In an ideal situation both parties benefit. Larger companies often want to take advantage of fresh ideas but it could also be an attempt to knock out the competition before it becomes a threat later on.
Smaller companies often are wary of investments from other companies, conceded Smithkline's Gavin. This could be because they fear losing their technology or because their involvement with an industry giant could repel other partners. Gavin explained that building the relationship is very important in overcoming that trepidation.
Legal steps might also be appropriate to ensure that your ideas are protected. AEA asks that companies do not send in proposals until an initial discussion has been held and advises companies to seek patents where appropriate to avoid any potential conflict.
Smaller companies, although often reluctant to sell an equity stake, can take advantage of the resources and reputation of a larger company. Although Geoff Mortimer of Cogsys believes his company would have been successful anyway, he is grateful for some of the international relationships that he has been able to build as a result of his backing by British Gas.
In fact, said Graeme Jones, head of Natwest Bank's growth and innovation unit, there aren't many drawbacks. However, alliances work best where there is an existing relationship as communication is better.
The Confederation for British Industry (CBI) and Natwest Bank completed a study into corporate venturing in the UK at the end of 1999. Their report, which also had the backing of the former DTI (now the Department for Business Innovation and Skills), grew out of the recommendations of an industry-wide committee that studied finance for technology companies, Tech Stars.
The report came out strongly in favour of corporate venturing and was coupled with some tax breaks introduced in the November budget. Corporation tax relief at 20% is available on corporate venturing investments if they keep the shareholding for three years.
The tax can also be deferred if the gain is re-invested into another company.
Will it replace other types of finance? Unlikely, according to Jones of Natwest. It is just another product on the wheel of finance. If a company can not raise debt finance or is not eligible for grants, it may want to consider corporate venturing either to take advantage of an equity injection or more general help. “It is not necessarily a panacea but another thing to be considered,” he said.