Accelerating innovation makes Corporate Venture Capital a must

Corporate Venture Capital (CVC) has continuously grown for many decades through several economic cycles as we have described in our previous article. In this post we provide an overview of the conditions that drove that growth.

Accelerating waves of innovation

Economist Joseph Schumpeter developed the theory of innovation cycles, suggesting that business cycles operate under long waves of innovation. Since the industrial revolution started in the 18th century, six long waves have been proposed.

Figure 1: Long waves of innovation (1785 - Present)

These long waves are getting progressively shorter due to a variety of reasons: globalization, interconnected markets, digitalization, faster product development, incremental innovation funding, etc. There is an ever-growing compounding effect in place, since new technologies accelerate the development of newer technologies and these in turn accelerate the development of the newest technologies. The Internet has been one of those foundational technologies that have accelerated the development of new technologies and new products and services in all kinds of sectors.

We can see this acceleration in the increased rate of adoption of new products in the following diagram plotting the adoption rates of technology in the US in the last century.

Figure 2: Adoption of Technology in the US (1900 to the Present) 

Source: BlackRock

It took over half a century for products like the Telephone or TV to reach a high level of adoption, whereas newer products like the Internet or Smartphones have been able to reach the same level of penetration in a decade or less.

Companies struggle to keep up with newest technologies

We are experiencing an even more extreme acceleration in the adoption of the newest technologies, particularly digital services like Netflix, Facebook, Instagram, Uber, Airbnb or ChatGPT.

Figure 3: Number of days to 1M and 100M users for digital services

Source: Kyle Hailey (2023)

To reach a wide level of global adoption (over 100M users), it took Netflix a decade and less than five years for Facebook. Astoundingly, it took only 2 months for OpenAI’s ChatGPT to reach this level of adoption.

At these extreme rates of adoption of new technologies, it becomes extremely difficult for companies to first foresee the changes these technologies bring and then adapt to them. This affects not only their environment (competitors, new entrants, customers, suppliers and substitutes) but also their own company’s internal talent, culture and operations (IT, HR, marketing, sales, R&D, etc.) in many ways.

Venture Capital fuels innovation

Many of these new technologies and innovations have been increasingly funded by Venture Capital firms. Over the last few decades, we have seen the growth of VC funding directly driving the disruptors of whole industries. This phenomenon, which started in highly technological sectors like semiconductors or biotech, now happens in all economic sectors, as foundational technologies like software are eating the world. 

Figure 4: VC investment fuels growth of digital economy in the US

Source: US Bureau of Economic Analysis, PitchBook and SVB analysis (2022)

For instance, as Venture Capital funding of digital startups has increased over the last 30 years in the US, the digital economy’s share of the US GDP has increased from around 6% to over 10%. The digital economy has outgrown the US GDP by a rate of 2.4x.  In just a few years, some of these new startups have become global champions: Meta (Facebook), Airbnb, Uber, Instagram, Tesla.  Hundreds of lesser known, but also high-growth startups, have disrupted numerous verticals such as: retail, consumer goods, media, telecommunications, real estate, mobility, etc.

Some of these VC-backed startups have eventually become the biggest companies in the US. In fact, as of 2023, 7 out of 10 top US companies were VC-backed.

Figure 5: Venture Capital financed most of the top US companies

Source: Ilya Strebulaev, Venture Capital Initiative, Stanford Graduate School of Business (2023)

Companies launch CVC to participate in accelerating innovation

In the early 20th century model, companies relied mostly on their internal Research & Development efforts to create and develop new products, services and business areas. For innovations not developed internally, there was enough time to plan for and incorporate these via sourcing or licensing agreements, or in some cases M&A when highly strategic.

However, as the pace of innovation accelerated, new methods were needed for companies to identify and leverage external innovations to their advantage. This is what came to be known as Open Innovation, and includes a variety of ever-increasing tools: licensing, strategic alliances, joint ventures, challenges, hackathons, incubators, accelerators, venture builders, etc.

Initially one of the goals was to anticipate technologies and innovations that could benefit or disrupt the existing business areas of corporations. But as the pace of innovation accelerated, many companies decided to take a proactive role and participate in the creation of these innovations, in some cases even taking the driver’s seat. As Venture Capital was increasingly funding these accelerating innovations, it was natural for companies to consider taking part of the action, instead of waiting reactively, by making Venture Capital investments as well.

This is not an easy step, as Venture Capital requires a specific set of skills, experience and geographical presence that might not generally be available in most corporations. Despite this, Corporate Venture Capital has been one of the most successful Open Innovation tools and as such it has continued to grow through many economic cycles for over half a century, with companies from a variety of sizes and sectors joining in.

In our next article we will dive deeper into the specific goals and motivations for companies to create and expand their own CVC programs.