Government fund of funds
Development institute of the Russian Federation

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What profit can bring a corporate venture fund?

10.11.2017

In modern life, major corporations are unable to retain their market positions without dealing with innovations. One of effective tools to implement innovation policy is a corporate venture fund. Its goal is to open a new access channel to open innovations, to favour commercialization of a company's technology reserve by investing in promising projects.

Since 2000, almost all major industry players started to launch corporate venture capital funds (CVC) throughout the world. The largest CVCs were established by such international giants as Intel, Cisco, Microsoft, Johnson & Johnson, Coca Cola, and lots of others. For example, in the wake of rapid development of auto-piloted driving and the increased IT integration penetration of information technology in the automotive industry BMW created BMW I Ventures. The tendency to form new funds is not limited "new economy" branches: such funds have been established by EdF, BP, StatOil. Overall, 30 to 50% of Fortune 500 companies today are investors in one or more venture funds.

By creating corporate venture funds, corporations primarily pursue strategic goals. If the corporation is actively involved in a start-up's life throughout the investment cycle, it provides the start-up with access to its own capacities and expertise, thereby investing in its development. In exchange, the corporations gain not only an opportunity to develop new products, but also the revenue from the growth of start-up capitalization. However, "nurturin" a start-up is not exactly typical for a large company, it does not fit into its business logic, and it can rarely be carried out by its internal unit. Therefore, it is important to form the CVC as an independent structure, which, on the one hand, pursues strategic interests of the company, but on the other hand, puts the financial result on the back corner.

In present-day Russia it is equally important to consider the shortage of professional teams that effectively manage venture investments as well as the fact that the number of investment-attractive start-ups is extremely limited and, according to our estimates, is no more than several dozens nationwide. In this context, corporations should invest in innovation primarily by making joined efforts in creating funds managed by professional teams with experience in effective management of venture financing instruments. This will enable the most effective use of existing limited resources of professional managers.

As of the end of 2017, Rostelecom is the only major state-owned company that made difference on the Russian venture market. Rostelecom has created an internal specialized unit for investment in innovative projects that develop competitive products for the infrastructure of telecommunications operators and data centres. According to the company's report for 2016, the total revenue of the six portfolio companies of the venture fund increased 8-fold and exceeded RUB 1 bln.

Besides, we are witnessing activities by other individual players – Gazprom Neft, Rostec –businesses development – wishing to create proprietary venture capital funds, partially owned by external co-investors, but, unfortunately, we have not seen any successful launches yet.

Currently, the Ministry of Economic Development is joining efforts with the development institutes to create a system of corporate venture funds in Russia. This year RVC established the Venture Market Council, a permanent advisory body that will help attract additional capital sources to the venture market, increase transparency of operating mechanisms, identify the current needs of professional market players and form initiatives for their implementation. One of the Council's tasks will be the development of recommendations for corporations on how to work with venture funds.

It should be noted that the entire Russian market is relatively small on a global scale and accounts for about 4% of the world market. This means that any serious innovation, with few exceptions, has better chances to receive much more substantial revenues from doing business on the global market than if such company were just limited to domestic one. And every corporation requires for its global expansion exactly professional independent managers of venture investments. These people concentrate all their efforts and resources on finding such "real innovations", on their cultivating and selecting the "right" investors or buyers for such businesses.




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