this – through support lines, for example. But existing corporates are in a better position to offer assistance, for example through their access to HR, accountancy and legal expertise. And corporates have strong incentives to share this expertise with firms they invest in – effectively providing low-cost incubation services that government could not hope to recreate on its own.
There is also a strong need for greater fluidity between employment and entrepreneurship; and between big business and small startups. Corporate venturing is a way for big business to stay in touch with and nurture new innovation, in the process giving their employees more exposure to the startup world. And evidence shows that employees of big firms involved in innovation often go on to create their own ventures, creating a more dynamic marketplace – and effectively a virtuous circle of innovation in big and small businesses alike.
Developing a better environment for startups is not about pitting big business against small. Instead, we need to rediscover the role existing corporates can play in creating the high growth businesses of tomorrow.