Corporate venture capital is simultaneously similar to, and different from, traditional venture capital firms. While not new, per se, the number of corporate venture capital funds is on the rise. In fact, we are seeing a major increase in the number of corporate venture capital funds as evidenced by the fact that in 2016 alone, there were 965 active corporate investors on a global scale. This represents a 300% increase in the number of corporate venture capital funds over 2011 figures.
Here’s what you need to know about the rising trend of corporate venture capital as a source of startup funding.
What is a Corporate Venture Capital
A Corporate Venture Capital (CVC) fund refers to a special fund that corporations use to invest in certain types of startups. In some cases, in addition to corporate venture capital, the companies may also provide these startups with professional mentorship on management and marketing. CBInsights provides a nice explanation of the key difference between a corporate venture capital fund and a traditional venture capital fund: “Corporate VCs provide startups with in-depth industry knowledge and access to potential customers, while institutional VCs are experts in building companies and driving financial results.”
CVC funds may invest in companies in different stages of development. In general, they expect an ROI within 4 to 7 years from startup companies and 2 to 4 years from established companies. Overall, CVCs tend to have substantial involvement in the startup until they see an opportunity to exit, preferably with a hefty sum of ROI.
Startups looking for funding through a CVC fund can make contact directly and start the review process. It sometimes also works the other way around, with companies seeking out companies with high potential that need funds.
The investments may then be used to carry out research and development, marketing, furthering market research, or even expansion, depending on the stage of the startup.
Objectives of Corporate Venture Capital
The goal of a CVC fund is to gain a competitive edge strategically and financially. CVCs often invest in startups with products or technologies that complement theirs. The aim is for the startups to develop technologies that will help to drive the development and sales of the parent company’s products.
And like a traditional VC fund, CVC funds cash in when the startup goes public, called Initial Public Offering (IPOs) or when mergers and acquisitions happen. In the case of IPOs, CVC funds sell their stock and then move on to new ventures. But as IPOs become rare, firms can still earn a solid return by selling their investment to a third-party firm.
Benefits of Corporate Venture Capital for Startups
The obvious advantage of getting investments from CVC is exactly that – funding. The parent company has deep pockets to ensure that R&D of the product is done in optimal environments. This can be hard to achieve without the guidance of a CVC. The involvement of a CVC in your startup also gives you access to the firm’s networks and industry expertise. This paves a lot of paths that can further the development and growth of a firm. Overall, securing CVC can provide startups the right tools early on that will ensure a win-win situation for both companies.
Drawbacks of Corporate Venture Capital for Startups
For most startups, the biggest drawback to seeking funding through a corporate venture capital fund is their ongoing involvement in the day-to-day operation of the startup. For instance, some founders have indicated that after being funded with CVC, they were pressured to take use the corporation’s products or services to the exclusion of all others. Other founders have complained that some CVCs staff their funds with inexperienced personnel who are not knowledgeable about key technological or operational nuances of the industries in which they operate.
Corporate Venture Capital Leaders
Out of the Fortune 100 companies, 75 have active corporate venture capital funds. In 2017, the CVC leaders were Microsoft, Bloomberg, Qualcomm Ventures, Intel Capital, and GV, among others.
Each of these CVCs focuses on startups in specific fields. Google Ventures, for example, provides venture capital funding in life sciences, artificial intelligence, transportation, robotics, and more. To date, it has over 500 investments since its inception in 2009. Qualcomm Ventures, the investment arm of the telecommunications company, understandably invests in startups related to mobile technology. Recently, it has made huge investments in AI-focused startups like Clarifai and Prospera. Check out this CBInsights article to see a listing of the most active global corporate venture capital funds.
Is CVC Right for You?
Before approaching a corporate venture capital fund, founders must understand the strategic nature of CVC investments. Most importantly, CVC funds invest not because they are altruistic, and not so much because they want to generate profit, but primarily because they want to further the strategic interests of the corporation they represent. Before approaching a CVC fund, founders also need to consider whether or not they are comfortable with a higher-than-usual level of investor involvement with their startup.
Want to talk more about corporate venture capital and whether or not it could be the right source of capital for your startup? Contact me today and let’s talk.