By Jérôme Faul – Président du Directoire d’Innovacom
It is more interesting for a large company (or corporate) to invest in venture capital funds alongside other corporate companies than to do it alone.
Remember that the value of a network is a quadratic function of the number of members. It increases as does its square. It is an empirical law formalized by Robert Metcalfe – founder of 3Com – in the 1990s.
Indeed, if the value of the network is proportional to the number of possible relationships, with N members, each one is in relationship with N-1 members, this gives N*(N-1)/2 possible relationships (it is necessary to divide by 2 because if a member A is in relationship with a member B, the same relationship exists between B and A). When N is large, N² is much larger than N.
The value is therefore roughly proportional to N². A good part of the success of telecom networks and then social networks can be explained in this way.
Corporate investors in startups through venture capital funds are interested in accelerating and diversifying their access to innovation. The work done together creates a lot of value and the value of a startup with a corporate clientele depends directly on the number of “key account” clients and partners it has.
Startups find these clients or partners preferentially among corporate companies that have invested in the venture capital funds that finance them (we speak of corporate venture capital or CVC).
Let’s formalize a (very small) little bit the subject. Given the proprietary nature of the CVC fund, if a fund manages on average a number P of startups, each corporate will have access to a number P of proprietary startups. The value of each fund will be proportional to P.
If there is N corporate, with N funds, the value of the ecosystem is proportional to the number of relationships created, i.e. N*P.
What happens if these N corporate Ns decide to invest in the same fund (multi corporate) rather than each separately?
They have the ability to manage N*P startups together – each of them having the ability to work with N corporate. The number of relationships is therefore N*N*P, the ecosystem value is proportional to the number of relationships created, i.e. N*N*P.
For the same amounts invested, the same number of corporate entities involved and the same number of startups financed, the transition from a corporate fund model to a multi-corporate fund model therefore makes it possible to value the ecosystem as a quadratic function and not a linear function of the number of investors.
From the corporate point of view itself, the gain is better even if it must be shared in N, it is no longer proportional only to the number P of start-ups it could have supported but proportional to N*P, i.e. also to the number N of corporate partners in the fund.
It’s a win-win system.
CQFD: from both an ecosystem and a business perspective, a multi-corporate fund model should be promoted, not a corporate fund model with a single sponsor.