Corporate Venture Capital is a practice that gained lots of momentum in the past years and for the right reasons. When done correctly, it is a WIN-WIN (-WIN) situation where both the start-up and the company benefit (and the society too.)
“I hate corporate investing!” said Fred Wilson in multiple interviews. “It’s dumb, corporations should BUY companies” he went on to say. Without neglecting his achievements and legacy, Fred Wilson’s point is one-sided. He might be talking about the outdated practices of corporate investing for financial reasons only, or he was simply frustrated with the growing competition for his investment opportunities.
But this is not the case anymore. Established companies and corporations have understood the dangers of not keeping up with the fast-moving world we live in and the opportunities they can unlock by supporting innovative young start-ups.
What is the role of Corporate Venture Capital?
Corporate Venture Capital is the practice of large established companies and corporations investing in early-stage innovative (or even disruptive) start-ups to access new technologies and adopting the agile approach that the start-ups have and the corporations lack. They do this by creating specialized investment arms that function similar to VC funds but with different purposes. For corporations, the investment is mostly strategic, without a focus on financial returns. Not in the short term at least.
They provide capital but also assist with business and product development and offer most of their resources and market expertise so that the start-ups can accelerate their growth.
The practice goes back over 100 years, to 1914, when Pierre S du Pont, owner of a big chemical and plastic manufacturing business invested in General Motors, a 6-year-old small private company at the time. Their relationship continued during and after the world wars, as their goals were both strategic and financial, the same as with most CVCs today.
As you can see in the chart above, the most “booms” in corporate venturing took place around major historical events that shaped and defined the business and technology world as we know it. These large companies understood the changes that were happening and jumped in the middle of them to keep their customers and their positions in the market.
But given the speed at which things change today and the historical events that happened in the past few years, corporate venture capital is here to stay. Companies understood the importance of such strategic moves and the need to be ready in the unpredictable environment they live in.
The COVID-19 pandemic was such an event that affected many sectors. This is exactly what accelerated the transition to future technologies and their importance and impact, as the author says in this report by FDI Intelligence.
And CVC is here to stay. According to CBInsights, CVC-backed deals reached a new record in the first half of 2021, with a 133% year-over-year growth. The rise might have been caused by how fast the tech landscape evolved, as well as the start-ups starting to understand the value that a CVC can provide to their business.
The difference between CVC (Corporate Venture Capital) and VC (Venture Capital)
There are a few major differences between CVCs and classical VCs, in terms of their goals, investment horizons, and the value they bring to start-ups.
What are they? – VC funds are companies that have the sole purpose of investing in start-ups for financial reasons, funded by Limited Partners (LPs). Corporate Venture Capital is done by a small team inside a big company that works as an independent arm that invests in start-ups for strategic reasons.
Goals – VCs invest for financial returns achieved by exits from the start-up that satisfy the LPs. CVCs invest strategically to create value for the companies and by acquiring industry know-how, access to technology, and other assets.
Value for start-ups – VCs provide start-ups with capital, their network, and the experience of partners. CVCs provide capital, industry, and market expertise, entrance to markets, networks of enterprise clients, specialists, channels for distribution and promotion, talent, and business development capabilities.
Exit – VCs push for exits that generate returns for the partners, because of their strategy. CVCs don’t have much financial responsibility so the main focus is creating synergy through collaboration that results in cutting costs, leveraging resources, and shortcuts to scaling.
Investment horizon – VC – 5 to 10 years. CVC – medium to very long term.
Why is CVC important? Benefits and advantages of corporate venturing
As we said in the beginning, strategic venturing comes with benefits for the start-up, corporation, and the society and ecosystem too.
What do start-ups get? Capital and the know-how to invest it and access to many, many benefits that come through the association between the start-up and the CVC – brand recognition, market and industry expertise, access to clients and specialists, a stable financial position, help with product and business development, access to even more capital, and smoother navigation of growth by avoiding the classic pitfalls and barriers.
What do corporations get? Strategic and financial returns based on their strategy. More precisely, access to innovative products and solutions, talent, new technologies, early adopters, and support for R&D departments. Because of their market knowledge, they might be better at predicting the success of a start-up, allowing them to invest earlier and get more returns.
What does anyone else get? Innovation. When both these actors collaborate, they accelerate the evolution of the ecosystem as a whole, and they raise the standards for the competition which will ultimately mean better solutions that provide more value to the customers.
What should start-up founders look for when searching for the right corporate investor?
Look at the investment strategy – Even though most CVCs fall into one category, they often have different investment strategies. Some might look for specific benefits such as the adoption of new technology or understanding the market while others look only for talent, a finished product, or just financial returns. Make sure that you know exactly what your start-up needs to find the right fit for you and create a relationship that will benefit you both.
Look for the value beyond capital – If you’re only looking for capital, then CVC might not even be your best option. But if you are looking for more than that, know what the potential investor can offer you – whether it is software development, market expertise, distribution channels, a network of enterprise clients or help with other business areas such as marketing, sales, recruiting, and others.
Look for a long-term partner – Compared to classical VC funds, the relationship you will develop with a CVC is one for the long run. Look at their history as well as their future plans and see where you fit in there. Are they committed to helping you and providing what you need to achieve your business goals? On the other hand – are you ready for such a commitment?
Look at their portfolio – To get a better understanding of how the CVC can help you, look at how they’ve helped other founders in situations similar to yours. Are there any such founders in their portfolio? In what industries are they? At what stage did they start working with the company? Where are they now? By looking at their investment portfolios, you will see if they can help you, when and, most importantly, how.
If you decided that Corporate Venture Capital is the best option for your start-up and the best way to grow your business in the long term, then let’s have a chat! We’re constantly looking for founders to support with capital and smart money too, depending on the needs – from software development capabilities to help with the product and business development areas too.Contact us