A guide for selecting the most appropriate corporate investment for entrepreneurs.
After 10 years of low-cost capital, startups have been confronted with a new reality: their funding is dwindling. Venture capital funding in the world fell 23 % to US$108.5 billion during the first quarter of this year, the second largest decrease in a decade. While the number is more than the levels that were seen prior to the pandemic, entrepreneurs might be excused for becoming more concerned over their ventures being deprived of funding.
The landscape is not without its positive side and that is the rising popularity in the number of corporations investing venture capital (CVC). Between 2010 between 2010 and 2020, the amount of corporate investors increased over six times to more than 4,500. In total, they put in an unprecedented US$169.3 billion between 2021 and 2022, an increase of by 142 percent over the previous year. While investment interest slowed during the first quarter of 2018 the number of deals was record-breaking 1,317 CVC-backed transactions. But funding decreased 19 percent to 37 billion dollars.
CVCs can provide financing as well as access to other sources like knowledgeable business unit managers in addition to marketing and development help and the halo-effect of a well-known brand. But prospective entrepreneurs should be aware of possible drawbacks. We conducted a thorough study of the CVC market in conjunction with the market intelligence firm Global Corporate Venturing. Our results show over half the CVCs investing between January 2020 between June 2021 and January 2020 were doing it for the first time, while only 48 percent were in operation for more than two years prior to the time of the investment.The relative CVC novices may have difficulty with even the simplest understanding of the norms of venture capital. In a separate study of world CVC executives 61% of them said they didn’t believe that the top executives of their corporate parent company understood the rules and regulations of the industry. Many CVCs could be more insecure than traditional VCs seeking quick profits.
In addition, existing investors in the startup might be hesitant about the idea of bringing an CVC in the fold. One founder we spoke to said, “We had to turn down a CVC because our existing investors believed that taking them on would dilute exit returns and result in a negative perception on the eventual exit.”
How do entrepreneurs determine whether corporate finance is the right choice for their business? If yes, what CVC? It’s the first thing to decide if the primary goal for this CVC you’re considering is in line with your requirements.
Different types of CVCs and their purposes
CVCs are classified into four categories that have distinct goals: strategic, financial, hybrid as well as in transition. Strategic CVC is one that prioritizes investments that directly aid in the development of its parent. A good example of this can be Henkel Ventures of the eponymous German chemical and consumer goods company.
“We don’t see how we can add value as a financial CVC,” states Paolo Bavaj, Henkel’s Head of Corporate Venturing for Germany. “The motivation for our investments is purely strategic, we are here for the long run.”
This method is suitable for startups that need more of a long-term view. Taymur Ahmad, the CEO of nanotechnology-focused actnano, said he went for CVC instead of VC investors because he believed that he required “patient and strategic capital” to steer his company through a complex industry that has supply chain technological, regulatory and supply chain challenges.
Financial CVCs On their own, seek to maximise the value of their investments. They typically operate independent of their parent companies and their investment choices are focused on the financial return instead of strategic alignment. Strategic collaboration and sharing of resources with parent companies are restricted. According to Jim Adler, Founding Managing Director of Toyota Ventures, put it, “financial return must precede strategic return.”
A CVC that is a financial CVC is usually a great option for companies which do not share much with the objectives of the parent company or less benefit from the services it can provide. The majority of these startups only seek financial aid and are more comfortable with being evaluated by their financial performance over anything else.
The third kind of CVC adopts a hybrid strategy by focusing on financial returns but still providing significant strategic value to the portfolio companies they manage. CVCs that are less connected between their companies in order to allow faster, more financially driven decision-making, however they offer support and resources from the parent when needed.
Hybrid CVCs generally have the widest market potential. For instance, Qualcomm Ventures offers its portfolio startups with a lot of opportunities to work with other divisions of the business, in addition to access to a broad range of technology solutions. It’s not constrained by the need of short-term financial results from the parent company, which allows the CVC to have a longer-term strategically-oriented approach to investing in its ventures.
Since its beginning around 1999, Qualcomm Ventures have achieved successful exits with 122 of them, including the acquisition of two dozen unicorns (start-ups that are valued at over $1 billion). As VP Carlos Kokron explained, “We are in this to make money, but also look for start-ups that are part of the ecosystem…start-ups we can help with product or go-to-market operations.”
Additionally, there are some CVCs that are undergoing a transition from a financial, strategic, or an approach that is a mix of both. The entrepreneurs who are considering these CVCs must be aware of the way the investor they’re speaking to today could change in the future. For instance, in 2021 Boeing announced that, in an effort to draw in more foreign investors, it will spin out its strategy CVC unit into an independent and financially focused fund.
Due diligence: A step-by-step guide
After you’ve chosen the best kind of CVC for your startup Here’s how you can decide if a certain CVC meets your requirements.
1. Examine the connection between CVC as well as its main company
Contact employees at the parent company in order to know more about the CVC’s reputation within the company and its connection to the company, and the KPIs or goals that the parent company has for its venture division. A venture with KPIs that require frequent information exchange among the CVC and the parent company may not be the right fit for an entrepreneur looking for free capital, however it could be ideal for a new company looking for a hands-on corporate patron.
To understand the connection between the CVC and the parent company inquire about ways in which the CVC has been able to communicate its mission internally, the extent and deepness of the relationships to the different departments of the parent, in addition to whether CVC is able to provide the internal network that you require. It is also important to inquire how the parent company evaluates its success with the CVC and what kinds of reports and communications is expected.
Tian Yu, CEO of Aviation start-up Autoflight spoke about the importance of having discussions with employees from all areas of the company. “We met the investment team, the key employees from business groups that we cared about, and gathered a sense of how a collaboration would work,” the CEO stated. “This series of pre-investment meetings only raised our confidence levels that the CVC cared about our project and would help us accelerate our journey.”
2. Determine the structure of the CVC and its expectations
Once you have determined the CVC’s position within the home organization You should then investigate the unique structure and the expectations of the CVC it self. Does it have a separate approach to decisions, or is it closely linked to the parent company or perhaps under the supervision of the Corporate Strategy or Development department? If the latter What are the strategic objectives the CVC is supposed to help achieve? What are the decision-making procedures of the CVC and not just for deciding on investments, but also to give portfolio companies access infrastructure and services? What is the length of time that the CVC generally keep its portfolio companies? And what is its expectation regarding timeframes for exit and results?
Bart Geerts, founder and CEO of Healthplus.ai the company, stated that it declined the offer of a CVC due to “we felt that it limited our exit options in the future”.
3. Speak to anyone you can.
Be sure to have the opportunity to meet with top managers from both CVC as well as the company that is its parent to learn about their culture and vision. In addition, you should contact the CEOs of at least two of the CVC’s portfolio companies. These conversations could be the difference between productive collaboration or a complete sourness.
One of the entrepreneurs we spoke to explained that the group “loved the pitch of an possible CVC investor…but meeting with the board was a fascinating encounter as their questions revealed the risk-averseness of the business. We didn’t go through with this deal.”
To conclude, CVCs may offer substantial support and resources for startups, however startups should look over potential partners in depth even in a slow investment environment.