Navigating Corporate Venture Capital
Corporate Venture Capital (CVC) has often been regarded as one of the most lucrative industries and for good reason. In 2018 over $60B was invested in CVC deals. That number returned a 100% increase from the previous year and represents 23% of the total calculated capital invested in represented VC firms (Forbes). It is no surprise that CVC puts up these impressive numbers: it is an easy and symbiotic way to develop business interests, expand your network, and see tangible results in a short time. These results can be seen through new integrated solutions, foreign business opportunities, and growth in general assets.
Many CVC ventures end up largely profitable for the larger corporation as well as the smaller startup. This is because working together allows both organizations to develop themselves in a way that is positioned around each other. As the relationship develops, this results in financial return and expanded partnerships. In some instances, the larger firm can even acquire the start-up if it is well integrated into the larger business environment. As you can tell, this is very rewarding for both sides of the venture!
Corporate Venture Capital at its core is used to solve a problem. The scope and intensity of the problem can be varying, but the bottom line remains that the purpose of CVC is to address and mitigate some internal business challenges, while likely finding solutions to other problems that exist through various business areas.
The Why Behind CVC
According to Bloomberg, it is estimated that over 70% of capital invested in CVC is directed through the San Francisco Bay Area. This is because the Bay Area still holds the innovation hub of the world. However for those outside the Bay, it can be difficult to have executive partnership conversations without a local anchor. With venture capital being such a “people industry,” building and maintaining relationships is one of the most, if not the most important aspect in being successful.
TIP: Go into the venture with the mindset of building synergetic relationships
As a CVC it is important to go into the venture with the mindset of building synergetic relationships. This is because CVC is always a two-way street. As a part of a larger corporation, it can be easy for the startup to be overtaken with the corporation's larger disposable resources and facilities. However, this often causes the start-up to fail. The CVC Partner needs to play umpire and protect both the needs of the startup and the company they represent. It is imperative that you maintain the authenticity behind both companies while looking for ways to grow together. Avoiding these pitfalls allows for a symbiotic relationship between the startup and corporate partners. As a result, having those pre-established internal relationships allows you to hit the ground running, and is why successful ventures within a CVC can quickly scale in market and industry respectively.
Establishing CVC Governance
When starting to think about starting up a CVC practice, keep in mind who you will be reporting to. We had the chance to interview Mitchell Weinstock at HP Tech Ventures, his background heavily reflecting work through the hardware industry, with over three successful startup exits.
Mitchell notes that where your group operates changes the behavior of the CVC. Sometimes the CVC organization will report directly to the CEO, or the CFO, or the CTO and each will have a different governance style. When bringing a startup forward, the CVC team should know the answers to questions such as:
“Who is this project benefiting? And, who is providing the funding? ”
At different stages and levels of CVC engagement, the people who are supporting the startup project will be different.
This will also affect the other times you will closely work with a specific part of the organization at large and how they will respond to the CVC group. Ensuring a regular cadence of communication in your chain of command is critical. You need to constantly be aligned with the current thinking and be ready to adjust your investment thesis if the leadership team changes direction. Part of that is deciding upfront if you are purely investing for strategic intent and financial gain takes a back seat to gain insights for the organization, if they are equal, or you are acting more like an institutional VC and focusing on financial gain.
A governance structure is also important for a variety of financial reasons. If you are reporting to the CEO you tend to have greater flexibility in your decision making and funding. CVC funding can be done from a variety of sources. Depending on the size and purpose behind the venture, the funding may come directly from the company (like a single LP fund where the company is the sole limited partner), or it may come from an off-balance sheet account where the funding is not affecting the business units.
TIP: Go to the people that will be overseeing the potential venture and align with the strategic visions they have for the company
Before even starting a CVC practice, Mitchell recommends that you go to the people that will be overseeing the potential venture and align with the strategic visions they have for the company. Being able to tailor CVC initiatives that revolve around these objectives will allow you to layout a road map for what kinds of potential partnerships you are looking for and create an investment thesis that both startups and other venture entities will understand.
Creating a Focus
You might be wondering how exactly to scale down your initial list of CVC opportunities. An investment thesis will keep the team aligned and focused on what is strategic to the company. And when looking at startups Mitchell recommends that you look past the product idea and look hard at the team behind the solution. He said:
“The teams that most often win are not those with the best product, but those with the best execution.”
Invest in teams first. Think about the characteristics of a good business partner, and most importantly know that it may take years for the product to develop and mature to the point where the company can engage in a partnership. Many CVC opportunities for HP Tech Ventures developed over long periods. Take your time and consistently reevaluate the maturity of the product and team, don’t give up on them because startups pivot and change over the various stages.
Remember, it is always beneficial to start with a big funnel of deal flow contacts and then narrow down your potential opportunities to match your investment thesis. But don’t eliminate opportunities just because they do not match one of your criteria. Take the time to thoroughly evaluate each business venture and determine whether you see a potential of collaboration in the future.
Mitchell points out that some of his most successful opportunities have been from people or places that he did not initially consider as a likely source of good startups.
Landscaping CVC through COVID-19
Amidst the coronavirus, those that operate through international markets are especially able to connect with others from around the globe. One advantage of being able to exclusively meet online is that it is easier to find a common time to sit down and chat. Another is those small cultural disparities are overlooked allowing for a smoother channel of communication. By creating a good network right now when you have the chance (due to COVID-19), you will set up a strong infrastructure for creating syndicates of investors who will support corporate venture capital investors in the coming years. This infrastructure will allow you to assert yourself into the venture capital world and you will be able to carry these networks into real-life collaboration.
You will need to be more creative as an investor or an entrepreneur because of the global working phenomenon caused by COVID-19. As you can probably imagine, many events where investors and investees regularly come together have been forced to postpone or shut down out of an abundance of caution. But even in this, Mitchell suggests that there is a large number of opportunities. Many investor conventions have moved to an online platform, and as a result, you now have accessibility to thousands of presentations and pitches that you would not normally be able to see due to the time conflicts and distances needed to attend. Take advantage of this. Go online and see what you can find, some great places to start are by looking up conferences that pertain to your industry or horizontal. All you need to do is stay awake while remaining in your time zone.
As you begin to build a pipeline of prospective startups and VC’s, remember to have regular readouts of the funnel status with your management team. They need to know when you are getting close to closing so they can prepare all the funding stakeholders for funding requests and to ensure that your internal sponsors are committed to this investment.
We wish you all the best in your CVC involvement. If you are interested in learning more about 10X Innovation Lab and the work that we do to support corporates, startups, governments, and universities you can contact us directly at klaus@10Xinnovationlab.com.
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