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Nicholas Sauvage ADP2003 and Gary Dushnitsky offer a guide to understanding the different corporate investor types
The dramatic growth of the venture-capital landscape has seen an increase not only in the number of investors but also in investor types. Corporate investors, also known as corporate venture capitalists (CVCs), are among the most prolific investors; both in terms of numbers and assets under management. However, the decision to seek corporate backing is not a trivial one and should be taken with care. Here, we take you through an entertaining narrative on the potential role of CVCs in serving a startup; exploring how such partnerships can be beneficial in some cases, yet detrimental in others.
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Corporate venture capital is equity investment by an established corporation in innovative startups. The practice dates back to the early days of the VC industry. The entrepreneurship space has long been aware of the differences between corporate VCs and ‘traditional’ institutional VCs; now, as the landscape continues to evolve, platform VCs – where institutional VCs build expert in-house teams to realise the potential of their portfolio companies – are becoming more familiar. In terms of the depth of expertise within their corporate mothership, CVCs constitute powerful platforms. This may be particularly true in domains that require highly specialised expertise, such as DeepTech.
As an entrepreneur, you are dedicating years of your precious time, resources and passion in growing your spark of an idea into an explosive startup – armed with energy and primed to make your vision for the globe a reality. In the world of business, you’re a superhero! You have successfully conquered countless villains of adversity, learned from the battles lost and turned the right ‘nos’ into a ‘yes’. You’ve done this with superpowers unique to your startup and your vision for its future. However, no one can go the entrepreneurial path alone and on every superhero’s journey there comes a time to partner up to ensure victory.
In DC Comics you see the Justice League’s Superman partnering with Wonder Woman and others; in Marvel the legendary Avengers bring together Black Widow, Captain America and Iron Man. So, too, along your startup journey you will need to form your own team of Corporate Crusaders to help along the way. When building your team, time is of the essence and financial backing is critical, but you don’t need just another funding source. You need someone with experience, ties to industry and the same passion and dedication you have to your goals. In other words, you need other superheroes.
Enter CVCs, flying to your side to help smooth the way ahead. But you can’t afford to jump into a partnership with just anyone without first doing your homework – there’s too much at stake. What is a CVC exactly? How are they different from traditional VCs? How are they superheroes? Are all CVCs the same? And, of course, how can you identify which one will benefit you the most?
This feature is intended to give you a head start on these questions. We hope, after reading it, you will be ready to go on a first date with a potential CVC super-partner, fully equipped with a set of insights that will empower you to know for yourself which superhero, or set of superheroes, is right for you and your team.
Academic research finds evidence of the benefits associated with CVC backing. For example, analysis of the US biotechnology sector from 1990 through the early 2010s reveals that CVC-backed startups outperformed their VC-backed peers in terms of patenting and scientific publication. A similar pattern is observed in about 2,000 US-based startups that held IPOs between 1980 and 2004.
In simple terms, a CVC is a venture-capitalist entity with a connection to a corporate mothership. This distinguishing characteristic is deceptively simple; yet the implications of this mothership connection explain why CVCs have been viewed as distinct from VCs in terms of capabilities and incentives. Their superpowers are largely a function of their unique ability to draw on corporate resources; be that technical expertise, sales channels, regulatory know-how or the visibility and credibility that comes with the backing of a globally recognised brand name.
How those superpowers are put to use is a matter of strategy and incentives, so their impact can vary widely. Whereas a traditional VC is its own business, whose success hinges on the success of the startups it chooses for its portfolio, a CVC’s corporate connection gives it an explicit purpose and goals. CVCs are often meant to further the parent corporation’s goals by identifying key technology and growing individual business units – and may not necessarily be primarily focused on making money. The ties to corporate may also blur the governing principles that the CVC follows. While its venture-capital mission should require a VC-like mindset, depending on the strength of the corporate tie, there may be leanings toward cautious incremental investment behaviour. The ultimate CVC strategy and incentives can be traced to this balance. This makes CVCs unique: no two are alike.
As reported by TechCrunch in 2020, 10 years ago there were less than 380 active CVCs operating in the US. Now that number has climbed to more than 3,200 and deals that had CVC backing exceeded 2,100 in 2021.
A closer look at these patterns reveals two key insights into the role of corporate investors in the VC ecosystem. The first insight concerns CVC longevity. While many units were formed over the past couple of years, dozens have been active for a decade or more. They boast a visible track record and are respected in the ecosystem. The second insight has to do with the prevalence of CVC investors. Historically, corporate investors were active in a handful of industries such as pharmaceuticals and semiconductors. More recently, established firms from a wide set of industries have taken up CVC activity.
Their financial resources likely have understandable appeal to a superhero like yourself – and rightly so. They offer specialist support, especially in times of critical growth and scaling. But money isn’t everything, and it’s worth keeping in mind that half of all CVCs that had invested during the Covid-19 pandemic (as of April 2021) were formed during the pandemic. This is when doing your homework is an absolute must as not all CVCs are created equal and not all have fully developed their own superpowers – some are even newer to the game than your startup and are learning, growing and maturing themselves.
With so many options, deciding which CVC or set of CVCs to work with (and which could benefit your startup the most) isn’t as simple as picking the oldest, newest or biggest. Selection has much more to do with your needs and goals. Each CVC has distinct motivations depending on how and why it was formed, as well as how it is evaluated both internally and by its corporate mothership. It is not that anyone is necessarily better than the other, as each has the potential to be the superhero you are looking for. Rather, each has powers that manifest in different ways; ways which could make or break your own hero’s journey. To select an ideal match, you as an entrepreneur must be able first to classify what type of CVC you are dealing with and then be able to evaluate which one fits your needs best – you need to get to know these heroes, so you know which ones you want fighting by your side to save (well, change) the world.
Each Crusader’s superpower stems from their track record and their relationship to their mothership corporation. Depending on this link, and the corresponding culture of the company in question, a CVC can offer a variety of key interrelated resources (aka superpowers) aside from money. It is up to you to determine which combination of powers you want on your side and what will make the best team to ensure victory for your company.
LINK TO THE MOTHERSHIP. Some CVCs are created based on a strong connection with the corporation and its interests. If a connection with a particular corporate sponsor is exactly what your startup needs to move the mountains in its way, then a Captain Corporate CVC, or sometimes Baroness Business, may be just the partner you need.
On the other hand, your company may seek to cater to a broad set of clients and innovate in the field. If so, a more independent CVC, such as the Venture Vision archetype, may be the partner for you. It’s also increasingly common to seek an amenable combination of both; finding any of the three that provide an ideal balance.
INDUSTRY EXPERTISE. Often inherent in mothership linkage, the CVC has strong ties to an industry that means it has experience and subject-matter expertise in one or more fields of interest. By partnering with any of the CVC archetypes, this industry expertise can unlock many doors and substantially expedite the path forward. This benefit is a huge distinguishing factor, which typically sets CVCs apart from more traditional VC organisations.
NETWORKING AND EXPOSURE. It’s not always what you know, but who you know. A ‘yes’ from the right person can go a long way towards success. These networks and resulting exposure are very much a superpower. CVCs have vast networks of partners and collaborators both internal and external. By partnering up, you gain access to this network and here, too, the importance of choosing the right archetype comes into play. For a Captain Corporate CVC, the shared network may be limited to the corporate mother; whereas Baroness Business may introduce many sub-organisations or collaborators. The Venture Vision archetype is the most flexible in this respect because they have looser ties to the corporate arm and are often able to cast a wider net.
DE-RISKING AND SCALING. Through a combination of networking, inherent corporate linkage and expertise, Corporate Crusader CVCs offer the ability to de-risk your startup. They can make the right connections, at the right time, along with funding your further development to spur growth. They can save the day and make your own hero’s journey a little less dangerous. Which members do you want on your team, fighting for the greater good?
Perhaps due to the corporate balance that they often tread, it is commonly thought that CVCs are primarily interested in investments in the later, more risk-averse, stages of growth. In reality, CVCs play the entire field of investment stages, with the majority investing in earlier stage (Series A and B) ventures, and a notable fraction are active at seed stage. In many ways, it is because of the corporate connection that CVCs can invest in riskier endeavours. They are able to bring value through all stages of growth, leveraging their sister business units and networks to foster and accelerate growth where some more traditional VCs may struggle. So, while it’s important to keep the five-to-10-year plan in mind when assessing which CVC archetype will bring the most value to your startup, wherever you are on your journey, it may be the right time to consider partnering up.
Perhaps the best way to demonstrate what a member of your Corporate Crusader team can do for you is through an example. TDK Ventures is aiming to be a Baroness Business-type CVC. It retains a loose and constant connection with the TDK Global parent corporation and its divisions. This enables TDK Ventures to act with the flexibility and speed of a traditional VC, but retain the backing of a respected industry giant – and leverage its network, expertise and resources across the globe to benefit their entrepreneurs. The central tie to the mothership is in aligning with the TDK Global mission by accelerating solutions towards an attractive and sustainable future. TDK Ventures cares about the financial return, but for the right reasons in wanting to ensure success for you, the entrepreneur, and for the co-investors. Its superpowers (network, expertise, resources, etc.) are known as ‘TDK Goodness’ and providing these helping hands beyond financial backing is seen not as an obligation but as the right thing to do to further the corporate owner’s own vision and improve humanity through technology. Help provided might include:
The entrepreneurs are the heroes in their stories and, when coming to the rescue, TDK Ventures leverages its TDK Goodness as its superpower.
The road ahead on your superhero journey to entrepreneurial success is treacherous and you still need back up. You have been introduced to a few CVC superheroes. Based on what you know now, how should you evaluate your potential partners? We hope that going through the steps below will not only help to make sense of the myriad of potential CVC investors, but will also put you and your corporate investors on track to cultivate a mutually beneficial relationship. After all, every great superhero story needs a successful partnership!
The first step is to attend to your own soul-searching process. What superhero (or superheroes) do you need? Be honest with yourself and your team about where the best help is likely to come from and how to ensure that it aligns with your needs and strategic vision for the future. Once you have identified what you see as an ideal partner, the next step is to interact with each potential CVC superhero and identify which archetype they fall under. Are they a Captain Corporate, a Baroness Business or a Venture Vision? When doing this, recall the motivations each archetype has for investing and selecting startups for its portfolio.
With those in mind, observe (and ask directly!) the CVCs about their organisational structure and key performance indicators. Understanding these two characteristics of each entity will help you identify how strong ties are to the corporate mothership and how the CVC is evaluated internally.
If you are looking for a Venture Vision, then learning about a CVC structure that is heavily tied to the mothership with KPIs that require consistent knowledge transfer to corporate may be a reason to pause. Does it indicate that the CVC may not be who it thinks it is, and perhaps not be the best match for you?
Alternatively, you may be looking to build a strong relationship with an industry leader and value constant interaction and commercial collaborations with their business units. Maybe you’re looking for a Baroness Business? If so, when you hear a business-unit matching requirement it could be a match made in heaven for your Corporate Crusader team.
The next check is another exercise in due diligence: track record. Do not shy away from asking the CVC’s portfolio companies, fellow entrepreneurs and even other CVCs with whom they’ve co-invested in the past about them. See what they have to say about the firm you are contemplating partnering with. What is reasonable to expect from the focal CVC team and what is not? To understand the answer to this question, consider asking what superpowers they brought to the table for other members of their portfolio. Will they be there for you to go into battle with, too? In your conversations they could be describing an ideal scenario for you, but if the reality matches a different archetype, it is critical to identify this sooner rather than later.
Keep in mind that partnering with a CVC isn’t a one-time deal. Ideally, it’s more like a lifelong partnership. You don’t just want a one-off collaboration during your journey, but for your Corporate Crusaders to be an enduring team. Together, you will mature your business over what could be five, 10 or even more years.
Given that time horizon, the vigilant entrepreneur must also account for the possibility of change. Your company will hopefully grow and be very different in five or 10 years’ time, having scaled to match your vision of success. Is the superhero you need now the same as the superhero you will need then?
Similarly, CVCs themselves do not stagnate but are organically evolving organisations in their own right. The reality of the matter is that the three archetypes exist very much on a continuum. They can fluctuate and, over time, will shift or mutate between these three different archetypes. Their identity is usually driven by a few key individuals, and often by two: the head of the CVC and the CEO of the mothership (or whoever the head of the CVC reports to).
When you interact with each CVC, be sure to get a sense of these individuals and their vision for the CVC and its culture. If leadership changes, be sure to re-evaluate the situation. Know the superheroes you need now and the superheroes you may need in the future, and try and find a balance so that your team possesses both.
Speaking of teams, when making your choice be sure to maintain a team mindset. It is less important (and less likely) to identify one CVC superhero that can provide everything you’re looking for. Rather, seek a diverse and complementary unit of super allies that can make your Crusaders unstoppable. Ask yourself how they can play off each other’s strengths and weaknesses, and give due consideration to how these dynamics may come into play and change over time.
Above all, make sure that you are all tied together by your unrelenting vision for progress and the success of your mission. In doing so, success is so much more likely. Remember: you are the leader of this team and it will be under your keen eye that the world is forever changed.
It’s the moment you’ve been waiting for. The time has come to choose the CVC superheroes for your journey. You’ve done your homework, you understand the motivations and superpowers of each archetype, and now is time to select your team. To help you on this process, we have listed some key questions you should ask yourself – and some key questions regarding your prospective CVCs.
Remember: this journey isn’t a static one, so the answers may very well change over time.
Good luck on your journey!
Corporate investors come in many shapes and sizes. For the purpose of this discussion, it’s useful to consider three different CVC archetypes that can make up your team of Corporate Crusaders! They can save the day, support your cause when most needed, and leverage their network and mothership connections to usher in the growth you need when the very fate of your business lies in the balance. Each has powers specific to its ties with the mothership, so whom should you choose to help you and your startup on its courageous journey?
Possesses the power of superstrength! He is mighty and strong, with a constant connection to the corporate mothership. He is loyal above all else and fights to ensure corporate victory. This type of CVC was formed with the intention of strengthening the mothership itself. It has little to no focus on its own financial returns, but rather seeks to leverage partnerships to bring in new knowledge and technologies to the corporate centre and grow the mothership’s financial success. While powerful, Captain Corporate is intricately tied to the mothership and sometimes slow to react, but when engaged successfully is expertly effective.
As an entrepreneur working with Captain Corporate, you’ll have many resources at your disposal, but you will have to prove your commitment to the mothership through continuous engagement and ensure the corporation can integrate your solutions for its own betterment.
If your startup is looking to break into a specific industry or work with a particular sponsor, Captain Corporate could well be your guy, but keep in mind the constraints and strict requirements that may come with such a partnership, which often require contractual engagements and exclusivity terms that could limit your aims.
Has the power of shape shifting! She morphs and changes to match your business and aims to provide the right synergy at the right time. Nimble and quick on her feet, her USP is that she can decide her form to address your needs. As a CVC, Baroness Business retains her ties to her mothership corporation but does not require engagement with the mothership to partner with a startup. Instead, she requires synchronicity with some business unit within the corporate network (analogous to the shape-shifted form). While faster to react than Captain Corporate, Baroness Business is very thorough and typically requires approval from a (sometimes large) investment committee prior to action. And not all Baroness Business CVCs are focused on financial returns. When partnering, keep in mind the importance of the business unit to her motivations and goal of furthering the unit’s development through a collaborative partnership with your startup. In this way, such CVCs are often very specialised in the help they provide, which will likely correspond with the linked business unit.
The final archetype to consider for your Corporate Crusaders team has the powers of both vision and speed! She is the fastest of the bunch and uses her keen, independent thinking and unmatched intellect to bring state-of-the art solutions to bear on any problem. These CVCs have the loosest connection to their motherships, with no corporate engagement required from their startup partners. They are motivated by financial return, but their primary focus is on you as the entrepreneur and your startup success, so you all succeed together. The loose connection enables fast reaction time and a forward-thinking mindset. At the same time, it follows that the value you may seek from the mothership is far from guaranteed.
Gary Dushnitsky is Associate Professor of Strategy and Entrepreneurship at London Business School
Nicolas Sauvage is President of TDK Ventures
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