Corporate Venture Capital: Alternative to Finance R&D in MexicoBy Victor Gabriel Sánchez | Mon, 05/03/2021 - 09:05
The budget that the government and companies allocate to science, technology and innovation in Mexico has steadily decreased in recent years. According to OECD data (OECD Stats, 2021), the gross domestic spending on R&D in Mexico fell from 0.495 percent of GDP in 2010 to 0.284 percent of GDP in 2019. Of this amount, 76.74 percent is contributed by the public sector, 21.81 percent by the business sector, and 1.45 percent by other sources. The low percentage contributed by the private sector contrasts deeply with that seen in developed economies such as Israel (88.91 percent) and Japan (80.30 percent) and even with that observed in developing economies such as Colombia (40.6 percent) and Turkey (64.20 percent).
Various barriers affect the growth of private investment in research and development in Mexico, including public policies that do not stimulate private investment in R&D; a limited culture of innovation in the business sector; time and financial constraints associated with technological development; and lack of knowledge of the various alternatives to incorporate innovation in the organizational environment.
At the business level, innovation constitutes a key element within strategic development that leads to competitive advantages that serve to strengthen and increase a company’s position in existing markets or facilitate the entry into new ones. Establishing robust, consistent processes and considering the advances that other organizations and people have made in technology projects may serve as guidelines to invest in innovation. Within the actions that can help meet this objective, corporate venture capital is an effective alternative.
Corporate venture capital, or corporate venturing, “is the framework for collaboration among established companies and innovative startups,” in “which the established company decides to explore working with a startup through the use of different methodological frameworks” (CORFO, WAYRA, 2020). With the help of the established company, the startup can introduce new products, services or business models into the market, accelerating its internal innovation processes through financing, incubation, acquisition, resource exchange or mentoring. Global companies such as Google, Intel, Merck, Ely Lilly and Walmart offer consolidated examples of corporate venturing. In Mexico, Grupo Bimbo, FEMSA, CEMEX, América Móvil, and Grupo Televisa are some of the successful examples.
According to CB Insights (2020), globally, corporate venture capital reached record-high funding with US$73.1 billion in 2020, increasing 24 percent from 2019, in spite of the fact that the number of deals declined from 3,416 in 2019 to 3,359 in 2020. The Asia-Pacific region and the digital health sector showed significant growth compared to other regions and sectors in this type of private investment. In Latin America, according to the work “Corporate Venturing Latam” carried out by IESE and WAYRA (2020), it was possible to identify “460 initiatives run by 184 subsidiaries of 107 corporate giants in 19 Latin American cities located in 6 countries (Brazil, Mexico, Colombia, Chile, Argentina, and Perú).” The major sectors that received funding included financial services; information technologies; management consulting; telecommunications; food, beverages, and tobacco; pharmaceutical; and energy. Although this is an important advance, the main initiatives are concentrated in large companies and their adoption rate is still low compared to 16 percent of large companies in Latam with corporate venture programs, versus 75 percent of the Fortune 100 list (CORFO, WAYRA, 2020).
This strategy to finance innovation provides benefits at both the corporate level and the startup level. On the one hand, to the established company it brings potential technologies that can be integrated into production and marketing processes; it saves significant research and development resources at very early stages (identifying validated technologies in proofs of concept); and it reduces introduction time-to-market of new technologies, among others. On the other hand, this strategy provides the startup with access to financial resources to advance its technological development, as well as experience, infrastructure, validation, and mentorship on issues out of its scope of expertise (finance, accounting, legal, commercialization and others).
The levels of financing via corporate venture capital are gradual ranging from early-stage and seed capital to mergers and acquisitions and the mechanisms to incorporate innovation are diverse, including alternatives such as sharing resources, challenge prizes, hackathons, scouting missions, venture clients, venture builders, strategic partnerships, corporate incubators, corporate accelerators, corporate venture capital, and startup acquisitions (IESE, WAYRA, 2020).
The technology transfer offices that operate in Mexico can be important allies in the formation of these financing programs for innovation from the private sector due to the articulating role they play between entities that generate new applied knowledge and organizations that require new technologies to be competitive in their industries. A successful collaboration took place in 2020 in which Universidad Panamericana and Siemens Energy developed the “Collaborative Network for Innovation” program to identify disruptive technologies in renewable energies.
Corporate venture capital can be a viable strategy in Mexico to increase private investment in research and development in startups and spinoffs from universities and research centers. It is important to expand the communication of the benefits that established companies can exploit in these open innovation schemes, while directly providing benefits to startups. Undoubtedly, the technology transfer offices in Mexico can be major strategic allies of both companies and startups involving corporate venture capital, providing support for technology transfer and technology selection-maturation processes.