“Corporate investing is dumb. I think corporations should buy companies. Investing in companies makes no sense.” This quote from Fred Wilson, an American businessman, and investor, is by now notoriously famous. It demonstrates the great skepticism by corporates concerning minority investments.
Throughout the last years, Corporate Venturing and Venture Capital have gained popularity throughout all industries and more investors were able to find success through such investments.
To successfully invest, it is crucial to command the necessary know-how, consider organizational aspects, and follow some simple investment rules.
In this post, we explain the basics of Corporate Venture Capital and the main differences between Venture Capital and Corporate Venture Capital.
First of all, what is Venture Capital?
Private individuals or business entities like to invest their capital in different ways, e.g., in bonds, publicly offered companies (stocks), and startups. In the latter case, the invested money is called venture capital, and the investors are called venture capitalists. In return for their capital, the venture capitalists receive an equity stake in the company, e.g., they invest 1 million Euros for 20% of the startup’s ownership. (That means the startup is worth 5 million euros before the investment. This is the so-called “pre-money” valuation).
Such investments are by design very risky because investors have little protection if the young company fails, and the failure rate is very high. However, in case of success, those investments are capable of giving impressive returns. The returns to the venture capitalists naturally depend upon the growth of the company.
Why is it important?
Venture capital is an important source to get money for young companies, which have limited operating history and, therefore, limited access to bank loans or other debt instruments. Venture Capitalists play an essential role in keeping the economic ecosystems alive and foster change and innovation.
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How Corporate Venture Capital appeared
Corporate Venture Capital – also known as Corporate Venturing – has already been around for over 100 years. In 1914, Pierre S. Du Pont’s company invested in General Motors and set the foundation for Corporate Venture Capital (CVC).
However, since 1914 a lot has changed in the world, and Corporate Venture Capital has gained popularity, especially in the last five years, where global CVC-backed fundings and deals have tripled. In 2019 the global CVC-backed fundings reached a record high of 57 $B. However, CVC raised fundings are still much less compared to the classic VC-backed fundings with a total of 257 $B globally in 2019.
Why do Corporates choose to invest their money in risky ventures?
Corporate Venturing defines the practice of large businesses investing in innovative startups. Similar to angel groups and VC funds, CVCs invest in startups in all stages. By acquiring these startups’ equity stakes, the CVC fund can obtain a competitive advantage and access new ideas, markets, and technologies. In general, Corporate Venture Capital can be motivated by strategic as well as financial goals.
"Corporate Venturing defines the practice of large businesses investing in innovative startups to obtain a competitive advantage and access new ideas, markets, and technologies."
“Strategic” means that the CVC fund’s objective is to invest in startups to access new technologies and possibly identify acquisition targets early. CVCs aim to create value for the corporate and the startup.
Startups that get an investment from a CVC benefit not only from the invested money but also from the corporate’s industry expertise, administrative support, and network (“smart money”).
“Financial” focus means that the CVC invests in new companies for solely financial returns, unlike traditional VC funds. Down below, you’ll find a table that explains the relevant differences between a traditional VC and a CVC.
|Venture Capital (VC)||Corporate Venture Capital (CVC)|
|Architecture||Limited Partners (LP) are Business angels, institutional funds, and Corporates. The LPs provide the VC with the money, which the VC can then invest in startups.||The CVC is an (in)dependent investment arm that is founded and owned by a corporate. Therefore the company is the CVC’s owner and lone limited partner.|
|Goals||Financial Goal: Return on Investment to satisfy LPs||Industry know-how, market knowledge, customer basis, brand reputation, network|
|Benefit for startup||Money, network and scaling expertise|
VCs can also act as strategic investors, and the startup can benefit from the VCs network.
|Industry know-how, market knowledge, customer basis, brand reputation, network|
|Exits||They have a financial responsibility to push for an exit that would generate returns to their limited partners. Therefore, they try to accomplish successful exits like an IPO (initial public offering) or buyout from another fund or corporate.||They do not have a financial responsibility to push for an exit. They instead focus on strategic synergies and lasting partnerships.|
|Investment horizon||The fund life cycle ranges from 5 to 10 years.||The fund life cycle is often not terminated. In that case, they are called evergreen funds.|
Venture Capital vs. Corporate Venture Capital
The mentioned aspects resemble the stereotypical VC and CVC, but the exact details can vary from each other, of course. From our experience, the biggest differentiating factor is that a CVC’s focus lies in financial success and also on having a strategic fit with the startup it invests in. Therefore, the startup can benefit from the investment and make use of strategic support of the CVC like its big network or customer base. This can be very useful, especially in the early stage of a startup. The corporate is also profiting from the strategic investment because it is looking to get new and innovative products and solutions into the marketplace. Supporting and cooperating with startups can help achieve that goal.
If you are interested in exploring this topic further or have any questions, do not hesitate to contact our Corporate Venturing Experts.
Corporate Venturing as a Service
As an innovation agency, we at WhatAVenture have worked very closely with startups and corporates for years. We empower organizations by implementing sustainable innovation structures, programs and activities. Moreover, we are investors ourselves and invested successfully in startups like GLEAM, Pixofarm, Woodspace, and Variand. Therefore, we offer corporate venturing as a service, where we support CVCs with their startup deal flow and to manage their portfolio.