Large companies have long sensed the potential value of investing in external start-ups. Once called “strategic investments,” VC deals involving corporate venture arms as investors have accelerated at a rapid pace over the past decade. Globally, corporate venture capitalists dramatically increased their activity last year via a venture capital arm, according to a new report from CB Insights. They invested a record $169.3 billion in 2021, up 142 percent from 2020’s investment total.
Companies launching their first corporate venture capital (CVC) fund and the rise of more dedicated funds with a focus on specific themes (e.g., sustainability) drove growth. Corporations entering corporate venture in 2021 included CVS Health, which launched a $100M fund, and Circle, which created a fund to invest in early stage blockchain companies.
Here’s a look at why organizations should consider a CVC fund and how to launch a corporate venture arm:
The number of new CVC arms launched rebounded from a six-year low of 144 in 2020 to 221 in 2021, up 53 percent year-over-year with no signs of slowing down. There are a multitude of reasons why corporations launch CVC funds. Traditionally, these efforts focused on strategic and financial goals such as early access to innovation and emerging technologies, collaborative partnerships with startups and other young companies, and plentiful M&A opportunities. Today, with so many funding options and ways to take an established company to the next level, the whys behind launching CVCs are evolving.
Among the benefits:
- Corporation Innovation: The ability to make strategic investments is one tool in the overall innovation ‘quiver’ that can be leveraged to not only tangibly engage the startup ecosystem, but to also capture a piece of the increase in enterprise value that is often generated for startups when blue chip corporations become their customers and/or investors.
- Close(r) Partnerships with Fast-Moving Startups: As an investor in a startup, you form close partnerships with their senior management teams and not only have visibility, but often some degree of influence over their roadmaps. For corporates who need a hand with innovating, pairing with startups can provide fresh ideas, insights, and technology fast.
- Trend Monitoring and Market Insights: Investing in startups can give you a bird’s eye view of what’s trending, where an industry is heading and what new industries or models are emerging. You’ll see these market insights from the inside out, providing early and firsthand perspectives, rather than learning about these trends and changes in the media, from analysts or out on the competitive market together.
Even with this upward trend, there are a number of complexities corporations face when they undertake launching a CVC effort and not all these strategic investment groups are created equal. There are, however, certain steps corporations can take to help set a new CVC team up for success.
The first step to launching a corporate VC arm is getting internal alignment on the drivers to create a CVC fund, especially its intended purpose and definition of success over time. It’s then important for senior management to clarify where the CVC will fit in the organization and how it’s activities will be run day-to-day.
For example, who will need to give approval for the deals? Do deals require a commercial relationship to exist in conjunction with any strategic investment? Failure often occurs when CVCs move too slow because decision paths are overly complex or involve multiple stakeholders to approve.
The best deals in the market can happen at lightning speed and like institutional venture investors, CVCs need the ability to make decisions free of overly stringent corporate friction. On the flip side, when launching a CVC fund, you can’t expect, nor should the goal be to operate in a silo. One of the key offerings to a startup is the doors you can open for them across the organization.
Putting the right team in place is critical. It’s often not as simple as tapping one or more existing internal employees to create and manage a new CVC arm. If there are experience gaps, you might need to recruit outside talent. The ideal combination is utilizing an existing employee who has been with the corporation for a while. This individual should know how to navigate the corporate structure and deeply understand the key players and products across lines of business.
Their insight and skill set should be combined with an individual who has experience in making venture investments in startups. Since the latter is often harder to find for a new fund, many CVC and innovation teams work with our firm to help design, launch and support their strategic investment programs across their lifecycle.
You’ll also need to decide how you’ll compensate your CVC professionals. At institutional VCs, compensation is indelibly tied to investment returns for the fund. For a CVC, positive returns or commercial value can take on a broader definition and capture a number of contributions beyond cash-on-cash returns.
After staffing your CVC arm the next question that soon follows is how to retain them. For the best on those teams, the challenge is how to do so economically in a way that keeps them in their seats and from jumping ship to a private venture capital firm, where there may be greater personal economics upside from generating successful investments. It’s also important to note that since managing a CVC fund is challenging, a growing number of corporations retain third-party experts to design and manage their strategic investment efforts on their behalf.
Gaining access to the startup ecosystem can propel corporations into a new phase of growth and innovation. A CVC fund provides an optimal platform and collaborative atmosphere to drive innovation with the right startups.