How can startups leverage corporate venture investors to fund their startups?
Corporate Venture Capital (CVC) is becoming an increasingly significant part of, and force in the startup ecosystem. It is a source of financing that can come with many other benefits as well.
So, how does it work? What drives corporations to invest in startups? How do they do it? Even more importantly, how can your startup land this capital, navigate any pitfalls involved, and find active corporate venture investors to pitch?
The Ultimate Guide To Pitch Decks
Here is the content that we will cover in this post. Let’s get started.
- 1. What Is Corporate Venture Investing?
- 2. Corporate Venture Investing Cycles & Trends
- 3. Who Are Some Notable Corporate Venture Investors?
- 4. Types Of Corporate Investing Strategies
- 5. Passive Investments
- 6. Emergent Investments
- 7. Enabling Investments
- 8. Driving Investments
- 9. How CVC Invests At Different Stages Of A Startup
- 10. The Pros & Cons Of Corporate Venture Capital
- 11. The Pros Of CVC
- 12. The Cons Of CVC
- 13. How Do You Approach Corporate Venture Investors?
- 14. Sell to them as a customer
- 15. Partnerships
- 16. Intrapreneurship
- 17. Introductions
- 18. Summary
What Is Corporate Venture Investing?
Corporate venture investors refer to corporations making direct investments into external companies. In this case, specifically, smaller startup companies.
This can be done in a variety of formats. Including acquiring equity in a startup in exchange for their capital, and joint ventures.
If successful, the outcomes can often include mergers and complete acquisitions, IPOs, and even ultimately spinning off and reselling these companies.
See How I Can Help You With Your Fundraising Efforts
See How I Can Help You With Your Fundraising Efforts
In addition to equity capital, corporate investors may provide strategic direction, additional lines of credit, facilities, and human resources, including management.
It appears that large corporations have been increasingly establishing separate arms of their companies to focus on finding and managing these venture investing activities.
Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Corporate Venture Investing Cycles & Trends
Corporate venture investing may be a much more substantial piece of the startup funding ecosystem today, but it is not a totally new addition to the capital and financing stack.
In fact, HBR gives a good example of CVC from all the way back in 1997, when Intel invested in startup Berkeley Networks. They put their technology together to create something new and more efficient.
This type of corporate investing may be traced back even further to the days of billionaire entrepreneur Andrew Carnegie when investing in new technology to make steel faster than it had ever been done before. Which enabled him to build bridges that were previously impossible, and connect the country by railroad.
Bain notes that the dollar volume of corporate venture capital deals has grown by more than 10x in the last 10 years. With an average annual increase of 7% from 2017 through 2020. In 2020, Stanford Graduate School reported that CVC arms invested over $70B in startups. Making up 25% of all venture capital deals.
The Corporate Finance Institute says there are now well over 1,000 veteran corporate venture capital firms. Along with close to 500 new funds in this space.
They invest in a wide array of industries and sectors. Running from telecom to biotech, healthcare, and other finance, manufacturing, materials, logistics, and technology startups.
While CVC arms should never stop making these vital investments, their ability to do so and appetite may be correlated to the wider economy, the health and direction of their parent companies, as well as new regulations and monetary policy.
Who Are Some Notable Corporate Venture Investors?
According to TechCrunch and the Corporate Finance Institute, some of the most notable players in this space have included:
- Google Ventures
- Intel Capital
- Qualcomm Ventures
Others may include Ascension Health, Siemens, and Johnson & Johnson.
Types Of Corporate Investing Strategies
There appear to be four main categories of CVC strategy.
1. Passive Investments
These are purely financial investments. These are hands-off investments made purely for the financial gain, and health and performance of their overall portfolio.
While there may certainly be hope for growth, passive investments may for often be made in later stages and more stable companies with revenues, income, and profits. Though tax write-offs, deductions, and write-downs can also be beneficial for the investing company.
These investments will often provide diversification, and will not be directly tied to the business of the parent company.
2. Emergent Investments
This is a hybrid financial and strategic investment strategy.
Emergent investing is about investing in potential emerging sectors, trends, and marketplaces. It is a strategy that allows the corporation to investigate, collect data, and measure new potential avenues, without just betting or risking burning their own capital.
If the excursion proves not to be worth the company pursuing and rolling into their core business, then the investment can be held as a purely financial stand-alone one.
If there is a proven match for the company, a merger or acquisition could be a potential outcome that serves both companies well.
3. Enabling Investments
These are more strategic types of investments. While not directly tied to the parent company’s operations, the anticipation is that if the startup being invested in is successful, it will, in turn, create more demand for the parent’s services or products.
However, even if the startup is successful at growing this market and demand, it is really only a success if the parent wins the bulk of the new market share being created.
If that doesn’t happen, it may still prove to be a financially profitable investment. Though the competition could see just as much benefit.
4. Driving Investments
These investments are the most intertwined with a parent company’s current business. They may be the most obvious and commonly seen from the startup entrepreneur’s perspective.
It is about finding startups with tight links to their operations or consumer-facing business and enabling growth in tandem with their own.
This can be incredibly advantageous for large corporations. While being crucial for making new startups and innovations possible. Though it provides little to no diversification from a pure investment perspective.
How CVC Invests At Different Stages Of A Startup
Different corporate venture firms may focus on investing at different stages of a startup. Just as the above strategies can call for investing at different stages.
Late-stage startup investments may be far more about financial investments. Which may be for steady returns and income. As well as the anticipation of liquidity through an IPO, which may soon be on the horizon.
Mid-stage startups can provide a combination of benefits for the corporate investor. They are often financially less risky than early-stage startups, but also offer more value and potential gain than late-stage startups. This can also be a smart step toward testing the waters for an M&A deal.
Early-stage investments are often more about financing the development of new technology and inventions. Which can often be achieved far faster by lean startups, than among the corporate bureaucracy and slow-moving juggernaut decision-making process that has evolved in large companies.
Even as you’re reading up on how to get corporate venture capital, you might want more in-depth information on how venture capital works. If you want to ensure that it’s a good fit for your company, check out this video I have created. You’re sure to find it helpful.
The Pros & Cons Of Corporate Venture Capital
There may be both advantages and disadvantages, perks and pitfalls of taking or soliciting corporate venture capital from the startup founders’ perspective.
Let’s take a look at some of them, to see if this is a good fit for your capital stack and business at this stage.
The Pros Of CVC
- Big Money: While it may not all come at once, CVC firms certainly have significant backing, and can provide far more financial resources than some angels or boutique VC funds.
- Alignment: These companies in your industry already get it. They know the problem you are solving and see its value. You don’t have to spend months educating them before you can pitch them.
- Future M&A Prospects: Raising capital from corporations is a natural step on the way to a big merger or acquisition. Plus, you get to feel them out and see if they are really a good home for your company, team, and customers in advance.
- Resources: CVC can bring many other resources than just money. This may include premises, talent, management, materials, and more.
- Credibility: Being able to raise from the most notable brands in your space gives a lot of credibility and validation in the industry. Like if you invented a new material for tires, and Porsche invested in you. That can be all you need to secure many more customers, more easily, with better unit economics.
The Cons Of CVC
- Speed: Big corporations are notorious for being slow. Especially in decision making. You can expect them to have much more rigorous due diligence processes, with far more people and parties involved as well. If you need to put money in the bank to make payroll or buy inventory by the end of the month, this probably isn’t right for you right now.
- Getting Locked In: Taking significant amounts of capital from corporate partners in early rounds means that you will also likely not only be giving up a lot of equity and stock but also be giving up board seats to entities that have their own interests and agenda. That may limit your venture and lock you into one major player who doesn’t want to play nice with their competitors.
- Management: Following on from the above, some corporate venture investors may be adamant about installing their own management in your venture. This can be incredibly helpful and valuable. It may also turn your startup from being fun to being a grind you no longer love.
- Different Corporate Cultures: There can be substantial company cultural differences at the best of times. Even more so when you are combining parts of a really big legacy company and a small, nimble, and scrappy startup team that is used to operating on the fly. This can cause a lot of friction if you don’t get out ahead of it, and make sure it is a good match first.
How Do You Approach Corporate Venture Investors?
Now, for the fun part. If corporate venture investors are a good move for your startup, what strategies can you use for pitching and getting funded by them?
Sell to them as a customer
If they become a customer and investor, you double up your win. In some cases, they might invest first, and then buy what you made with their money. Or buying your product might make them interested in investing.
Another way to start is through partnerships, either with an investment up front, or not. This may be collaborating on a cross-over of your brands, as is often done in the fashion world. Or as Microsoft and HP do with processing chip manufacturers. There are marketing collaborations, bundling of services, and exclusive referral agreements to consider too.
If you are still working inside a big company, they may give you a budget and team to begin your idea within their walls. If it works, you may end up spinning off your company to be a standalone venture.
Leverage the help of an experienced and well-connected fundraising advisor to get warm introductions to those you need to pitch and build relationships with.
Corporate venture investors have been steadily taking over more and more of the startup funding space, and plowing a lot more money into it.
As a startup founder, it is important, and highly valuable to understand how this option works for your capital stack and long-term strategy. As well as becoming familiar with the pros and cons, and knowing what to look for in a good fit. Then just start connecting and testing the waters, so that you can maximize the upside potential of your startup, and put it into hyper-growth mode.
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