VC to CV

Who’d be a venture capitalist in 2015? In spite of the evergreen nature of BBC TV’s Dragon’s Den with its photogenic piles of cash it seems there are countervailing trends that are emerging in how start-ups and SMEs can access the funding they need to grow. Here we examine three alternative ways that are gaining ground.

1. Corporate Venturing

This is where a large company sets up a fund to invest in SMEs, usually with the intent to commercialise the smaller company’s innovation. Corporate venturing (CV) has replaced some of the early stage venture capital fund money and has been on the rise for the past few years growing by c. 10% a year.  An article a year or two back from Global Corporate Funding  stated that between 2010 and 2012, 182 CV units were formed bringing the total number globally to 936. For example in 2012 Intel alone made 150 investments  worth $353m. Corporate venturing has been displacing venture capital as funds have decided to focus on fewer bigger deals, corporate R&D departments have shrunk and the companies have become better at managing exits and creating business models that are less restrictive to the SME in terms of IP and exclusivity.

2. Open innovation

Open innovation between an SME and a larger company constitutes the majority of open innovation deals. 100%Open spends most of its time helping small companies meet big ones for relationships and profit. Many of the deals that are done involve some sort of investment but the primary reason for the relationship is more immediate, pragmatic and, dare I say it, business-like: For the SME the deal can represent a route to market. Open innovation provides access to many consumers through the larger partner’s distribution channels and marketing spends. For example we ran a competition for Orange back in 2012 and this led to an ever-deepening partnership that has flowered in the form of Orange Fun Finder.  For Orange, the relationship represented an uncomplicated and low-risk way of winning the loyalty of fickle phone subscribers. For start-up Last Second Tickets it was an opportunity to scale their business and create value fast.

3.  Crowdfunding

Crowdfunding is the practice of funding a  venture by raising cash from a large number of people who are not professional investors but are members of the public.  There are two mechanisms.  The first involves a reward where entrepreneurs pre-sell a product or service to launch a business concept without giving away equity or accruing debt. The second is where an investor backer receives shares in exchange for money pledged. Most  crowdfunding is conducted on specialist platforms such as Kickstarter founded in 2009 and Fundageek (2011).  You can invest in anything from from smart watches to a Green MP for Cambridge.  There is a significant level of activity.  The Crowdfunding Centre measures an impressive  22,667 calls for funding currently live (March 2015), with 455 new projects being added every day. The US tops the table of crowdfunding activity, followed by the UK, Canada, The Netherlands andJapan.

Open Options

So if you’re a young business (or not-so-young politician!) looking to raise funds there are many options open to you. You may not have to give away large slices of your company to a venture capitalist or cede control to a fund in order to succeed.  It’s true that the best VCs offer much more than money. This route can be a source of support, advice and connections too. However, many venture capitalists play a numbers game with 1 in 9 or so investments reliably making significant returns. From the point of view of the small business these odds don’t look so good. The numbers from open innovation, corporate venturing or crowdfunding might be better.

David Simoes-Brown

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