By defining what Corporate Venture Capital (CVC) is not, it is frequently easier to understand what CVC is. Even when the investment vehicle is backed by a single investing business, an investment made through an external fund managed by a third party is not regarded as CVC. Most significantly, CVC is a particular subset of venture capital and not the same as venture capital (VC).
Corporate venture capital funds target a specific industry for the majority of their investments—typically with at least one focus on digital technology and another on their own traditional core industry or even complementary products or services.
These funds aren’t typically looking just to invest in startups and get out; they want to work closely with their portfolio companies to help them succeed which can be an advantage for startups looking for “smart capital”.
This article explains what corporate venture capital funds are and how they invest in startups.
What is Corporate Venture Capital?
Corporate venture capital funds are the practice of large companies investing in startups as part of their overall corporate strategy. CVC is defined by the Business Dictionary as the “practice where a large firm takes an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise; the objective is to gain a specific competitive advantage.”
CVC funds typically look for investments in venture-backed startups that have at least one early stage investor. This would mean that CVCs do not tend to invest in very early stage startups that have not attracted any external funding yet.
CVC firms typically focus on specific industries, such as health care and technology, for the majority of their investments. Industry/market choice heavily depends of current arenas of the corporate and its future expansion strategies.
These funds aren’t looking to make a quick buck; they want to work closely with their portfolio companies to help them succeed. This is a huge advantage for the startup because the corporate can help to find customers or partners which may be difficult in the early years of a startup.
How Corporate Venture Capital Funds Invest in Startups
There are a variety of ways that corporate VC funds invest in external startups given that CVC has essentially two main objectives: 1) Strategic 2) financial objectives.
With respect to the financial objectives, some fund managers simply want to partner with startups to use their expertise and resources to help them succeed. Others fund managers want to fully invest in the companies in their portfolio, using the funds to help them grow and become successful. These two types both predominantly have financial objectives.
A strategic CVC investment is made by a large established firm to increase its sales and profits by investing in a new firm. For example, investing firms may want to obtain a window on new technologies, to enter new markets, to identify acquisition targets and/or to access new resources.
Because investing firms seek to exploit the potential for additional growth within their own organizations, CVC investments are strategically driven. In this respect, the startup resources and capabilities further help the growth and success of the large firm.
The key to why these big companies would want to get involved in investing in startups is the disruptive nature of the opportunity. In order to make an impact with the consumer, an investment in startups has to offer a product or service that is disruptive.
Typically, corporate VC funds focus on at least two industries for their investments. For example, one fund may focus on health care while another focuses on technology. These funds often focus on specific sectors because they want to find the best opportunity in that industry.
Working with a Corporate VC Fund
CVC fund managers are interested in partnering with startups because they have corporate excess cash and these investments are riskier with higher potential returns than many others.
Therefore, they often want to partner with startups that have some proven level of success. A few commonly accepted metrics for startup success include revenue, customers, and growth although of course CVC managers active in the startup ecosystem are also probably familiar with the innovation accounting concept.
One way to measure how much a startup has grown is to see how many investments it has received such as angel investment or government grants. With that information, a CVC fund can see how successful a startup has been and how the company may be growing in the future.
When looking for opportunities in the corporate sector, startups should first look for opportunities that align with the company’s goals and objectives.
Having a partner in the corporate sector can help a startup focus on growing within its own sector as well as finding CVC investment within this sector. This can be a great way for a startup to tap into new markets and grow as a business.
The Drawbacks of CVC Funds for startups
There are many benefits to working with a corporate VC fund, but there are also drawbacks. First, it’s important to note that the risk involved with corporate venture capital is much higher than the risk involved with angel investing. This is because a large firm has much higher bargaining power over future decisions that concern both the corporate and the startup.
Second, there is a danger of intellectual property loss for the startup since knowledge and technology can be leaked to the corporate. While the other way might be the case, corporates have a lot more resources to make use of knowledge acquired from the startup.
Third, there may be a mismatch between plans and strategic directions that startup founders and corporate managers have in mind. It could be startup founders prioritize high growth and fast moves in the market, corporate managers prefer slower growth and be hesitant when it comes to working with corporate competitors in the future (as customers or partners of the startup).
Lastly, Having a Goliath-sized investor as your financial competitor may prevent other equally attractive sources of funding from getting involved with you. Corporate venture capital can unintentionally (or even intentionally) scare away other investors, particularly VCs. This can hinder fundraising or growth of the startup in the future.
The Bottom Line
CVC investment has gained popularity in the past decade in the startup ecosystem as many larger firms have started such initiatives. It can be an interesting investment method for startups particularly because it can provide kind of “smart capital”. However, there are some drawbacks as we explained above.
The best way for corporate funds to invest in startups is to align with their goals. That way, corporate funds can find investments that fit within their strategy and are also disruptive enough to make an impact.
Corporate venture capital (CVC) funds invest in early-stage startups as part of their overall corporate strategy. They are often large corporations, such as IBM or IBM-owned companies like Red Hat, and sometimes other independent businesses who have teamed up to pool resources for a specific investment opportunity. These firms can participate in venture capital funds or they can directly invest in high-potential startups through CVC funds.
They target a specific industry for the majority of their investments—typically with at least one focus on digital technology and another on their own traditional core industry or even complementary products or services.
These funds aren’t typically looking just to invest in startups and get out; they want to work closely with their portfolio companies to help them succeed which can be an advantage for startups looking for “smart capital”.
This article explains what corporate venture capital funds are and how they invest in startups.
What is Corporate Venture Capital?
Corporate venture capital is the practice of large companies investing in startups as part of their overall corporate strategy. CVC is defined by the Business Dictionary as the “practice where a large firm takes an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise; the objective is to gain a specific competitive advantage.”
CVC funds typically look for investments in venture-backed startups that have at least one early stage investor. This would mean that CVCs do not tend to invest in very early stage startups that have not attracted any external funding yet.
CVC firms typically focus on specific industries, such as health care and technology, for the majority of their investments. Industry/market choice heavily depends of current arenas of the corporate and its future expansion strategies.
These funds aren’t looking to make a quick buck; they want to work closely with their portfolio companies to help them succeed. This is a huge advantage for the startup because the corporate can help to find customers or partners which may be difficult in the early years of a startup.
How Corporate Venture Capital Funds Invest in Startups
There are a variety of ways that corporate VC funds invest in external startups given that CVC has essentially two main objectives: 1) Strategic 2) financial objectives.
With respect to the financial objectives, some fund managers simply want to partner with startups to use their expertise and resources to help them succeed. Others fund managers want to fully invest in the companies in their portfolio, using the funds to help them grow and become successful. These two types both predominantly have financial objectives.
A strategic CVC investment is made by a large established firm to increase its sales and profits by investing in a new firm. For example, investing firms may want to obtain a window on new technologies, to enter new markets, to identify acquisition targets and/or to access new resources.
Because investing firms seek to exploit the potential for additional growth within their own organizations, CVC investments are strategically driven. In this respect, the startup resources and capabilities further help the growth and success of the large firm.
The key to why these big companies would want to get involved in investing in startups is the disruptive nature of the opportunity. In order to make an impact with the consumer, an investment in startups has to offer a product or service that is disruptive.
Typically, corporate VC funds focus on at least two industries for their investments. For example, one fund may focus on health care while another focuses on technology. These funds often focus on specific sectors because they want to find the best opportunity in that industry.
Working with a Corporate VC Fund
CVC fund managers are interested in partnering with startups because they have corporate excess cash and these investments are riskier with higher potential returns than many others.
Therefore, they often want to partner with startups that have some proven level of success. A few commonly accepted metrics for startup success include revenue, customers, and growth although of course CVC managers active in the startup ecosystem are also probably familiar with the innovation accounting concept.
One way to measure how much a startup has grown is to see how many investments it has received such as angel investment or government grants. With that information, a CVC fund can see how successful a startup has been and how the company may be growing in the future.
When looking for opportunities in the corporate sector, startups should first look for opportunities that align with the company’s goals and objectives.
Having a partner in the corporate sector can help a startup focus on growing within its own sector as well as finding CVC investment within this sector. This can be a great way for a startup to tap into new markets and grow as a business.
The Drawbacks of CVC Funds for startups
There are many benefits to working with a corporate VC fund, but there are also drawbacks. First, it’s important to note that the risk involved with corporate venture capital is much higher than the risk involved with angel investing. This is because a large firm has much higher bargaining power over future decisions that concern both the corporate and the startup.
Second, there is a danger of intellectual property loss for the startup since knowledge and technology can be leaked to the corporate. While the other way might be the case, corporates have a lot more resources to make use of knowledge acquired from the startup.
Third, there may be a mismatch between plans and strategic directions that startup founders and corporate managers have in mind. It could be startup founders prioritize high growth and fast moves in the market, corporate managers prefer slower growth and be hesitant when it comes to working with corporate competitors in the future (as customers or partners of the startup).
Lastly, Having a Goliath-sized investor as your financial competitor may prevent other equally attractive sources of funding from getting involved with you. Corporate venture capital can unintentionally (or even intentionally) scare away other investors, particularly VCs. This can hinder fundraising or growth of the startup in the future.
The Bottom Line
CVC investment has gained popularity in the past decade in the startup ecosystem as many larger firms have started such initiatives. It can be an interesting investment method for startups particularly because it can provide kind of “smart capital”. However, there are some drawbacks as we explained above.
The best way for corporate funds to invest in startups is to align with their goals. That way, corporate funds can find investments that fit within their strategy and are also disruptive enough to make an impact.
