Tips for startups to consider when working with CVCs
Corporate Venture Capital (CVC) has become significant force in the venture capital market. In Europe, CVCs participated in 1,325 deals worth €19.4bn in 2020 and are active in virtually every sector, and across all stages from Seed to growth equity. In the UK, CVCs participated in some of the biggest deals of 2020 - Hopin, Carzoo, Arrival - and despite significant headwinds due to COVID-19 deal activity remained strong, defying critics who had anticipated a slowdown as corporate balance sheets came under pressure.
While corporate venture capital has become considerably more professional and moved closer to the traditional VC model, it can still be challenging for a founder to understand whether or not a particular CVC is a good fit.
A number of prominent CVCs with strong brands have emerged over the past decade, and they are known quantities among market participants. But there is also a large and diverse group of corporate investors who are less well established. Founders are therefore well-advised to perform their own due diligence.
At the most basic level, CVCs fall into two groups. The first group of CVCs make any investment contingent on a collaboration between the startup and the parent organisation. While this can be beneficial for both parties, it works better for later-stage companies who are mature enough to handle the complex procurement process of large companies.
The requirement of having an internal sponsor also means that turnaround times to complete an investment tend to be longer, so if a startup raises a round on a tight timeline and the deal is competitive, this group of investors is often not able to move fast enough.
However, the benefits of a collaboration can be material, to the point where it becomes a game-changer for the startup. UPS’s investment in Arrival, which coincided with a giant order of 10,000 of Arrival’s vehicles, is a good example.
The second group operates more independently and tends to invest earlier. In doing so, CVCs following this model accept that startups might pivot into a different direction and that the parent corporation will not end up cooperating with each portfolio company. Instead, the activity of these CVCs is geared towards generating early market insight and validating new business models and technologies.
Startups benefit from receiving support to navigate complex market structures - the automotive industry where we are active is a good example - and the endorsement of a corporate-backed investor can help build credibility in the marketplace.
Once a founder has established which of these two philosophies a CVC pursues, the next step is to ask questions about the organisational set up of the CVC in order to understand whether they are actually in a position to deliver any benefits beyond capital. In that context, there are three critical stakeholders that matter - the corporation’s C-suite, the internal ‘champion’ who acts as the interface between the C-suite and the founder, and middle managers controlling strategic assets the startup wants to benefit from.
Acting as the interface between the C-suite and the founder, the corporate innovation ‘champion’ fights the internal battles, acting as high protector, political fixer and mastermind behind the innovation strategy. That person may be a partner at the corporate venture fund or a senior enterprise leader with an innovation remit, who is cooperating with the CVC arm.
To be successful, the innovation champion needs to have the CEO’s ear and should be a respected organisational veteran with a large internal network (counting among them the company’s middle managers who control resources critical to the startup’s success) to understand and master the internal politics. They should be incentivised to take risks and tolerate failure as a necessary by-product of the innovation process.
The growth of corporate venture capital over the past decade and its resilience during the COVID-19 pandemic indicates that CVC will continue to play an important role in funding technology startups. Founders who take the time to understand the inner workings of a corporate-backed investor will find that the extra time spent on asking the right questions will pay off.
If financial and strategic objectives are well aligned, both sides can win. However, it is important to set realistic expectations. CVCs need to ensure they time the engagement with the parent company right to avoid distracting the founders and draining the startup of its resources. Startups should patiently develop the relationship and work with the CVC to strike at the right moment.