Corporate Funds Join Venture Capital Crowd ; Old-Economy Companies Cause Inflated Valuations, Critics of the Trend Say

By Smith, Randall | International New York Times, April 20, 2016 | Go to article overview

Corporate Funds Join Venture Capital Crowd ; Old-Economy Companies Cause Inflated Valuations, Critics of the Trend Say


Smith, Randall, International New York Times


Through the funds, companies scout for new products or services and business partners, but critics say the funds contribute to inflated valuations.

At first glance, the maker of Cheerios and Cocoa Puffs might not fit the image of a cutting-edge venture capital investor.

But with the food business moving to healthier offerings and online distribution, General Mills has created a venture capital unit that recently led a $3 million investment in Rhythm Superfoods, a specialty start-up that makes kale chips and broccoli crisps.

General Mills, based in Minneapolis, is part of an increasing number of old-economy companies, including the convenience chain 7- Eleven and the Campbell Soup Company, that have joined a crowd of technology companies to create venture capital funds. Through them, they scout for new products or services and promising potential business partners.

Their moves have accompanied a surge and recent crest in the valuations of many venture capital-backed start-ups. Critics say the corporate-run funds have contributed to inflated valuations for start-ups, and some funds have begun selling stakes even as they face reduced valuations on some holdings.

Reports recently surfaced that Intel's fund, the largest of its kind, might sell up to $1 billion of its holdings as it narrows its strategy under its chief executive, Brian M. Krzanich.

With valuations of many young, private companies faltering as interest in initial public offerings of stock has waned, corporate venture investing faces a test.

"I think some of the corporate V.C. will get a little less enamored as the venture market goes from euphoria into a little more normal period," said J. Sanford Miller, a general partner at Institutional Venture Partners in Menlo Park, Calif.

Since 2011, the number of companies making venture capital investments has risen 79 percent, to 801 globally, according to Global Corporate Venturing, a data provider. The ranks include Verizon Ventures, Volvo Group Venture Capital, Chevron Venture Capital, Pfizer Venture Investments and Blue Cross Blue Shield Venture Partners.

Even as total venture capital investment more than doubled from 2011 to 2015, to $58.8 billion, the amount invested by corporate venture funds quadrupled to $7.6 billion in the same period, according to the National Venture Capital Association. Corporate funds make up a 12.9 percent share of the total, the highest since 2000.

As a sign of how start-up valuations have waxed and waned, the size of the median late-stage fund-raising roughly tripled from 2012 to 2015, but it has fallen by 23 percent so far this year, according to Global Corporate Venturing.

For many company funds, financial gain is less important than finding the next big idea.

Arvind Sodhani, who led Intel's venture unit for 10 years, until mid-2015, said corporate venture investing has grown partly because of interest by chief executives. "C.E.O.s who are worried they're going to get disrupted want to have an outpost in Silicon Valley to discern where the disruption is coming from," he said.

Such corporate funds have "clearly been driving up valuations," he added.

For General Mills, which has also invested in the plant-based food maker Beyond Meat and two other start-ups, the venture capital fund is a way to keep pace with the growing number of small food brands that have found consumer success, especially online.

"The traditional consumer packaged goods model of big advertising budgets, trade leverage and scale -- a lot of those factors have been neutralized by these small brands," said John Haugen, who heads the General Mills venture fund after managing brands such as Nature Valley, Yoplait and Hamburger Helper. Emerging brands, he added, "have alternative pathways to market online."

Technology companies pioneered corporate venture funds 30 years ago, followed by media, finance and health care companies. The two giants of the field are Intel, with stakes estimated by outsiders of more than $5 billion in over 400 companies, and Google, now Alphabet, which has a $2. …

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