Another Way to Fund Tech Ventures

There is a narrative that goes with the typical rise of a successful startup in today’s technology boom.  Some problem is addressed and solved by a small team of intelligent and ambitious people  – if only they could acquire the funding to launch their project.  A struggle commences to attract seed funding and once they do, millions of consumers or thousands of businesses are using their product and the founders’ idea becomes reality – nearly overnight.

A version of this narrative is played out in a recent feature story from Wired, which follows two San Francisco tech entrepreneurs struggling to find financing for their startup. It’s an honest look at what it’s like for startups before the money starts rolling in, and a reminder that not all startups succeed. But their story, like the general tech funding narrative, begins and ends with venture capitalists and other angel investors taking a chance on the ambitious new idea.

That will continue to be a familiar story for successful technology companies. But there’s another longstanding source of funding available to many of these firms in the form of corporate venture capital (CVC).

Plenty of great innovations either dry up or grow slowly from a lack of funding – either because they’ve been overlooked by traditional VC firms or because they may not know about other sources like CVC. For plenty of technology firms, CVC can give life to their idea and connect them to an industry in a way they may not otherwise find. CVC funding may not be widely known, but it is nothing new.

Since 1995, CVCs have been involved in about 500 venture capital deals – about 17 percent of all VC deals over that time according to the National Venture Capital Association.  These deals have averaged about $4.7 million from CVCs.

 

Of course, the benefits of a successful venture investment go two ways. And in the case of CVCs, that means the investing company is attaching itself to the kind of innovations that can help it thrive in the long term.   Technological innovation has never been more important in the financial services industry, and it’s why we recently launched our own CVC arm at CME Group, Liquidity Ventures.

As a Crain’s profile of our venture fund highlighted, the idea is to harness the power of entrepreneurship and the rapid pace of technological advancement to grow our industry and our business. The goal of our fund is to supplement the traditional route of buying the product of an established company by taking stakes to ensure the success of ones that have the potential for future large-scale impact.

Such is the approach of CVCs overall. By investing in ideas and innovation outside the walls of the firm, they’re not just interested in acquiring technology, but in seeing that technology succeed in the biggest way possible. That means introducing technology to entire industries, advising young companies on practical applications, and providing valuable resources. And importantly for all those tech startups, it means another place to look when they’re seeking that all-important early round capital.

Mark Fields is Managing Director of the Strategic Investment Group at CME Group.

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