Is Corporate Venture Capital Right for Your Startup?

Traditionally, start-ups have looked for three main sources of funding: venture capital firms (VCs), angel investors, and family offices. But in recent years, a fourth option has increasingly grown: corporate venture capital funds, or CVCs. Between 2010 and 2020, the number of CVCs grew more than sixfold to more than 4000These centers closed more than 2,000 deals worth $79 billion in the first half of 2021, outstripping all previous deals. annual preparation.

These corporate investors provide not only financing, but also access to resources such as affiliates that can act as market and customer auditors, marketing and development support, and trusted existing brand. However, along with this added value, Card Verification Codes (CVC) can also come with some risks. To explore these trade-offs, we teamed up with market intelligence firm Global Corporate Venturing to conduct a quantitative assessment deep analysis From the CVC scene, as well as a series of qualitative interviews with both CVC founders and CEOs.

We found that of the 4,062 CVCs that invested between January 2020 and June 2021, more than half were doing so for the first time, with only 48% operating for at least two years at the time of the investment. In other words, if you are considering a CVC partner at the moment, there is a good chance that a potential investor will have little or no experience making similar investments and supporting similar startups. And while more experienced venture capitalists are likely to come with the resources and credibility that founders might expect, relatively new entrants may struggle with even a basic understanding of the project’s parameters.

In fact, in A Survey of Global CVC CEOs, 61% reported that they did not feel that senior executives at the parent company understood industry standards. In addition, due to the business requirements of the parent companies, Many CVC It may also be more patient for quick returns than traditional venture capitalists, which could hamper their ability to provide long-term support to the startups they invest in. Moreover, even a patient, veteran CVC can cause problems if other existing investors aren’t on board. As one of the founders we interviewed explained, “We had to reject the CVC because our existing investors believed that accepting them would reduce exit returns and result in a negative perception of the eventual exit.”

It is clear that the CVC can be injured or missed. How can entrepreneurs decide if corporate finance is a good fit for their startup, and if so, which CVC to choose? The first step is to determine if the primary purpose of the CVC you’re considering matches your needs. Broadly speaking, CVCs can be classified into four categories, with four different types of goals: strategic, financial, mixed, or in transition.

Four types of CVC

a strategic CVC prioritizes investments that directly support the growth of the parent company. For example, Henkel Ventures is outspoken about its focus on strategic investments rather than financial investments. “We don’t see how we can add value as a CVC financially” explain Paulo Pavag, Head of Henkel Enterprise Adventure in Germany. “The motivation behind our investments is purely strategic, we are here for the long term.” similarly, Unilever Ventures It explicitly prioritizes brands that complement the consumer goods giant’s existing businesses.

This approach works well for startups that require a long-term perspective. For example, CEO of nanotechnology startup Aktenano Timur Ahmed told us he chose CVC over venture capital investors because he felt he needed “patient and strategic capital” to guide his business through an industry fraught with supply chain, regulatory, and technical challenges.

On the other hand Financial issues The venture capital is clearly directed by maximizing the returns on its investments. These funds typically operate more independently of their parent companies, and their investment decisions prioritize financial returns rather than strategic alignment. Financial CVCs still offer some association with the parent company, but strategic collaboration and resource sharing are very limited. As Toyota Ventures founding general manager Jim Adler succinctly put it, “Financial return must precede strategic return.”

A financial card verification code is generally suitable for startups that have less in common with the parent company’s mission, and/or less to take advantage of the resources it offers. These startups generally look only for financial support, and tend to feel more comfortable evaluating their financial performance above all else.

The third type of Card Verification Code (CVC) takes a file hybrid approach, prioritizing financial returns while continuing to add significant strategic value to their portfolio companies. Hybrid CVCs often maintain more flexible communications with parent companies to enable them to make faster, financially driven decisions, but still make sure that parental resources and support are available as needed.

While some startups will benefit from a purely strategic or financial CVC partner, hybrid CVCs generally have the broadest market appeal. For example, Qualcomm Ventures offers the startups in its portfolio great opportunities to collaborate with other business divisions, as well as access to a wide range of technology solutions. It is not constrained by requests for short-term financial returns from the parent company, allowing CVC to take a more strategic long-term perspective in supporting its investments. At the same time, Qualcomm Ventures is still appreciating the financial returns, having achieved 122 successful exit Since its inception in 2000 (including twenty rhinos – i.e. start-ups worth over $1 billion). As VP Carlos Kokron explained, “We’re in this to make money, but also looking for startups that are part of the ecosystem…startups we can help with product operations or market entry.”

Finally, some CVC are in contrast between a strategic, financial and/or hybrid approach. As the entire investor landscape continues to grow and evolve, it is important for entrepreneurs to be on the lookout for these transition foreign currencies and to ensure that they are aware of how the potential investor they are talking to today will turn out tomorrow. For example, in 2021 Boeing announce In an effort to attract more outside investors, it will separate its risk-checking token strategic arm into a more independent and financially focused fund.

Choose the right match

Once you’ve decided whether you want to work with a strategic CVC, a financial CVC, or something in between, there are several steps you can take to find out if a particular CVC is a good fit for your startup.

1. Find out the relationship between the card verification code and the parent company.

Entrepreneurs should start by talking with employees at the parent company to learn more about the CVC’s internal reputation, its interdependence within the parent organization, and the key performance indicators or expectations that the parent company of its venture arm has. A hardware device with KPIs that requires frequent transfer of knowledge between the CVC and the parent company may not be the best match for a founder looking for capital unencumbered by any restrictions – but it may be ideal for a startup looking for a viable corporate sponsor.

To get a sense of the relationship between the CVC and the parent company, ask questions that explore the extent to which the CVC has been able to communicate its vision internally, the breadth and depth of its links with the different departments of the parent, and whether the CVC will be able to deliver the intranet that it needs. You’ll also want to ask how the parent company measures the success of the Card Verification Code (CVC), and what types of communication and reporting are expected.

For example, Tian Yu, CEO of aviation startup Autoflight, explained the importance of in-depth interviews with employees across the company in guiding his decision moving forward with CVC: “We met the investment team, key employees from the business groups we were interested in, and brought together An idea of ​​how the collaboration works. This series of pre-investment meetings have increased our confidence levels that CVC cares about our project and will help us accelerate our journey.”

2. Determine the CVC structure and expectations.

Once a CVC is located within its larger organization, it is important to delve into the unique structure and expectations of the CVC itself. Is it independent in making its decisions, or closely linked to the parent company, perhaps working under the umbrella of the corporate strategy or development department? If the latter, what strategic goals is the CVC supposed to support? What are the decision-making processes, not just for selecting investments, but for giving portfolio companies access to internal networks and resources? How long does a CVC typically hold its portfolio companies, and what are its expectations in terms of exit timelines and outcomes?

For example, after founder and CEO Bart Geerts delved into the expectations of a potential CVC investor, he eventually decided to hold off funding: “We felt it limited our exit options in the future,” he explained, adding that CVCs could be more A bureaucracy of venture capital, and that for his company, the benefits such as increased market access are not worth the drawbacks.

3. Talk to everyone you can.

In the end, people are the most important component of any potential deal. Before going ahead with a CVC investor, make sure you have a chance to speak with key executives from both CVC and the parent company, in order to understand their vision and culture. It may also be helpful to chat with the CEOs of one or two existing CVC portfolio companies, to get inside information about issues you might not otherwise discover.

Sure, it can sometimes be inconvenient to ask for meetings that go beyond the typical investor due diligence process — but these conversations can be pivotal. For example, one entrepreneur explained that their team “loved the presentation from a potential CVC investor, and there seemed to be a great match between our strategic goals and theirs. We got along well with the CVC leader, but the board meeting (which was not intended to be a part of from the process) It was a great experience as their questions shed light on the risk aversion nature of the company. We didn’t start the deal.” Don’t be afraid to go beyond what is presented in the presentation and ask the tough questions of a potential partner.

With the increasing prevalence of CVCs, entrepreneurs are likely to face an increasing number of corporate financing opportunities alongside traditional options. These investors can bring significant value in the form of resources and support – but not every CVC will be right for every startup. To build a successful partnership, founders must define the CVC’s relationship with its parent company, the structure and expectations that will guide the decision-making process, and most importantly, their cultural and strategic alignment with the key people involved.

Authors Note: If you have experience working with CVC, please consider contributing to the authors’ ongoing research by completing it. this study.