Once venture capital-backed startups themselves, today’s tech giants know a thing or two about VC seed money. It’s fitting that many of them have created corporate venture capital groups of their own. These CVCs help their owners experiment and nurture new technologies and ideas in the early stages, without requiring the commitment of an acquisition.
The CVC strategy often augments a company’s research and development efforts as well as complementing its M&A strategy. Middle-market dealmakers would be wise to track the VC investments of the five companies we highlight in this story: Amazon, Google, Intel, Microsoft and Salesforce.
A CVC fund can be formed either as the independent arm of a corporation or as a dedicated fund within the same company. In the past, strategic buyers invested only in tech companies that directly fit with their core products. But as time went on, CVC funds started behaving more and more like traditional venture capital funds.
Using venture capital has advantages for strategic buyers. One is that they can gain access to new technologies while doing due diligence for potential deals.
Corporations are partnering with AI startups in particular as they look for companies that will help them compete with new players.
For example, Microsoft has partnered with KenSci, which developed AI software that predicts care and cost risks for patients. AI startups raised a worldwide record of $26.6 billion in 2019, compared to about $22 billion in 2018, according to CB Insights.
The Alexa Fund, Amazon.com Inc.’s (Nasdaq: AMZN) venture capital fund, invests up to $200 million in VC in voice technology companies. The fund focuses on hardware products both inside and outside the home, businesses that deliver new services to devices enabled by Amazon’s Alexa and companies that can contribute to the science behind voice technology. That includes text to speech, natural language, automatic speech recognition and artificial intelligence.
“We believe experiences designed around the human voice will fundamentally improve the way people use technology,” Amazon’s website states.
Voice and text-assisted technology, including the Alexa device, is becoming ubiquitous in everyday shopping routines. Voice shopping on Alexa is catching on quickly, ranging from ordering food to restocking refrigerators, and investors are figuring out how to take advantage.
The Alexa Fund has specific investment criteria: It’s looking for companies that can offer convenience via one’s voice, and businesses that solve hard problems in creative ways and are a good fit with the Alexa Skills Kit or Alexa Voice Service. Alexa Skills Kit is a set of tools that build apps for the device; Alexa Voice Service is built into Internet-connected devices that have a microphone and a speaker.
In 2020, Alexa Fund participated in a Series A round of VC funding for Dublin-based Sweepr. Sweepr’s smart technology offers technical support for Internet-connected homes without having to go through customer service. The program delivers specific instructions, photographs and videos in an easy-to-understand format that are customized for each person.
Sweepr can answer everyday simple questions such as “Why won’t Netflix load?” “Customers love using Alexa to control their connected devices and we want to continue to make the entire smart home experience even simpler and more convenient,” says Alexa Fund director Paul Bernard.
It’s not just smart home technology that Alexa Fund is interested in: The fund is targeting businesses in education software. Alexa Fund was among the investors that closed a seed funding round in Bamboo Learning at the end of 2019. Bamboo Learning has developed an Alexa skill that allows families in more than 80 countries learn about historical figures, including writers, scientists, musicians, social justice activists and artists.
“Bamboo Learning is a true innovator in developing entertaining educational Alexa skills like Bamboo Luminaries,” adds Bernard.”
Venture capital is just one prong of Amazon’s strategy for developing voice-assisted technology. On its M&A prong, the company bought data analysis and search engine company Graphiq, which collects and organizes product details to make it easier for people to get verbal answers.
In research and development, Amazon has developed Alexa-powered earbuds that have a built-in voice assistant. The company has also developed early-stage smart glasses that access Alexa with a push of a button.As Amazon rolls out more voice-enabled technologies, it will look for startups to help the company grow.
Businesses are monitoring customer behavior and aiming to offer better experiences through artificial intelligence, and this is creating investment opportunities for technology giants. Enter Alphabet Inc.’s (Nasdaq: GOOG) Gradient Ventures, a venture capital arm that launched in 2017 and focuses on early-stage AI startups.
“While artificial intelligence has been around for a long time, most AI companies are just getting started, which is why we primarily invest in early-stage rounds,” Gradient states on its website.
Gradient led a Series A round of VC investment in 2019 in behavioral biometrics company Typing DNA, which uses AI to authenticate user identities based on how they type.
“With global regulation impacting face-recognition-based authentication and hackers targeting SMS-based two-factor authentication, typing biometrics is the best form of identifying people without compromising privacy or security,” says Gradient Ventures general partner Darian Shirazi.
Google has also expanded its AI portfolio through M&A. In 2018, the company acquired Onward, an AI-powered chat services company that helps businesses connect to customers.
Google has other VC funds that back AI-related companies. For example, Google’s growth equity fund, called CapitalG, led a Series F round of VC investment in language learning application Duolingo in December 2019. “Duolingo has been adding users and revenue at an impressive pace, continuing to solidify their position as the number one way to learn a language globally,” says CapitalG general partner Laela Sturdy. Since it was founded in 2013, CapitalG has invested in more than 25 companies.
Duolingo, founded in 2011, lets people read and speak in many of the world’s most popular languages for free, along with a premium service. The company, which says has more than 30 million users, also teaches fictional languages, such as Klingon. The online language learning market will top $20 billion by 2026, predicts Verified Market Research. Duolingo has been investing in AI and machine learning so it can customize lessons to individual learners as a human teacher might.
Google’s third fund, GV (formerly known as Google Ventures), invests in enterprise and frontier tech, including AI. GV has backed more than 400 companies since it was formed in 2009, and it manages more than $4.5 billion.
GV recently invested in Viz.ai, which uses AI to help doctors and medical professionals detect early signs of stroke. Viz.ai uses deep-learning algorithms to look for stroke symptoms in a CT scan and alerts doctors. “By alerting the right doctor at the right time and synchronizing care, Viz has the potential to significantly reduce the time to treatment and greatly increase a patient’s chances of a good outcome,” Viz.ai says.
Google also has long term AI projects of its own in the pipeline such as wearable sensors, real-time translations and technology that detects sign language.
Looking ahead, AI will remain an important technology for Google and other startups that will seek funding.
Intel Capital, the venture capital arm of Intel (Nasdaq: INTC), was formed in 1991. Since then, the fund has invested more than $12 billion in more than 1,500 companies, and 677 portfolio companies have either gone public or been involved in a merger. Broadcom Inc. (Nasdaq; AVGO) and VMware Inc. (NYSE: VMW) are some of Intel Capital’s past investments.
Artificial intelligence is one area that Intel Capital focuses on. The fund invested in AI company Kyndi in 2019. Kyndi helps businesses find hard-to-locate information within collections of documents without requiring large, labeled data.
“Enterprises are turning to AI to take advantage of new opportunities and to solve pressing business problems, and we expect AI’s use in business will continue to grow as the technology matures,” says Nick Washburn, senior managing director of Intel Capital. “Solutions like Kyndi’s, which remove some of the mystery of AI technology, will continue to gain importance, and we look forward to helping them accelerate AI adoption and address the need for explainability.”
Intel is making acquisitions to accelerate growth in AI. In 2019, Intel paid $2 billion for Habana Labs, a developer of AI training technology for data centers. “This acquisition advances our AI strategy, which is to provide customers with solutions to fit every performance need – from the intelligent edge to the data center,” says Navin Shenoy, executive vice president and general manager of the data platforms group at Intel.
“Intel’s AI strategy is grounded in the belief that harnessing the power of AI to improve business outcomes requires a broad mix of technology, hardware and software, and full ecosystem support. Today, Intel AI solutions are helping customers turn data into business value and driving meaningful revenue for the company,” Intel adds in a release.
Besides AI, Intel is looking to grow in other sectors, such as real estate software. Demand for real estate tech is rising, as firms rely on technology to assist them in managing their deals and properties, driving deal activity.
Intel Capital recently backed Cherre, a Software-as-a-Service provider for the real estate industry. Cherre offers potential investment data on more than 170 million properties.
“The global real estate industry is undergoing a transformation, catalyzed by massive data flows and the application of artificial intelligence,” says Intel Capital senior managing director Trina Van Pelt. “Despite its substantial impact on the global economy, this sector is still in its infancy when it comes to data-centric investing and underwriting decisions. We see Cherre as critical infrastructure to accelerate the future of this industry.”
In other recent investments, Intel Capital and Eight Roads Ventures led a funding round in human resources technology company Gloat in December 2019. Gloat’s software helps businesses retain employees through AI that compares employees’ work skills, interests and career histories to recommend potential projects and career-advancing opportunities.
Microsoft Ventures, MI2 touts itself as having “the agility and pace of a startup, getting deals done quickly and focused on the value-add that we can bring to you as a collaborative partner, not just your investor,” according to its website. Microsoft Corp.’s (Nasdaq: MSFT) venture capital fund concentrates on AI and cloud computing.
M12 recently invested in German travel software startup Comtravo. The target’s software translates emails and other text-based requests into data, and then uses artificial intelligence to send customized travel options to customers based on previous searches and bookings. Companies are implementing text-supported software, such as natural language processing, to improve customer experiences, and they are attracting investor attention as a result.
“Comtravo is disrupting the huge business travel market through deep automation and unique access to travel providers,” says M12 partner Lior Litwak. “We were very impressed with the company’s vision of increasing efficiencies for both businesses and travel agents without compromising on high-quality service and traveler experience.”
The International Air Transport Association predicts that passenger growth will double in the next 20 years. With the rise of low-cost carriers, airlines are competing to gain more passengers and are looking for ways to make their flying experiences standout.
For M12, the firm is ramping up its investment efforts in European startups. The fund recently opened a new London office to seek opportunities across the AI, big data, analytics, cloud infrastructure, machine learning and Software-as-a-Service sectors.
Earlier in 2020, M12 participated in a funding round for London-based SuperAwesome, a platform that allows for safe web browsing for kids. The company’s products include kid-friendly advertising, social engagement tools and parental controls. “Making the internet safer for kids is a sector-agnostic mission,” says SuperAwesome CEO Dylan Collins. “As increasing numbers of companies outside of the core kids sector realize that children cannot be ignored, we’ve begun to shift our horizons to the wider internet.”
In the U.S., M12 backed Evisort, which uses AI to automate processing and tracking of corporate contracts. Evisort reviews, analyzes, approves and tracks contracts, invoices and purchase orders.
Aside from dealmaking, internally Microsoft is investing in AI research in the healthcare sector. The company recently announced plans for a five-year, $40 million AI initiative for global health challenges and research. The program is designed to help research organizations develop diagnostics, treatments and preventive measures.
“We know that putting this powerful technology into the hands of experts tackling this problem can accelerate new solutions and improve access for underserved populations,” Microsoft president Brad Smith said in a statement.
In 2019, Microsoft formed a partnership with health insurer Humana Inc. (NYSE: HUM) that gives Humana access to Microsoft’s cloud and AI resources. The deal is aimed at making more digital health services available to seniors. Microsoft indicates that it sees additional similar partnerships down the road.
Buying into new habits
Salesforce Ventures is the venture capital arm of Salesforce.com Inc. (NYSE: CRM). Since 2009, the fund has invested in over 375 companies. Salesforce Venture’s previous investments include DocuSign, GoCardless, Guild Education, nCino, Twilio and Zoom. Salesforce Ventures says it invests in “the next generation of enterprise technology that extends the power of the Salesforce Intelligent Customer Success Platform, helping companies connect with their customers in entirely new ways” and describes itself as “building the world’s largest ecosystem of enterprise cloud companies and extending that technology to customers.”
Salesforce Ventures has at least seven active venture capital funds focused on global regions. They include the $50 million consultant trailblazer fund, $125 million Europe trailblazer fund, $50 million Australia trailblazer fund, $100 million Japan trailblazer fund, $100 million Canada trailblazer fund and $50 million Salesforce impact fund. Since 2009, Salesforce has backed over 300 technology startups across 20 countries.
One industry where Salesforce Ventures looks to help companies is retail, which relies intensely on technology for everything from predicting what customers want to delivering orders quickly. Retailers are under immense pressure to adapt to the rapidly changing consumer landscape, and give shoppers what they demand.
Earlier in 2020, Salesforce Ventures has invested in Omnichannel-as-a-Service provider NewStore, which helps retailers run stores from iPhones. “Retailers have long faced hurdles in offering a seamless interaction between online and brick-and-mortar,” NewStore says in a press release. “Connecting legacy systems and outdated technologies is time-consuming and cumbersome, creating friction behind the curtains and on the store floor. With NewStore, retailers operate a seamless end to end experience across all touchpoints, unlocking in-store revenue drivers including endless aisle, mobile checkout, store inventory and clienteling.”
“Despite stores being a source of great frustration, they also represent a major opportunity,” says NewStore CEO Stephan Schambach.
“This gives customers even more choice in how they deliver omnichannel experiences to keep pace with the rapidly changing needs of their shoppers,” adds Salesforce Commerce Cloud CEO Mike Micucci.
Salesforce is also making acquisitions in the retail tech sector. In 2020, the company acquired Evergage, which was previously backed by Arrowroot Capital, G20 Ventures and Point Judith Capital. Evergage uses data to monitor customer behavior and helps retailers offer personalized services.
“Evergage’s mission has always been to personalize the world, and we’ve been doing that one client at a time for nearly 10 years,” says Evergage CEO Karl Wirth. “Now, as a part of Salesforce, we’ll be able to do what we do better and at a much greater scale and pace than we ever could before.”
In a recent similar deal from Salesforce Ventures, the fund co-led a $479 million VC growth funding round in cloud data provider Snowflake. The latter has worked with Conagra Brands Inc. (NYSE: CAG), JetBlue Airways Corp. (Nasdaq: JBLU) and Office Depot Inc. (Nasdaq: ODP).
“When consumer expectations change faster than the speed of business, you can’t afford to rely on fragmented or stale data to make daily decisions that affect your bottom line,” Snowflake states on its website.