Fred Wilson, famed venture capitalist of Union Square Ventures, once said that he thought corporate venture capital was the “devil.”
"[Corporate investing] is dumb. I think corporations should buy companies. Investing in companies makes no sense. Don’t waste your money being a minority investor in something you don’t control. You’re a corporation! You want the asset? Buy it.”
Corporate venture capital or CVC is a subset of venture capital. It is an investment made by large corporates to fund early-stage startups that are building innovative products or services. The funding is used to finance the early-stage startups and help them grow into successful businesses.
CVC has emerged as a focus area for large corporates as it gives them various benefits such as return on investment, market expansion, strategic partnerships, acquisitions of new technologies or products that have been developed by such early-stage startups.
CVC on other hand is also beneficial for such early-stage startups since it provides them with seed funding and enables them to access key people, business network within the company that would otherwise be unavailable due to financial and other restrictions.
One can consider CVC as a way for large companies to tap into the innovation economy, which has seen tremendous growth over the past decade. In fact, more than $14 trillion was invested in U.S. based startups between 2006 and 2020 alone with investment of more than $140 billion in 2018 and 2019 and a record $156 billion in 2020.
This phenomenon of investing corporate funds directly in external startups which started in late 1990s in USA is now catching up in India. The concept of investing in startups in India is about a decade old and has gained huge momentum in recent years, it is largely dominated by Angel Investors, HNIs, Family Offices, Venture Capital firms and Private Equity players with very less participation from corporates. While most corporates have sensed the potential value of investing in startups, more often than not, they just can’t seem to get it right.
The winds are changing now as many corporates are looking at CVC as an alternative means to innovation. The concept of investing in startups by corporates, specifically early-stage startups is gaining momentum as it gives the benefit of early mover advantage, access to new innovative ideas and disruptive business models, potential market growth, existing customer base, possibility of creating a new product or market segment and most importantly financial returns. The initial investment would allow some level of access to financials, a greater understanding of the pros and cons of the business (which lacks where there is no prior relationship), and access to a younger company which is likely to innovate to solve a newer problem.
Corporate venture capitalists typically invest between $1 million and $10 million per company they're backing. They may also provide loan guarantees or other support programs in exchange for equity stakes in their portfolio companies.
While taking a decision to invest through the CVC route, a company should have clear objective in mind i.e. either to make strategic investments with an intent to acquire such startups at a later stage or purely earn financial return. A company should also understand the type of benefit that it might realize from the investment.
A corporate should however bear in mind that such early-stage investments in many ways are resilient to short-term changes, due to the simple fact that such investments are long-term. Corporates should not look to invest in startups that will see huge growth in the immediate future; they should look for ones that will grow into something extraordinary over a period of time which will help the corporate in enhancing its own business or to create as separate business segment. As part of their corporate venture investment thesis, corporates should place their bets on startups poised to jump-start a fundamental change in consumer or business behavior which is no different than what a corporate would do when starting a new business or industry.
When done correctly, CVC can be an excellent way for corporates to stay ahead of the competition as it supports innovation with capital and expertise, in turn fueling ecosystems that are based on knowledge intensive entrepreneurship. Their contribution to innovation support entrepreneurial efforts. Although through different behaviors, CVCs operate for the growth of innovative firms, and their contribution in supporting innovation regionally and internationally will be considerable.
As a decade of growth in venture capital investment falters amid uncertain economic conditions, one thing remains constant: CVCs will keep searching for companies that do business in a way that’s never been done before.
We hope this post has clarified some of the many questions that companies have about CVC and what it can do for them. In case there is more information required on how to make your own custom CVC program, we at 100X.VC would be happy to help you on a no-obligation basis.