Corporate VC: The auto industry is moving forward. Just look at the successful public listing of electric car maker Tesla Motors. General Motors wants to innovate too. It has plowed $100 million into a venture capital fund to tap new technologies and add to the bottom line. Corporate VC can be a creative way to outsource research and development. The odds of spawning anything more look long.
Like other big companies, GM has carrots to entice start-ups. It can offer quick access to potential markets in everything from batteries to new entertainment systems. And it has underused, but expensive facilities, such as wind tunnels, that are a nice perk for some new thinkers.
Small firms do worry about the drawbacks of a corporate backer. Conflicts of interest and bureaucracy are the biggest. And pricey testing grounds can always be rented out. In fact, companies typically pay more to buy stakes in start-ups than VC-only firms do, according to academic studies, which may be tied to the wariness of entrepreneurs.
Some big companies have had success backing new firms. It can be a smart way to back an employee with a potential innovation while sharing the risk with others. Intel has backed Clearwire, Broadcom and BlackBerry maker Research in Motion. These investments give the chip maker a better view on the direction of technology, and expand the microprocessor market.
But this is more exception than rule. Corporate VC tallied $16.2 billion in 2000; last year, it was $1.3 billion. Accenture, for one, invested hundreds of millions of dollars in start-ups during the dotcom bubble - and got creamed. New companies burn cash, and fail, at alarming rates. Success takes a while to emerge. Venture capitalists say corporate backers often lose interest in the meantime.
GM will need patience and some trend-defying luck. Venture capital fund investors have lost about one per cent annually over the past decade, according to Cambridge Associates. And since corporate funds are strictly limited in their areas of investment, they often find themselves in the wrong place at the wrong time. That’s a big risk for GM. Its venture fund may keep it plugged into the auto technology race, but is more likely to generate red ink.
