Exploring the Ascendance of Corporate Giants: Charting the Intricacies of Venture Capital
Traditionally, startups have relied on three primary sources for funding: venture capital firms (VCs), angel investors, and family offices. However, in recent years, a fourth option has gained significant traction in the form of corporate venture capital funds, or CVCs. The rise of CVCs has been impressive, growing over six times from 2010 to 2020, exceeding 4,000 entities. These CVCs have shown significant activity, closing more than 2,000 deals worth $79 billion in the first half of 2021, marking a notable surge compared to previous years.
This surge in corporate investment brings both opportunities and challenges. While CVCs offer funding, they also provide access to invaluable resources such as subsidiaries for market validation, customer networks, and support for marketing and development. Yet, alongside these benefits, CVCs also introduce risks. To better understand these dynamics, organizations like Global Corporate Venturing have conducted extensive analyses of the CVC landscape, combining quantitative assessments with qualitative interviews involving founders and CVC executives.
The Findings
The first generation of Corporate Venture Capitalists (CVCs) is navigating the startup landscape with varying levels of experience. Especially in more developed countries like the US and Europe, a significant portion of these CVCs, more than half, started investing between January 2020 and June 2021, showing they're still learning the ropes. While some newbies are eager to help, their limited understanding of how things work in the startup world and their tendency to be too pushy in negotiations can make it tough for startups, especially those just starting out and looking for initial funding.
The emergence of the first wave of Corporate Venture Capitalists (CVCs) with varying levels of experience is impacting not just mature markets like the US and Europe, but also less developed regions. In places like Latin America, there's a growing push for CVC activity as companies aim to compete globally. However, in these regions, there's still a lot to learn about CVCs as the market is relatively new and less liquid. This means that while there's interest in participating, there's also a lack of expertise. Newcomers may struggle to understand how venture capital works and may find it hard to negotiate with startups, especially those seeking early-stage funding. Despite these challenges, there's potential for growth and innovation in less developed regions.
Furthermore, many CVCs operate cautiously, preferring to follow rather than lead investments, complicating negotiations with founders. Patience and a focus on short-term results are crucial for CVCs to sustain their operations. However, challenges persist, as a majority of global CVC executives express concerns about a lack of understanding among senior corporate leaders regarding industry norms and expectations.
Seated at the Table: Corporate Venture Capital's Boardroom Influence
Despite the potential benefits, CVCs may hinder long-term support for startups, particularly if existing investors perceive them as diluting exit returns. This underscores the importance for entrepreneurs to carefully evaluate whether corporate funding aligns with their startup's objectives and values. Determining the core objective of a CVC is paramount, as it can be classified into four distinct types: strategic, financial, hybrid, or in transition.
Strategic CVCs prioritize investments that directly benefit the parent company's growth, ideal for startups seeking long-term partnerships.
Conversely, financial CVCs focus on maximizing investment returns independently, making them suitable for startups primarily interested in financial support.
Hybrid CVCs find a middle ground between seeking financial gains and providing strategic benefits, making them attractive to a wider audience. This often leads to the creation of new business units and additional revenue streams for both startups and the parent company.
CVCs such as Qualcomm Ventures, Paypal Ventures, Citi Ventures, exemplify a successful hybrid CVC, emphasizing both financial returns and strategic collaboration, positioning itself as a valuable partner for startups seeking a blend of support. Ultimately, entrepreneurs must carefully assess their startup's needs and goals to determine the most suitable CVC partner, ensuring alignment and maximizing the potential for success.
A strategic vs financial mandate is a strong indicator of investing behavior.
Corporate Venture Capitalists (CVCs) tend to avoid taking board seats in early-stage startups due to several reasons:
Risk Management: Early-stage startups are inherently risky ventures, and CVCs may prefer to maintain some level of distance to mitigate potential losses. By avoiding board seats, they can limit their exposure to the day-to-day operational risks and decisions of the startup.
Flexibility: CVCs may prefer to maintain flexibility in their investment approach. By abstaining from board seats, they can retain the freedom to adjust their investment strategies or exit the partnership if necessary without being tied down by board responsibilities.
Resource Allocation: Board seats require time, attention, and resources. CVCs may prioritize deploying their resources towards areas where they can provide the most value, such as strategic guidance, access to networks, or operational support, rather than committing to board seats in every investment.
Strategic Focus: CVCs often invest in startups to gain strategic insights, access to new technologies, or potential partnership opportunities. In the early stages of a startup's development, the strategic direction may not yet be fully formed, making it less appealing for CVCs to secure board seats until the company's vision and trajectory are clearer.
Preference for Observation: By refraining from board seats, CVCs can adopt a more observational role, allowing them to closely monitor the startup's progress and development without directly influencing its strategic decisions. This approach may align better with their investment objectives and corporate goals.
Overall, while CVCs may engage with early-stage startups through various forms of support and collaboration, they often choose to avoid board seats as a means of managing risk, maintaining flexibility, and focusing their resources on strategic priorities.
Despite common belief suggesting, CVCs are not restricted from leading deals or securing board seats. This misconception, however, serves to highlight the contrasting approaches of strategic and financial CVCs. Remarkably, nearly all financially-focused firms (94%) have the capacity to lead deals and are twice as likely to secure board seats compared to their strategically-oriented counterparts. Furthermore, half of the surveyed CVCs take the lead in 30% of their deals and hold board seats, indicating a more significant influence than previously assumed.
Synergies and Addition of Value
Despite these differences, successful hybrid CVC models, strike a balance between financial returns and strategic collaboration. Positioned as valuable partners for startups seeking comprehensive support, these hybrid CVCs offer extensive opportunities for collaboration, access to networks, and assistance with strategic planning.
Ultimately, entrepreneurs must carefully evaluate their startup's needs and goals to select the most compatible CVC partner, ensuring alignment and optimizing the potential for success. As the CVC landscape continues to evolve, understanding these nuances becomes increasingly crucial for startups and investors alike.
For the next episodes we will be discussing how do CVC tend to start building their innovation network, as well as findings on best practices for Venture Building , and direct investments.
If you're an innovation leader eager to participate in the GCVI Summit or seeking assistance in connecting with key players from Corporate Venture Capital firms across Latin America, please reach out to us!