Startups Benefit From Corporate VCs

Corporations with venture capital (VC) arms – divisions which directly invest in startup businesses – have invested $5 billion in new firms over the first half of this year, and interest is growing as funding startups becomes an easier and (relatively) less risky way for companies to innovate, revamp their business models, and earn large returns on excess cash.

According to NVCA data for 2000, 1,050 firms that year each invested $5 million in startups. By 2013, the count had fallen to 548 firms. Nonetheless, according to CB Insight, VCs participated in 40% of the largest funding rounds initiated by private technology companies last year, which was twice the participation rate in 2009.

Now, companies like 7-Eleven Inc., Google Inc. (GOOGL), and Patagonia Inc. are entering the venture-capital market, since the market is no longer restricted to tech and pharmaceutical companies. 7-Ventures LLC is a VC branch of 7-Eleven, which has invested in several startups (an automated coffee-kiosk company, a lottery number-tracking app company, a key duplicating app company, and Belly Inc.).

After acquiring Uber Technologies Inc. for $258 million, Google raised its stake in the ridesharing service in June. Uber generates approximately $20 million in gross revenues each week, which translates into an annual revenue run-rate of $1 billion. Currently, Uber has more than 450,000 active users.

Some VCs are investing in startups for environmental, rather than financial, reasons. For instance, Patagonia Inc’s VC arm, $20 Million and Change, funds like-minded and environmentally-friendly startups. The firm recently invested in clothing retailer CO2Nexus Inc., which uses liquefied and recycled carbon dioxide (instead of water) in textile production processes. CO2Nexus’ current revenues are $0.48 million.

According to CB Insight Chief Executive Anand Sanwal, venture-capital is a high-risk asset class which has outperformed the S&P 500 over the last decade. Corporate VCs allow businesses to be innovative, and earn a solid return on investment capital for any excess cash that they may have.

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