Harnessing Types Of Corporate Venturing To Propel Early-Stage Startups Forward

Corporate venturing, or corporate venture capital, as it is also called, is gaining traction in the last decade or so. A form of venture capital, corporate venture funding is a strategic investment strategy where large corporations invest in early-stage startups.

The objectives behind the investment can range from financial returns to capturing new markets or harnessing innovative technologies. Depending on the objective, the investing company may set up a separate VC arm that identifies good candidates for backing.

Or it sets aside funds from its balance sheet to support new ventures that can eventually be acquired and integrated. At the onset, corporate venturing provides funding and added support to get the startup off the ground.

Once the new company is established, scaling, and generating profits, the investor could make an M&A offer. Or assist it in going to IPO. Either way, the investor stands to make significant profits–by purchasing the company or making a strategic exit.

Corporate venturing or corporate venture funds (CVC) can be of different types. Large corporations invest in early-stage companies and offer funding to later-stage and series A through series C companies.

Founders can approach these funds for support at any growth stage and benefit from the partnership. When reaching out to potential investors, you’ll want to understand their goals behind the funding. Also, understand the kind of support you can expect and align the offer with your startup’s needs.

Keep in mind that corporations are entering into mega investing deals which can go up to $100M and more. Further, at least 33% of Fortune 500 companies have a venture capital arm for investing in new startups. Connecting with the right partner can propel your startup in the right direction.

Read ahead to understand how corporate venturing deals work.

Corporate Venture Funding as Purely Financial Investments

Corporations often invest in startups solely for the purpose of financial returns and don’t have any other strategic interest. Their only goal is to make profits from their stake in the company, and they don’t offer any expertise.

You can’t expect any other perks from the partnership besides financial benefits. Typically, the terms and conditions of this corporate venturing may involve a major equity stake, often going up to 50%. However, you’ll enjoy complete autonomy to run the company with zero interference.

Such corporate investors are financial CVCs with minimal resource sharing and strategic guidance. Their objective is typically investing in an entirely distinct vertical from their own and are unconcerned with your mission.

As long as you demonstrate potential for scaling and generating profits, getting their support is easily done. Their valuation and due diligence typically center around financial stability and robust metrics.

More often than not, this form of investment is the corporation’s initial foray into the venture capital world. It may or may not rely on accelerator or incubator programs and venture capital firms to dabble in investing. The focus is on startups with a ready MVP and infrastructure for quick growth.

Over time, the corporation may set up an entirely autonomous venture capital arm that solely works to invest in upcoming startups. But then, it ceases to be a corporate venture capital firm.

Corporate Venturing as Strategic Investments

Corporate venture funds may target startups as strategic investments with the end goal of advancing their own interests. They typically look for new companies with innovative concepts and technologies that they can leverage to expand operations.

For instance, a tractor manufacturer may invest in and nurture a startup that innovates farming tools and implements. You’ll get their support if your startup can support the investor’s product lines and core business and improve its market position.

Corporate strategic investors target new companies within their business vertical, and their objective is primarily strategic. These corporations provide much more than just funding. Their VC arm provides in-depth, industry-specific knowledge and expertise along with access to the investor’s infrastructure.

Such strategic investments are called driving investments because they are geared toward scaling the investment quickly. And indirectly promote the investor’s growth also. Accordingly, they identify small companies that can help them navigate supply chain, technical, and regulatory hurdles.

You’ll attract corporate investment if your startup ideates complementary products or spare parts. Also, expect access to marketing and distribution channels, networking opportunities, and assistance with other management techniques. Hiring top talent will be made easier thanks to the partnership.

Corporate Venture Funding to Expand Core Operations

Corporations must consistently evolve to stay competitive in a rapidly changing business ecosystem. For that to happen, they must expand into new and emerging markets and develop new technologies to keep pace with the competition.

Adapting to changing consumer buying trends and preferences is also crucial. Corporate venturing could be the ideal strategy to make that happen.

Larger corporations may find it harder to adapt and stay agile because of their sheer size. Investing in in-house research and development divisions typically involves a high amount of money. Results and marketable products can take too long to develop to make sense to shareholders.

A better option is to support upcoming startups that are creating new technologies. The capital diverted to the company can yield effective results at minimal expenses without the need to build separate R&D departments.

Similarly, expanding to new locations is easily executed by backing a startup with a local presence. Your company has an established customer base and proven sales and revenues, which is an advantage. If it demonstrates success, you could exit with an M&A deal.

Corporate venturing may come with added benefits designed to assist you with R&D, such as equipment, tools, and talent to develop new products. You could also benefit from the investor’s infrastructure, distribution channels, networking opportunities, and more.

For instance, a mega pharmaceutical corporation may partner with a startup developing advanced AI and automations to test drugs.

Enabling Corporate Venturing to Create Demand

Larger corporations have the resources to promote the entire business ecosystem in which they operate. They are open to backing startups that are not directly linked to their operations. Their objective is to indirectly stimulate demand for their products.

For instance, the microprocessor Intel’s investment arm is Intel Capital. This company invests in smaller startups developing products that must use the chips to function. Similarly, enabling corporate venturing is all about supporting customers, suppliers, and third-party startups and developers.

Corporate venture capital (CVC) is also known for nurturing distinct cultures and unconventional business frameworks. Although most corporations have end goals like acquisitions, they are open to encouraging and supporting unique concepts.

By supporting underserved customers and underrepresented founders, they foster inclusive cultures. If you have radically unique ideas or a fresh perspective of how the industry operates, corporate venture capital might just be the funding you need.

Encouraging open innovation is how they aim to stay ahead of not just the competition but also evolving customer needs. When negotiating the terms and conditions for corporate venture capital, understand that there are no cut-and-dried distinctions.

Corporate investors may offer you capital and additional support depending on their objectives and future M&A goals. You can also negotiate for hybrid forms of CVC that align with your needs.

In this post, I have talked about corporate venturing and venture capital. If you need more information about the different types of investors you can approach to back up your company, check out the video below.

How Corporate Venture Capital Differs from Conventional Venture Capital

Corporate venturing is different from conventional venture capital in several ways. Here’s how.

Structure

Venture capitalists (VC) are essentially firms in which different entities pool their resources. These entities may include angel investors, institutions, university endowments, family offices, and other investors who participate as limited partners.

The fund managers can then invest the funds and support viable startups. The venture capital management screens potential candidates and conducts the due diligence before investing capital. Corporate venture funds are provided solely by large corporations that directly invest in the startups.

The capital for investment is sourced from the corporation’s balance sheet. No third parties can be involved for the investment to qualify as corporate venturing. The investing division can function as part of the corporation but not as an independent entity.

Investment Objectives

When venture capitalists invest in startups or early-stage companies, their objective is returns and a profitable exit. The managers are accountable to the limited partners for delivering returns. CVCs, on the other hand, think beyond profits.

Their objectives can range from gaining innovations, ground-breaking technology, access to new markets, and an expanded customer base. They could also be looking to grow their network and build their brand reputation. Some corporations may also want to acquire the startup eventually.

Advantages for Startups

Partnering with venture capitalists will give you access to capital along with guidance and expertise. VCs typically request board seats and decision-making rights. Your startup can benefit from the know-how they provide, along with access to their networks.

Since the VC’s objective is to earn returns and scale the company, this goal aligns with the founder’s. On the other hand, partnering with a corporation could offer you much more. Depending on the investor’s goals, you could get access to their labs, manufacturing units, distribution channels, and much more.

Expect to share in industry-specific expertise and networks of vendors, suppliers, customers, and third-party service providers. The collaboration with an established brand adds validation to your startup and adds to its market value. Subsequent funding rounds are likely to be more successful.

Because VCs are primarily concerned with profits, they may not be open to backing new companies. Their due diligence could be more stringent, and startups must demonstrate an MVP and profits to make the cut. VC fund managers may only pick the best companies to back.

Although CVCs also target viable companies, their screening processes go beyond profits. They can identify projects with the potential to grow quickly per industry standards. You have a higher success rate with corporate venturing funds, even if you have a disruptive business idea.

Holding Period

Venture capitalists stay invested in startups for anywhere from five to seven years. At times, they may choose to stay vested for around ten years. However, corporate venturing does not have a specific timeline.

Corporations often stay invested for longer periods and may maintain the funding right up to IPO. Such investments are thus also called evergreen funds. Because of the longer holding periods, CVCs typically evaluate startups meticulously.

They will select candidates who demonstrate the potential to scale rapidly from the long-term perspective rather than short-term gains.

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Exit Strategies

Venture capitalists are accountable to their limited partners to make an exit with significant profits. With this objective, they tend to push for an IPO. They may also be open to selling their stake in the startup for a profit.

Their exit strategies can sometimes work against the interests of the startups. You may feel the pressure to take the company to IPO prematurely. Or risk the VCs selling their equity to investors who have different policies and game plans for your company.

Corporate venturing is never about an exit, though the investors would be interested in your startup going public. Although they do seek to earn profits and returns from their investment, they are also interested in long-term collaborations.

Most corporate investors nurture their investments with the intention to acquire them eventually. They foster synergies early during the holding period and seek out startups whose culture and mission align with their own.

In a Nutshell!

Corporate venturing or corporate venture capital (CVC) is a great source of funding for early-stage startups. If you can collaborate with a mega brand within your business vertical, you can harness more than monetary resources.

Most corporations are keenly interested in supporting upcoming ventures with disruptive ideas that can complement their products and services. These partnerships help them stay competitive and consistently reinvent themselves to cater to evolving customer needs.

Startups stand to benefit from access to a whole range of resources that the established partners can make available to them. But before accepting CVC, understand the terms and conditions in detail.

You’ll also scout around for other market capital sources, including venture capitalists, angel investors, family firms, and more.

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