The pros and cons of companies venturing onto Sand Hill Road.

More and more companies are using their cash piles to take a punt on venture capitalism. It’s par for the course for seasoned tech giants like Intel (NASDAQ: INTC) and Alphabet (NASDAQ: GOOGL), but now non-techs too are taking the plunge. The motives for corporate VC – both profits and excitement. (Barron’s)

But beware of the latter reason. Companies risk their reputations and money on “tourist” corporate adventurism at the “petting zoo” on Silicon Valley’s Sand Hill Road. “They look at you from the cages of their cars, or they get out and want to pet you,” says Claudia Fan Munce, the former head of IBM’s venture division and an adviser to NEA, one of the biggest venture firms. “Safaris may be fun, but the lions can eat you for lunch.”

The risks from treading VC street

The first thing that comes to mind is timing. Corporate venture money may be buying peak valuations with a long-in-the-tooth bull market setting up feverish FOMO (fear of missing out) sentiment.

Case in point: Shareholders at Altria (NYSE: MO) may be dismayed at the recent $4.1 billion haircut the company took on its investment in e-cigarette maker Juul Labs.

SoftBank Group (OTCMKTS: SFTBY) muscled into VC territory with a $100 billion fund. It’s now nursing a $3.6 billion write-down on its stake in WeCompany. SoftBank’s troubles have attracted the sharks – activist hedge fund Elliott Management has taken a $3 billion stake in the company and is demanding changes.

Even venerable VISA (NYSE: V) recently splurged $5.3 billion on fintech Plaid – slightly a year after it participated in a $250 million funding round that valued the start-up at $2.65 billion.

“Corporate venture capital is driving up valuations and deal sizes,” says Munce.

This phenomenon is being reflected in the IPO market. Many startups have canceled or postponed their offerings in the public markets, fearing investors may reject their valuations.

However, in many cases, it’s a devil-or-deep-sea choice for companies. They remain gripped by FOMO as their CEOs fear having to explain being disrupted by startups. The alternative is to bite the valuation bullet, and it may prove expensive.

Case in point: Beyond Meat (NASDAQ; BYND), which is valued at $7.4 billion post-listing. Kraft Heinz (NASDAQ: KHC) and Conagra Brands (NYSE: CAG) both missed the bus.

Where corporate VC makes a difference

Some startups actually prefer corporate funding. They welcome the long-term commitment that comes with corporates’ understanding of industry and technology.

Case in point: Xpansiv CBL, a commodity-data exchange backed by BP (NYSE: BP), Occidental Petroleum (NYSE: OXY), and Macquarie Group (ASX: MQG) which raised $25 million.

“Traditional VCs were looking for short-term, niche investments—they want your time-to-market to be tomorrow,” says. “But this isn’t like funding a gaming app. These are long-term problems we’re trying to solve.”

Besides, it’s no secret that startups are staying private for longer, and therefore, they welcome private funding, corporates included.

For corporates, there’s another advantage. They get to efficiently outsource research and development. “It’s efficient because you don’t need to acquire a $100 million company—you only need to invest $1 million to see what’s going on. It’s a defensive mechanism to hedge or manage the risk of tech disruption,” says Song Ma, an assistant finance professor at Yale University.

Case in point: Alexandria Real Estate Equities (NYSE: ARE), a real estate owner and developer for the life-sciences industry managing a $1 billion venture fund. “It’s one of the few ways to stay at the leading edge of science and technology,” says Chairman Joel Marcus.

Another favorable development for corporate VCs is their growing acceptance by traditional VCs. In a developing symbiotic relationship, VCs are welcoming corporates to fund capital-hungry, large startups.

Indeed, there is a developing body of evidence that startups funded by corporates are likelier to make a public exit at higher valuations and file more patents. In the long-term, they also produce better returns.

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