Three Advantages of Corporate Venture Capital

When a startup or growth company is looking to raise investment, the choices can seem quite slim.

The main avenues include:

  • Seed Financing, usually via friends and family, angel networks and crowd funding. This is often the first port of call due to the attraction for investors of SEIS and EIS Relief;
  • Grant Funding, usually via Innovate UK grants for tech-based innovative R&D or EIC Accelerator Grants still provided to UK SME’s by the European Commission; and
  • Venture Capital.

For companies that need to raise in excess of £1 million, venture capital is the most prevalent form of fundraising, especially if the company has already exhausted its access to seed and grant funding.

But not all venture capital funds are the same. While each venture capital fund may have its own USPs, industry focus and characteristics, usually reflective of the characters that lead them, they can be split into two basic camps: the traditional venture capital investors (VCs) and the corporate venture capital investors (CVCs).

The VCs are the classic venture capital investors, which in the UK may include the likes of Octopus Ventures, Balderton, Index Ventures etc. They are solely focused on finding, and investing in, early stage and growth companies, usually with shiny new technology or business models. They look to invest at a relatively low valuation and hope that through their capital, sector expertise and contacts, the expertise of the company’s management team, and a small or large degree of luck, they can exit the investment, usually through a sale, or very rarely (and getting rarer in the UK with each passing year) an IPO, at a much higher valuation.

Ideally, VCs want to get a return of more than 3x their initial investment and they want the exit to occur within a 3-to-7-year timeframe. The capital they invest is not their own; they have their own investors that they have to answer to, usually known as LPs (limited Partners), and the timing of the exit may well depend upon the life cycle of the fund that is investing and when the VC has agreed with the LPs that funds will be returned.

The difference between CVCs and VCs

CVCs are very different to VCs and are a relatively new phenomenon. Over the last 10 years they have grown from a handful to a few hundred. They are always connected to much larger, usually international, businesses that are often recognised brands. They are, in effect, the investment arms of their parent companies and are dwarfed by those companies. They invest the funds of their parent companies and usually have no other external investors to answer to. Examples of corporate venture capital funds include Google Ventures, BP Ventures, Samsung Ventures and Apple Ventures. In fact, you might be hard-pressed to find a well-known brand or international corporate that does not have its own CVC.

The reasons that CVCs invest in startups and growth companies is very different to those of VCs and, as such, the capital may come with very different requirements for the companies that they invest in.

 In contrast to the investment made by VCs, the main driving force for investments by CVCs is not a significant return on investment within a certain timeframe. 

What are the advantages of CVCs?

1. Prioritising ideas over investment

Most of the parent companies of CVCs are looking for one thing above all else; great new ideas, technology and resulting intellectual property. Because CVCs are primarily prioritising access to ideas over investment return, the way they invest can have significant differences.

Fundamentally, CVCs are looking for these assets in order to either strengthen their sector expertise, allow them to penetrate new markets, or fill the gap in a technology shortfall in their own offering. Traditionally, corporates have solved these problems through their own R&D function or by acquiring companies with proven technology (which they still do). But CVCs allow them to invest in nascent and untested ideas at relatively low costs.

2. Shared expertise and distribution networks

The investee companies may have expertise and management that they do not have or are just nimble and more dynamic. Investing in these businesses may be lower risk than conducting their own R&D, especially if there is a chance of failure and potential liability. CVC investment has become a very useful tool in the arsenal of large corporates in a rapidly changing environment.

Additionally, large-scale CVCs offer an advantage in terms of distribution networks. A common challenge facing startups is customer acquisition, an area where new funding often gets funnelled. Large-scale CVCs with a broad international customer base can be a better fit for an enterprise looking to tap into these connections to the advantage of their business.

3. A focus on long-term development

CVCs are generally not looking to exit an investment within the 3-to-7-year window that a VC is looking at; they are often looking at much longer term with a view to the investee company being a potential acquisition in the future. In contrast to VC investors, they will not be looking to control the board of the company they have invested in; usually an observer position is more than sufficient. If the CVC does want to have a director on the board, they will usually come with sector expertise and knowledge that the VC director does not share. The CVC investor is much more focused on the investee company developing its technology and building its IP portfolio, while the VC investor is focused on increasing revenues, profit margins and valuations, often at the detriment to R&D and product development.

There are also a large number of provisions in the usual VC investment documentation that the CVC investor will just not care about. As such a VCs investment documentation can be much more onerous for a company than its CVC counterpart. If things take longer than expected or cost more, the CVC investor, usually with much deeper pockets than its VC equivalent, may be much more forthcoming in making further investment.

When a company is looking to raise investment and one of the interested parties is a large corporate, investing via a CVC, rather than a VC, they should not reject the approach out of hand. While they may be newer to the game, the investment from a CVC may actually be the best route for the company and its long-term ambitions.