What do you do if you are an individual, or a small business, that is in need of a loan? Turning to your bank is the common answer. Well, Google’s recent investments suggest a different route; crowd and online funding platforms.
Recently, Google Ventures participated in a $17M funding tranche in On Deck Capital (Businessweek), an online platform offering almost instantaneous loans to small businesses. The investment supplemented a February round D of $42M. That same week, Google’s VP of Corporate Development, David Lawee, led a $125M investment in LendingCLub, a prominent peer-to-peer crowdfunding platform (New York Times). The deal included purchase of shares form existing shareholders, placing the crowdfunder value at over $1.5B.
The news caught my attention immediately. It brought together two of my main areas of research; corporate venture capital (think Google Ventures, Intel Capital, Siemens Venture Capital, Unilever Ventures, GSK’s SR One, and others), and online funding platforms (e.g., LendingClub, On Deck, Prosper, Zopa, as well as numerous recent upstarts).
The practice of Corporate Venture Capital (CVC) is on the rise, with more and more corporations pursuing equity investment in innovative startups (background). The investments are often managed by a dedicated CVC unit as a way to secure a balance of financial and strategic gains. My decade long research suggests that the exact balance varies across industries and corporations. Over the past few years Google Ventures has built a reputation of an independent, sophisticated, financially-orientated, investor. A first glance at last week’s activity seems to resonate with many of the common benefits associated with corporate venturing:
1. Consider an innovative startup. A corporate investor can offer invaluable support to its innovation and expansion goals. As alluded to by the CEOs of LendingClub and On-Deck, a corporate investor can critically support scaling up of operation. The well-respected Google brand can do wonders to grow awareness – and legitimacy – to the products of these online platforms. Beyond endorsement, corporate investors bring functional expertise in managing large scale operations, and rich and deep talent pools. Indeed, in a recent study into the biotechnology sector, I find that corporate-back startups performance at least as good as VC-backed peers on key innovation indicators (See Nature Biotechnology article).
2. The gains to the corporation can be plentiful too. While it is beyond the scope of this write-up to cover all potential benefits, the aforementioned investments showcase how CVC activity can expose – and develop – new markets. Consequently, corporate venture capital can augment the product line, uncover new revenue streams, and drive the innovativeness of the corporation itself (see study).
Maybe equally interesting are the insights last week’s investments offer the crowdfunding space.
1. Google’s investments target online platforms specializing in the provision of debt. Yet we often think of equity funding as the way to finance highly innovative ventures. Indeed, the recent JOBS Act passed in the USA in November 2011, and similar policies in many other countries, have removed some legal hurdles around platforms specializing in the provision of equity. It would be interesting to observe whether – and when – will equity crowdfunding platforms experience the same level of attention and valuation as their debt-oriented peers.
2. Google Ventures is known to operate across a wide range of investment stages, ranging from seed rounds to growth funding. It is noteworthy that Google’s moves in the online funding space have focused on late stage ventures.
More time, and data, is needed to fully understand the impact of these corporate venture capital investments on crowdfunding. I welcome your insights and observation as I continue to explore these themes.