CORPORATE VENTURE CAPITAL
Structuring a Corporate Venture Capital (CVC) is the natural path of a company that has connected with startups, has already conducted proofs of concept (PoC), validated the proposed solution, and built successful implementation cases.
Differences between Corporate Venture Capital (CVC) and Venture Capital (VC)
The main difference between corporate venture capital and venture capital is in the strategic objective. By investing in a startup, a venture capital is only seeking financial return. He does not expect to benefit otherwise from the innovation developed by the startup.
The corporation, on the other hand, when investing in a startup, is generally not prioritizing financial return but strategic return on investment. You intend to increase the value of your own company in the market.
There is a very famous phrase from Les Vadasz, the first Intel Capital leader (Intel's CVC).
'When you make a deal [with Intel Capital], you write this deal on a piece of paper.' What we provide (Give) and what we earn (Get)'. When Give and Get are just money in exchange for % in the startup, this negotiation does not go forward at Intel Capital."
Les Vadasz, First Intel Capital Leader
Gives and Gets in a Corporate Venture Capital
What are GIVEs
By nature, startups do not have a complete structure, especially in their initial phase. There is no HR or marketing department in startups that are looking for product-market fit.
A CVC offers this kind of support to the startup. Also, as an established player, your endorsement in the market brings a lot of confidence to potential startup customers.
Below is a list of the top "Gives" that a CVC provides to a startup: - Access to the Company's tools (HR, MKT, IT); - Financial Consulting; - Customer Base; - Workshop/Networking; - Use of the Mark.
What are GETs
In contrast, the company that structures a CVC does this to achieve its strategic objectives. Among its main GETs are:
- Ecosystem: product valuation
- CVC invests in startups that are building technologies that can support the company's products, be sold with them, or increase their value in the market.
- Market: demand stimulus
- This investment can stimulate demand for company products in different markets.
- Complementary technologies:
- Through CVC, the company can also invest in technologies that it has no interest in developing but knows that they are promising.
- Possible profitable markets in the future (Disuptake)
- Invest in disruptive technologies, i.e., technologies and business models that change entirely the way we exercise our purchasing power but present many risks and challenges along the way.
To illustrate some GETs, let's use some of the investments made by Intel Capital.
Ecosystem: investment in Mobileye
Intel eventually acquired Mobileye. However, before making this acquisition, Intel Capital invested in the startup that makes hardware for autonomous cars.
Intel understands the importance of participating in this market and, by investing in Mobileye, provides support for the startup to develop hardware using Intel processors, adapting its development team to produce processors for autonomous cars. The "get" is precise: by participating in this new ecosystem, Intel increases its market value.
Market: Investment in CloudFX
Intel Capital made an investment in CloudFX, a cloud computing startup based in Singapore. The company's interest - and its "get" - is to gain access to CloudFX partners and customers and stimulate demand for Intel products.
Complementary technologies: investment in Precision Hawk
By investing in this drone startup for the most diverse industries, Intel Capital understands that the drone market is essential and relevant. However, it has no interest in producing hardware for this type of equipment.
When investing in the startup, it has the "get" to participate in the market without having the cost of learning and operation.
Possible profitable markets in the future: investment in Evolo
Evolo is responsible for Volocopter, an electric autonomous aerial vehicle that aims to solve urban mobility.
How a Corporate Venture Capital works
When executives of a corporation structure a Corporate Venture Capital, they typically have questions about the type of seat they will have on the startup board.
CVC typically divides its stake on the startup board between Corporate Venture Capital executives and Corporate (Parent) executives.
In Intel Capital's case, for example, 75% of observer seats are filled by Intel Capital executives, and Intel business executives fill 25% of the seats.
Observers should actively participate in the strategic and financial decisions of startups. It is also his role to help create synergies between the activities of the startup and the activities of the corporation.
CVC must ensure that the startup has the resources to thrive as an onslaught. And it is during the startup board meetings that such matters are dealt with.
Some things are simple to solve. The investor can, for example, assign software use licenses to the startup. Other topics are more complicated and involve technical and market knowledge that only corporate has - and the startup would take a long time to build.
Types of startup support
We can divide the types of support CVC offers the startup into three parts:
- Access to technology experts;
- Development of processes with high standards of delivery;
- Human Resources, Marketing and IT Tools;
- Workshops from Financial Strategy to Technology and Marketing.
- Audience at corporate networking events;
- Participation in industry events;
- Introduction to potential customers.
- Corporate becomes a startup customer most of the time,
- This is a way to understand how to help the invested company more and engage the executives of the headquarters in the investment made.
A common mistake for companies that start investing in startups (probably without establishing a CVC) is not investing in rival startups.
The investment thesis is typically supported in a specific industry or technology. This means that the company can - and should - invest in competing startups that are part of its thesis.
This strategy is good for the corporation, which diversifies its investment portfolio, and for the startup, which has access to the exchange of information and talents, even if this advantage is not evident in the short term. The fact is that the startup that evolves faster will end up needing talents that often only exist in competitors. If they have the same investor, the transition will be simpler, and everyone can achieve their goals.
Corporate Venture Capital's financial objectives should not be treated in the same way as they are handled at headquarters. I say this because the return on investment in a startup occurs between 5 and 10 years. A corporation doesn't have this time to wait.
Therefore, CVC's investment horizon should be larger than the investment horizon of the matrix. If she can't sustain her support for the startup for as long as necessary, she will have done what we call dumb money.
What is dumb money, and what are your risks
The term dumb money was coined by Venture Capitalists here in Silicon Valley. This happened when they saw corporations full of good intentions injecting money into startups. After 2 or 3 years, the startup XYZ project was no longer relevant, and the corporation lost track of the attacks.
With the pace went away also the money invested. The same mistake has been repeated for over 30 years around here.
Relationship with corporation and startups
The image below illustrates the relationship between Corporate Venture Capital, corporation and startups:
The corporation wants to invest in startups so that startups contribute to their strategic objectives.
In addition to the capital contribution, the corporation helps the startup with customers, promotional support, and technical support, adding value to the emerging company.
Corporate Venture Capital (CVC) is an instrument for the company to invest in startups. In addition to transforming the financial asset into equity, CVC helps to manage interests between the universe of startups and the corporate universe. Through CVC, a startup receives support to grow, and the corporation achieves its strategic objectives.
Corporate Venture Capital needs to operate in an independent structure to make faster decisions and be less dependent on the changes that occur within the corporation. Its goal is to achieve success with the company's business areas and with the startups invested, fleeing the label of dumb money.
To create a CVC, the company needs to develop a good relationship with the entire startup ecosystem and all its players. All these relationships are productive and bring much more than money to the table for all parties involved.
However, one of the players in this ecosystem is especially important for Corporate Venture Capital – the Venture Capitalist. Apart from the obvious fact that by investing together in a startup, CVC and VC dilute risk, they also get the best investment opportunities, add knowledge and reduce opportunism.
Joint Investment Advantages for Corporate Venture Capital (CVC)
When CVC and VC invest together, there is a complement of skills. Corporate Venture Capital adds its market knowledge, solution applicability, and technology to venture capitalist's most financial-oriented perspective.
This helps maintain both parties' financial and strategic balance while diluting investment risks and decreasing corporate losses from bad investments.
Among the main advantages that Corporate Venture Capital has when investing in conjunction with VCs we have:
- Better selection of the business, since two perspectives analyze the same opportunity.
- Reduction of opportunism. With its market experience and VC with its experience with entrepreneurs, CVC can soon differentiate real opportunities of opportunism.
- Better balance between financial and strategic objectives. CVC tends to focus more on business, and VCs tend to focus more on finance.
- Better networking. Both parties receive market proposals, and this synergy improves their relationship in the ecosystem.
- Reduction of corporate losses. Less impact caused by bad investments.
Who are the executives behind Corporate Venture Capital
For CVC to make good investments, it depends a lot on the professional profile behind the selection of these investments. Therefore, it is essential to understand the executive profile of a Corporate Venture Capital, its selection process, and its responsibilities.
For the executive responsible for Corporate Venture Capital to really understand the company's projects and objectives, the ideal is that he has been part of the parent company for years.
Then, this professional's recruitment should begin with internal research in the pool of professionals that the parent company owns.
You must select those that have the following requirements:
- Senior leadership position
- Good Institutional Knowledge
- Good market connections and good networking
- Good engagement with stakeholders
- Knowledge in technology
- Financial knowledge.
The selected professional usually receives the title of "Investments Director." Large companies like Intel typically have one investment director per business area. Regardless of size, companies that are starting, regardless of size, usually have one or two investment directors supported by the internal business team.
It is super important that this professional can navigate within the company. It must have influence in the business areas to create synergy between them and the startup portfolio.
Financial knowledge is also indispensable because this professional will manage an investment fund that varies between 20 and 80 million dollars, in the case of companies that are starting. Despite being different worlds, in many cases, the professional who works at CVC has previously gone through M&A.
What CVC's investment director does
Among the primary responsibilities of the investment director of a Corporate Venture Capital are:
- Sharing goals with business areas. This ensures that CVC's strategic function is being fulfilled, that the matrix is not spending efforts on initiatives that already exist in the market, and that the two are striving to create synergies.
- Co-responsibility for the business decisions of the headquarters.
- Synergy with treasury
- Be part of the flow of information of the company. It has to be a senior professional and with influence on the matrix.
- Staff management
Step by step for Corporate Venture Capital investment
There is an ideal sequence for the investment process of a Corporate Venture Capital (CVC). Check out the step by step below.
1. Prospecting Opportunities
The investment proposals can come from various sources such as the corporate venture capital's team, the parent company's sales team, startup requests, venture capital community.
Let's look at it on a case-by-case basis.
We've talked about the need for the executive to come from the parent company, right? It is at this point that this attribute becomes essential. When selecting investment opportunities, the CVC executive should wear the parent company's business hat to assess whether the opportunity is attractive.
This professional's engagement with the ecosystem is critical because he must participate in meetups, hold events, be a speaker, and be actively promoting CVC to prospect startups with the desired profile.
2. Startup requests
This is a reactive model. Several startups directly seek CVC to offer their solutions. Often the founders of these startups are executives who understand the pains of the company's business. They come from the market and have access to CVC.
Other times, requests come from Linkedin messages or emails from startups by sending your deck or asking for investment directly. This model does not have a very high success rate because, unless the startup contact is a successful entrepreneur or a leader in its industry, a CVC will hardly open its deck or give due attention to it, no reason how the product is.
When the startup does not have access to CVC and is looking for investment, sending an email or connection request on Linkedin asking for money is not a good strategy. It is worth at least sending together a demo or a link to the prototype of the product. It is more interesting for the investor to evaluate the opportunity in this way than simply reading the deck.
Investors receive multiple decks every day, and all startups try to sell themselves as unique opportunities. A prototype dramatically increases the chance of the startup receiving attention.
One of the best ways to get investment from a CVC is through the sales team, especially for those who do not have a venture capital or a contact in the company.
As CVC invests in strategic business for the parent company, its sales team evaluates whether it is interesting and whether it can solve its problems. She should also assess whether she will want to take a slice of the cake and help the startup develop into any of the 4 models featured in the subtitle What are GETs.
3. Opportunity Analysis
After the Corporate Venture Capital team receives the opportunity, CVC executives study the investment opportunity, evaluate the 4 pillars (Ecosystem, Market, Gap Fillers, Disruptive Technologies), and which of the Investment Horizons the opportunity is related to.
If the opportunity makes strategic sense for CVC, it forwards the opportunity to the company's business areas.
Startups recommended by VCs This is the best thing that can happen to a startup: have the endorsement of a venture capital that previously evaluated the deal, found it interesting, and forwarded it to CVC. Even better if the VC wants to invest together with CVC. As the joint investments made by CVC and VCs bring deals with higher returns, most of the deals that a CVC does with startups come from indications of VCs. About 65% of them, to be more precise, occur this way.
4. Deal Concept Meeting (DCM)
DCM is a relatively casual meeting in which business managers and functional areas of the matrix come together to assess the business's qualities. The meeting is an opportunity for corporate venture capital's investment manager to review the target company and explain its relevance to the business unit.
DCM is also an opportunity for legal and financial management to evaluate possible issues associated with the business. This allows headquarters and CVC to assess the potential problems ranging from captable to startup executives or technology. It is worth remembering that most startups come with issues in some areas, and it is vital to know these problems before putting any term sheet on the table.
The business unit team should take a close look at the company, technology, and business plan to learn about the potential value of the new product, service, or capability.
Once this phase is complete, if CVC decides not to move on, the business is dead. However, if the result is positive, conversations with entrepreneurs begin.
Here, Corporate Venture Capital takes the next step for the business team to set parameters. These details involve business relationships, financial and legal milestones, and the business team's training that will sit on the startup board. Also defined is the person who will be responsible for negotiating with the target company. The process aims to structure good deals from the beginning.
5. Investment Project Authorization (IPA)
The IPA is a "go/no go" decision meeting focused on a specific agreement proposal. Once again, it is necessary to present the company, explain its potential value and detail the current business and financing model.
This moment are established the Gives and Gets and the success metrics of the startup.
From this phase comes the term sheet in which is structured the relationship between the parties, the value of the investment, and valuation. Here is also defined how the monitoring of investments will be done.
What are the Best Practices regarding the type of investment of CVC
Typically, a Corporate Venture Capital makes investments in startups with series B maturity. At this stage, the startup has a sufficiently proven and sustainable business model, has already found its market fit, has a promise aligned with the numbers, and needs help to solve some technical problems, structure team, and climb.
Series B is when risk/return is justified for both Corporate Venture Capital and the parent company.
This does not mean that investments in previous stages do not happen, but hardly a CVC will invest in a seed or previous startup. There are other players that do this role better, such as Accelerators, Angels, or Early Stage VCs.
It is also difficult for CVC to invest in a Series D startup or later because other players make more sense at this time, such as Private Equity and M & M&A, for example.
I make a remark here to clarify that other companies do acceleration programs (often even without investment, which causes strangeness here in Silicon Valley, but it happens), incubation, programs connecting with startups before Series A. It is an essential strategy of the company to connect with emerging technologies to get future deals. This strategy, however, is not common in CVCs.
Intel Capital is one of the pioneer companies in the world of Corporate Venture Capital. To illustrate an investment process, I set up an example of the company's deal flow and some unicorns that it invested that made all previous investments count.
As we have already said, CVC requires a longer time horizon than traditional corporate investments to reap a return. However, those who have strategy and patience will surely reap the rewards of this sophisticated vehicle of innovation.
Do you need a Corporate Venture Capital?
As I explained in the previous chapters, a Corporate Venture Capital's main objective is to align financial and strategic gains for the corporation. As long as the company does a good prospecting and due diligence of startups, corporate venture capital's expertise will help ensure the success of investments in the long term.
One different thing, however, is strategic gains. Throughout the book, we talk about the importance of engaging the company's functional areas with innovation so that it can be absorbed by the company and be part of the CORPORATION's DNA.
I believe that all companies should have a Corporate Venture Capital unit, as long as they are already used to implementing innovation with startups. Otherwise, it will be a financial initiative with great difficulty to sustain itself in the long run because the investment horizon of a Venture Capital is much larger than that of a company.
All the colleagues I talk to who also work with Corporate Venture Capital agree with the phrase:
"As long as you keep business areas happy, you will continue in the Corporate Venture Capital business."