The mystery of CVC
This post has been written in collaboration with lead CVC investors and founders who have partnered with CVCs in Australia. It aims to be a fair representation of the industry as a whole, however keep in mind this is not based on any one business.
Ahhh, CVC. So mysterious, so illusive.
In the 12 months I worked as an investment associate at a CVC, I was often asked the same questions and heard a lot of (often unfair) misconceptions, the most popular being:
“Corporates slow start-ups down”
“Start-ups and corporates have different goals and never see eye to eye”
“Partnering with a corporate means founders no longer have control”
In a picture, this is what the industry sometimes feels like:
Hopefully by the end of this blog, you will not only understand the dynamics and value a CVC can bring, but also understand if CVC investing is right for you. You’ll probably realise that the industry isn’t that enigmatic after all…
The Basics
The concept of Corporate Venture Capital started in 50’s in America (where else!), where several corporates emerged with their own venture-arm. The credit for being ‘first’ is often given to General Electric through GE Ventures. CVCs are closely linked to their parent company, meaning investors chase start-ups with solutions relevant to the business (that’s why banks love fintechs, insurance companies love regtech etc.) A CVC<>start-up relationship means the corporate can tap into rich innovation from the start-up scene; whilst the start-up gets access to corporate-scale funding, resources and customers.
Why so Mysterious?
Globally, CVC is on the rise, and despite recessionary conditions, 2022 saw CVC-backed funding reach $98.9B (the second strongest year on record). Despite the impact, there is confusion behind the model, benefits and whether it is an appropriate/wise avenue to explore for founders. Why the mystery?
Results vary: It’s very difficult to write blanket statements about CVC when each remit/structure varies wildly, even within the same industry. Some CVCs have an investing team who deploy a fund and have full autonomy…others do business case by business case and can even build ventures in-house for example.
Reputation risk: There is a high reputational risk of writing / saying / sharing something that inaccurately reflects the brand of the parent company - both for the author and the brand itself.
Sure, each venture-arm could share the intricacies of their focus and remit on the website, but as it is so tied to the parent company’s strategic focus, this can change frequently based on market, decision makers, regulators and the actions of competitors. It is often wiser for anything shared publicly to be general / ‘big picture’.
The Benefits of having a CVC on your Cap Table
Partnering with a CVC can be a game-changer for both start-ups and established companies. If you're an entrepreneur, partnering with a corporate VC can give you access to resources and expertise that can help you scale faster (an understatement, when the corporate has 10-20 million customers!)
Other potential benefits include:
Intros: Introductions to industry experts and access to global networks
Resources: Be it strategy, tech, risk, delivery etc., CVCs can support through their team of professionals to help you solve problems and save money
Varied expertise: CVCs often partner with VC’s, meaning you receive multi-faceted support (you don’t have to choose one or the other!)
Bridge the gap: CVC investors can help bridge the gap between start-ups and established companies, and want to drive success for both parties.
Important considerations before going down the CVC route
As a former founder and a former CVC investor, I believe seeking investment from a CVC isn’t for everyone (this isn’t a ground-breaking insight, most would agree). It’s important that founders are aware of the following:
Corporates have their own strategic goals. Start-ups may feel pressure to prioritise these over their own business goals, so it's important to establish clear expectations and maintain open communication to avoid conflict.
Financial performance (might) not matter. CVC’s aren’t always focused on investment financial return. Your numbers might be brilliant but if your business isn’t matched with strategic goals of the corporate, the conversation is unlikely to go far
Homework. Work is required from founders in learning and articulating how their start-up is aligned to the objectives of the corporate. Investors alone can’t keep up to date on every initiative of every business unit at all times
Different structures. Some CVCs don’t just provide capital, but also can build or acquire businesses. Though this may not have an impact on your business, it’s important to understand the investing team’s general big picture goals (they wouldn’t invest in a company they would simply build themselves).
Stakeholders Galore. There are a lot of people in a CVC to get ‘comfortable’, and this can mean a lengthier investment process. For the right company, this is well worth the effort, but you shouldn’t be sweating on your next pay cheque or be short on team members to support answering questions from the corporate.
Appetite changes. Short term / long term strategic initiatives of the corporate oscillate based on a variety of inputs, and just because your business wasn’t on the strategic agenda yesterday, doesn’t mean it won’t be today
CVCs and Start-ups
By investing in innovative start-ups, companies can stay ahead of the competition and drive growth and start-ups receive financial support, validation from a reputable institution and access to resources and insights.
Returning to the popular misconceptions from the beginning:
“Corporates always slow start-ups down?”“Start-ups and corporates never see eye to eye”“Once partnered with a corporate, start-ups no longer have control”
Thank you for reading!
If you still have questions not answered here, please comment below or get in touch on LinkedIn.
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