Investing in the Future: A Comprehensive Guide for Corporate Investors
Welcome to another chapter about the Hard Things about CVCs and VC in Latam.
This week we will introduce you to the topic of: “Mastering the Playbook: The Art of Corporate Investment”. Vanessa Bello is the author of this post, we invited her to write this week, and we will provide a brief introduction to her experience as an investment strategist. We hope that her expertise in a relatively new market can benefit those currently navigating the landscape of corporate investment and looking to establish themselves as successful investors.
The Corporate Investment Blueprint: Strategies for Success
Let me begin by shedding some light on the path of a venture capitalist. Drawing from my experience, I have identified three crucial pillars that have significantly influenced the investment propositions I have pursued. These foundations comprise:
The Team
The Business Model
The Growth Potential and Regional Adaptability
The Ultimate Race: The Thrilling World of Horse Racing
Are you familiar with the conundrum of the champion in horse racing: what determines a victorious race? This analogy is akin to the world of venture capital: the entrepreneur serves as the jockey, the business model as the horse, and the potential for growth as the racing terrain.
The jockey's expertise and training, as well as the horse, are crucial factors in winning the race, along with external circumstances surrounding the competition. Possessing knowledge and experience is crucial for success. While some may place their bets on the jockey and others solely on the horse, I believe that both elements are equally essential and not mutually exclusive. Therefore, when deciding to invest, a thorough analysis of the market, the team, and particularly, the capacity to pivot and manage the business model is imperative to ensure successful participation in the race.
Lessons Learned: My Journey as a Startup Investor
So far, I have invested in 34 startup companies and managed three investment funds across Latin America and the United States. Out of those, 4 companies have been bought by bigger companies, two of which became very successful, receiving the Catalogue of: Unicorns. The other 30 companies are still doing well, and still growing throughout the region.
From this experience, I learned an important lesson: "Investing is like a muscle that gets stronger when you use it often." It's important to keep investing to stay relevant in the business world. Making at least five investments per year can be a strong pace for a corporate investor or traditional venture investor. As CVCs, we prioritize finding value along with financial returns, making it challenging to find the right “FIT”. Therefore, I would like to share the fundamental principles that guide investment decisions, along with some recommendations to follow during the investment process.
Turning Theory into Practice: Applying the Lessons from the Investors Playbook
Corporate venture capital funds, also known as CVC funds, are investment funds set up and funded by corporations with the aim of investing in startups and emerging companies that align with their business interests. These funds operate similarly to traditional venture capital firms, but they benefit from the added advantage of being able to leverage the resources and expertise of the parent corporation. A crucial step in the investment process for CVC funds is the creation of an investment memo. We'll discuss the process of creating an investment memo for CVC funds and explore what these memos usually contain.
The Road to Investment: Understanding the CVC Scouting Journey
Before a CVC fund creates an investment memo, it needs to identify potential investment opportunities. This process is known as scouting. Scouting can be done in-house or outsourced to a third-party scouting firm, some firms such as Wayra have Scouting as a Service.
The goal of scouting is to identify startups and emerging companies that align with the CVC fund's investment thesis and business interests. This process involves analyzing market trends, attending industry events, networking, and conducting due diligence on potential investment targets.
Fitting Process or Business Development Validation
Once potential investment opportunities have been identified through scouting, the next step is to determine if they are a good fit for the CVC fund. This process is known as fitting or business development validation.
The goal of the fitting is to assess if a potential investment aligns with the CVC fund's investment thesis, strategic priorities, and overall business goals. This process involves conducting market research, analyzing the competitive landscape, and even testing POCs.
Scouting for Success: POCs
If a potential investment opportunity passes the fitting process, the next step is to conduct a proof of concept (POC). A POC is a small-scale trial or pilot project that aims to test the feasibility of a potential investment. The goal of a POC is to determine if the investment is technically feasible, economically viable and meets the CVC fund's investment criteria. This process involves evaluating the technology, market potential, and overall business model of the startup or emerging company.
The Anatomy of an Investment Memo: A Deep Dive into CVC Fund Processes
Once a potential investment opportunity has passed the fitting and POC stages, the next step is to create an investment memo. An investment memo is a document that summarizes the key findings and analysis from the scouting, fitting, and POC processes. It provides a comprehensive overview of the investment opportunity, including the startup or emerging company's background, business model, financial projections, competitive landscape, risk, and possible synergies that are feasible with the corporate.
A typical investment memo includes the following sections:
1. Executive Summary - a high-level overview of the investment opportunity, suggested ticket relevant investment metrics.
2. Investment Thesis - an explanation of how the investment aligns with the CVC fund's investment strategy and business interests
3. Market Overview - an analysis of the market size, trends, and competitive landscape, benchmark.
4. Business Model - a description of the startup or emerging company's business model, including revenue streams, customer acquisition, and distribution channels
5. Financial Projections - a forecast of the startup or emerging company's financial performance, including revenue, expenses, and profitability
6. Risk Assessment - an evaluation of the potential risks associated with the investment opportunity
7. Validation of Tech- an evaluation of the technology and synergies that can be adapted by both companies.
8. Conclusion - a recommendation on whether or not to proceed with the investment opportunity
9. Investment bet startegy - a brief description about the type of investment bet that the fund is making, this includes a big bet, and internal usage, bet, a competitive advantage integration.
The Art of Pitching: Creating a Successful Investment Committee
Once the investment memo has been created, it's time to present it to the CVC fund's investment committee.
The investment committee is typically made up of senior executives from the parent corporation and members of the CVC fund's investment team. The investment committee's role is to evaluate the investment opportunity based on the investment memo, as well as the Pitch Deck, and make a decision on whether or not to proceed with the investment.
Based on my personal experience, I highly recommend that you take the time to understand the backgrounds of the board members and the types of questions they may ask you during committee meetings. The more knowledge and empathy that you have can help you anticipate their concerns and prepare for any upcoming questions. Knowing why each board member is relevant to the committee is also important.
The Investment Committee will assess the investment opportunity and determine whether it's worth investing in and what the appropriate investment amount should be. If the investment is approved, you will begin the legal procedures to finalize the investment.
To sum up, developing a well-defined investment strategy that comprises a streamlined scouting process, an exclusive FIT approach, precise timing, and crafting a compelling investment memo is a vital aspect of the investment process for CVC funds. It is a meticulous and multi-faceted process that demands careful consideration.