Venture Capital: Corporations Fill a Gap

Cash-rich companies are backing startups with an eye to diversifying

Citi Ventures, Citigroup‘s corporate venture capital arm, has met with over 300 startups since it relocated its headquarters to Palo Alto, Calif., in March of last year. Debby Hopkins, who heads the operation, says the unit isn’t like traditional VC firms that place bets on companies using money raised from outside investors. Instead, Citi Ventures is backed entirely by its parent. And it isn’t investing purely for financial return but rather to keep up with the latest innovations that can bolster Citi’s existing businesses. “[We’re] looking for things that perhaps are adjacent to what we do today or maybe a little more of a stretch,” says Hopkins.

What she has in mind are outfits such as Shopkick, a two-year-old Palo Alto startup that makes a location-based shopping app with 1.9 million users. In July, Citi invested an undisclosed amount in Shopkick in a $15 million round led by VC firm Kleiner Perkins Caufield & Byers. At first, Hopkins’s colleagues didn’t understand Shopkick’s utility for the bank. “A lot of folks had very raised eyebrows,” she says. Its app pings users’ smartphones when they enter pilot Citi branches in the Palo Alto area. A sample message: “Complete a financial review with a personal banker to get 1,500 kicks [reward points].”

The drought in initial public offerings has taken a toll on traditional VC investment. Firms in the U.S. raised $12.5 billion in 2010, the lowest amount since 2003, according to the National Venture Capital Assn. Cash-rich corporations are stepping in to fill the gap. Data from NVCA show that in the last quarter corporates accounted for about 10 percent of all U.S. venture capital investment dollars, up from 8.5 percent in 2010. About 50 corporate VCs were established worldwide in the past 12 months, according to James Mawson, founder of Global Corporate Venturing, a trade publication in London. Gerald Brady, a managing director at SVB Financial’s Venture Capital Group in Palo Alto, says the resurgence is being driven by chief executive officers with “a lot of cash on balance sheets” pushing for growth and innovation, often in areas related to their core businesses.

When BMW established BMW IVentures in February, the carmaker wanted to appeal to urbanites who can’t afford its vehicles now but might in the future. It participated in a $5 million financing round for MyCityWay, an app that maps cities for individuals traveling on foot or public transportation. The words “Powered by BMWi” are displayed at the bottom of the app. Best Buy‘s corporate arm invests in consumer technology companies such as Zeo, a maker of sleep-tracking gadgets. It’s also testing demand for electric vehicle charging stations and home energy management systems at some of its stores. “As more companies are reaching outside their walls for new ideas, innovative technologies, and products, we all have to keep pace with one another,” says Meredith Schwarz, head of General Mills‘s venture arm. It invests in outfits such as MarketTools, a maker of customer feedback software, as well as mobile, video, social media, and gaming startups.

Corporate venture arms made a slew of bad bets during the 2000 dot-com bubble, pumping more than $15 billion into the market. “They were late-stage, dumb money,” says Mawson. “And they got taken to the cleaners.”

Companies are treading more cautiously now. Citi Ventures, for instance, committed around $300,000 in 2009 to sponsor Shopkick’s test app before taking a minority stake. That helped reassure Shopkick CEO Cyriac Roeding that his company would benefit from having the bank as a backer. Says Roeding: “We had seen Citi execute with us, and that’s why we pulled the trigger.”


    The bottom line: With traditional VC investing at an eight-year low, corporations are stepping up their funding of smartphone apps, robotics, and more.

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