Is Corporate Venture Capital Right for Your Startup?
In the first half of 2021 alone, Corporate Venture Capital funds (CVCs) around the world inked more than 2,000 deals worth more than $70 billion. It’s an increasingly prevalent alternative to traditional funding options such as VCs and angel investors — but how can entrepreneurs determine whether a CVC is a right fit for their startup?
To build a successful partnership, founders must determine the CVC’s relationship with its parent company, the structure and expectations that will guide its decision-making, along with a cultural and strategic alignment with the key people involved.
Traditionally, startups have looked to three primary sources for funding: venture capital firms (VCs), angel investors, and family offices. But in recent years, a fourth option has grown increasingly popular: corporate venture capital funds, or CVCs. Between 2010 and 2020, the number of CVCs grew more than six times to over 4,000, and these CVCs inked more than 2,000 deals worth $79 billion in the first half of 2021, surpassing all previous annual tallies.
In a survey of global CVC executives, 61% reported that they didn’t feel like the senior executives of their corporate parent understood industry norms. In addition, because of their parent companies’ business imperatives, many CVCs may also be more impatient for quick returns than traditional VCs, potentially hindering their ability to provide long-term support to the startups in which they invest. Moreover, even a patient, veteran CVC can pose problems if other existing investors aren’t on board.
A strategic CVC prioritizes investments that directly support the growth of the parent. For example, Henkel Ventures is upfront about its focus on strategic rather than financial investments.
This approach works well for startups that require a longer-term perspective.
Financial CVCs are explicitly driven by maximizing the returns on their investments. These funds typically operate much more independently from their parent companies, and their investment decisions prioritize financial returns rather than strategic alignment.
Financial CVCs still offer some connection to the parent company, but strategic collaboration and resource sharing are much more limited.
A financial CVC is generally a good fit for startups that have less in common with the mission of the parent company, and/or less to gain from the resources it has to offer.
The third type of CVC takes a hybrid approach, prioritizing financial returns while still adding substantial strategic value to their portfolio companies. Hybrid CVCs often maintain looser connections with their parent companies to enable faster, financially-driven decision-making, but they still make sure to provide resources and support from the parent as needed.
Finally, some CVCs are in transition between a strategic, financial, and/or a hybrid approach. As the entire investor landscape continues to grow and evolve, it’s important for entrepreneurs to be on the lookout for these in-transition CVCs and ensure that they’re aware of how the potential investor they’re talking to today may transform tomorrow.
For example, in 2021 Boeing announced that in a bid to attract more external investors, it would spin off its strategic CVC arm into a more independent, financially-focused fund.
Entrepreneurs should start by speaking with employees at the parent company to learn more about the CVC’s internal reputation, its connectedness within the parent organization, and the KPIs or expectations that the parent has for its venture arm.
An outfit with KPIs that demand frequent knowledge transfer between the CVC and parent company might not be the best match for a founder looking for no-strings-attached capital — but it could be perfect for a startup in search of a hands-on corporate sponsor.
Once you’ve determined the CVC’s place within its larger organization, it’s important to delve into the unique structure and expectations of the CVC itself.
Is it independent in its decision-making, or tightly linked to the corporate parent, perhaps operating under the umbrella of a corporate strategy or development department?
If the latter, what are the strategic objectives that the CVC is meant to support?
What are its decision-making processes, not just for selecting investments, but for giving portfolio companies access to internal networks and resources?
Ultimately, the people are the most important component of any potential deal. Before moving forward with a CVC investor, make sure you have a chance to speak with key executives from both the CVC and the parent company, in order to understand their vision and culture.
It can also be helpful to chat with the CEOs of one or two of the CVC’s existing portfolio companies, to get an inside scoop on issues you might not otherwise uncover.
As CVCs become more and more prevalent, entrepreneurs are likely to be faced with a growing number of corporate funding opportunities alongside traditional options. These investors can bring substantial value in the form of resources and support — but not every CVC will be the right fit for every startup.
To build a successful partnership, founders must determine the CVC’s relationship with its parent company, the structure and expectations that will guide its decision-making, and most importantly, their cultural and strategic alignment with the key people involved.
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