Are policymakers getting wary of CVC?

Imitation is the sincerest form of flattery, so I am delighted that the OECD has put out a white paper on the impact of CVC on startups that trundles out some of the same conclusions we’ve been putting out in Global Corporate Venturing two or three years ago.

Their study of 240 corporate venture funds — curiously only from North America and Europe even though Asia has for some time been the most active and certainly the fastest-growing area for CVC — shows a couple of things:

• CVC backing makes startups more likely to be acquired, although not usually by the investing corporation (we’ve noted this trend for some time)  
• CVC backing raises the profile of startups and multiplies the impact of their technology (these are exactly some of the strategic synergies in distribution and scaling that every CVC investor talks about providing) 
• Corporate investors like technologically complex startups, as measured by the number of patents they hold. This makes sense when considering that corporations are frequently looking for startups with industrial and deep tech startups. They may be interested in the odd business process innovation play, but really CVC is often about getting a view of something you can’t make internally. That is likely to be something complex 

The white paper goes on to note a few concerns. Startups that get CVC backing see a fall in the number of patents they file after that investment. The OECD researchers raise concerns that this may mean corporations are suppressing innovation in the startups they back, slowing down innovation.

There is also a concern about the kind of ecosystem investing that we often talk about at GCV (see for example Pepe Pasqual’s piece on “weaponising startups” or Mark Brook’s article on using CVC to bend markets). The report questions whether this might also stifle innovation:

“CVC investing in start-ups…to nurture their (proprietary) innovation ecosystem – may induce start-ups to align their innovation efforts with the ecosystem’s priorities, potentially diverting resources from more disruptive innovations.”  

Now here’s the bit that should give corporate investors a little pause:  

“These insights underscore the need for policies enabling start-ups to innovate across multiple open and competing ecosystems, as well as policies that promote a diverse set of financing options to support sustained, independent innovation among start-ups.” 

It’s not a hard recommendation. It’s not a proposal for a legislative change. But it does feel like a shot across the bows. CVC has become such a big pillar of the venture ecosystem that it is catching the eye of officialdom and others — like competition regulators — may also start asking questions about whether CVC relationships are healthy for startups.  

The concern is most likely driven by that very top end of eye-wateringly high AI deals being driven by big tech companies, which often appear more like acqui-hires or ways to get around competition law than classic VC. Even though the $100bn AI investments are not the reality for most corporate investment teams, it may be that Big Tech’s extreme may have spoiled it for the rest of the sector. Every CVC, unfortunately, may have to be prepared to have its story straight on why it is helping rather than hurting the ecosystem.

This editor’s note was first published in GCV’s Blueprint newsletter, which tracks corporate venture news, key deals, new funds best practice and jobs.

Want to get Blueprint directly in your inbox every Monday? Sign up for free here.