The number of large corporations providing capital for startups and emerging companies has jumped in recent years. Corporations are increasingly setting up their own venture capital funds (corporate venture capital funds) to support these investments. Corporate venture capital helping fuel the growth of more and more startups’ and emerging companies. Another interesting trend is the transition from an archaic way of imposing restrictive deals to giving startups and emerging companies a freer landscape to develop and manage the business.
Before going into more details about corporate venture capital. Let’s look into what corporate venture capital (CVC) is and why large corporations are doing CVC investments.
What is Corporate Venture Capital?
It has become a practice of large corporations to invest in small businesses or specialized firms with high potential for growth in order to gain certain competitive advantage aside from monetary gains. So basically, corporate venture capital (CVC) is an equity investment by large corporations in an entrepreneurial venture.
What are the Benefits of Corporate Venture Capital Investment?
CVC investments are primarily financially-driven as corporate investors are looking for leverage on returns, now corporate investors are extending beyond financial gains.
Corporate investors understand that strategic gains are more rewarding in the long run. These benefits include:
- Take advantage of complementary products or services.
- Identify new market opportunities.
- Discover unfulfilled needs of customers and unserved emerging markets. There are always needs to fulfill and untapped markets to explore. Investing into startups emerging companies can help identify these needs and find ways to fulfill them.
- Improved efficiency of supply chain and customer relationship.
- Gain higher return on investment.
- Develop new business relationship. Corporate investors can leverage business relationships to further their corporate goal and one way they can do so is through cvc investment.
- Learn new business models, practices, and methodologies. There can be something new that large companies can learn especially when it comes to innovation and being competitive on specific fields.
- Have access to or prevent competitors from acquiring access to a breakthrough technologies. Large corporations especially those on similar fields are always trying to be the first to have the technology. Supporting innovative startups or emerging companies can very well pave the way for them to have access to technological breakthroughs.
- Reduce the risk of missing out in technological innovation and development. Similarly, having access to technological breakthroughs can reduce missing out on new innovation and technological breakthroughs.
- Preparing startups or emerging companies for a merger or acquisition or a strategic alliance
Commonly the strategic goals and strategic benefits are difficult to measure so they are still evaluated on the basis of financial performance.
How are CVCs Helping Startups
Of course there are mutual benefits when CVC investment is concerned. If large corporations gain much from startups and emerging markets, the latter also gain something through the following.
- Startups and emerging businesses get the much needed capital. Capital can give startups boost in the early stage of their company’s development. Since corporate investors new and innovative products and service out in the market, supporting them could be a potential win-win situation for both.
- Startups and emerging businesses have live business environment to test their product or service. Corporate investors can provide a good testing ground for testing products and service with customers that can provide real time feedback. This reduces risk of failure and can make a better market fit.
- Startups are often given access to larger corporations network, partners or experts. This can accelerate the former’s expansion and development.
- With merger or acquisition in mind, large corporations can give excellent direction to startups and emerging companies as their agenda can be in harmony with each other.
Contact me today if you are interested in learning more about Corporate Venture Capital and how to find out if it’s right for you.