The real difference between normal and corporate Venture Capitals

One of the questions we get asked a lot when we meet entrepreneurs as well as other VC’s is “What is a Corporate VC? In what ways do you differ from the regular ones?”

This was originally posted on Sonae IM’s blog at sonaeim.com/en/blog/ .

Venture Capital firms span a wide range. They go from regular firms, where the partners raise funds from institutions such as pension funds, banks, university endowments or family offices, to corporate VC’s, where large corporations set aside a certain amount of cash to invest in start-ups and scale-ups in different phases of their development for a number of reasons, one of them being, that they don’t want to miss the boat on the next big thing.

The truth is that there are advantages and disadvantages to both VC models and entrepreneurs should really think about who they want to bring aboard on their journey (or if a mix of both would be beneficial!).

Corporate VC’s such as Sonae IM have quite a few differences to the regular VC model. The key differences, in our point of view, are the Sector focus, the Product development approach, the Active vs. Passive debate and the Duration of the investments.

1. Sector focus:

Pros:

Corporate VC’s tend to have a sector focus, typically linked to the expertise of the company. Santander’s and BBVA’s funds are focused on Fintech, i.e. financial technology; Roche’s venture fund is focused on life science companies; Sonae IM is focused on Retail and Telco, which are the two sectors where we have historically been present.

The advantage here is that these firms know what they are doing in these sectors and have an open mind to innovation (otherwise they wouldn’t have created these funds).

The truth is that any of these will have relevant, meaningful conversations, and will know the pains you’ll need to solve better than anyone. In addition to that, they will easily sit you with a sector expert, much faster than anyone else would.

We have done it extensively at Sonae IM and we know others do that as well, as there is a common purpose: to get the product as good as possible and as fast as possible.

Cons:

Although this is completely dependent on the corporate VC’s team and where and whom they get inspired from, sometimes you will need to get insights elsewhere, as the solution to the problem you are tackling might have been solved, for a totally different purpose, by someone else, in another industry. That’s where it pays off to have a generalist VC, that invests across different segments and who might introduce you to someone else who is really useful to your business.

2. Product development:

Pros:

A faster Pilot — that’s what comes to mind when you consider an investment from a Corporate VC. It is kind of an urban myth though: in several cases we have seen, the purpose of a corporate VC is not to develop products to be used solely by their firm — the aim is to invest in products that solve a real market pain, commonly to a lot of players. Therefore, what we see happening a lot is for pilots to be arranged (if the startup is good enough, obviously) as a mean of testing the product and to figure out how far along it is in its development, prior to the investment phase.

But it is not necessarily true all the time. Sometimes Corporate VC’s invest in a solution, having in mind its application to a different market segment that its own, at which point there isn’t yet a pilot involved. What you can count on is a hands-on approach when it comes to the product development, as anyone who sits down with you will question every feature of your product in a more contextualized and comprehensive way, due to their experience in the sector and their passion for solving problems that they are regularly experiencing.

This is what happened with Movvo, where they started pilots with some of Sonae’s retail and shopping center brands prior to the investment phase. The pilot’s success and the internal team’s feedback gave us — Sonae IM — the confidence to invest in the team, even though the product was, at the time, still evolving.

Cons:

Sometimes entrepreneurs want and need to do their own thing. Typically regular VC’s are much better at having a hands-off approach as, in the end of the day, their main goal is to deliver a financial return to their investors. Corporate VC’s tend to have an inner passion for the sector, and might, at times, not be able to contain their own views on the product — it will also depend on how fierce the entrepreneur is.

3. Active vs Passive:

Pros:

Both regular and corporate VC’s have different types of approaches to investing and to how active they want to be. Some demand to be the leading investor, others prefer to follow; some will need a board seat, while others prefer a more capital-oriented approach. And almost all of them preach to be active while they unfortunately don’t deliver on that promise.

Corporate VC’s actually do tend to be more on the active side. And that’s a good thing in our view. By being an active investor, you will have someone on the other end of the line every time you need, as often as required.

The active investor will also be proactive, acting as your external “salesman” and opening up his relevant contacts to you, saving your business development time. He will be active in questioning your business decisions and in questioning “why?” and “why not?” (more often than expected). And that’s when things get interesting: by having someone questioning you, you will be obliged to really think through and defend your positions, as well as seek different solutions if you believe your approach is not the most solid one.

Cons:

You will always be questioned — no doubt about it. If you the entrepreneur ends up not feeling comfortable with this, maybe he needs a different kind of investor, or maybe the best approach for him is to simply get a loan from a bank. The truth is VC’s, generically speaking, tend to be more on the active side, and that is one of their great advantages. The passive approach might be more appropriate for the experienced serial and successful entrepreneur. Even then, sometimes you need to question yourself and the best way to do that is by having a solid partner next to you.

4. Investment duration

Pros:

Corporate VC’s tend to avoid rigid investment durations. By this we mean that when a player like Sonae IM invests, we don’t tend to have a specific investment duration in mind, such as 5 years or 10 years.

By their own nature, regular VCs have fund durations, which means that they’ll invest in the first 2–5 years of the fund, grow the companies up to the 5 years’ mark, and focus on exiting the position in the last 4 years of the fund, sometimes extending the fund for a couple of years if they haven’t been able to sell their position in the regular timing.

Corporate VC’s tend not to act like that (and Sonae IM definitely doesn’t act like that). We are pride for not having a set duration.

By this we mean that if your company is successful, we will ride along side with you, no matter how long it is — we invest for life, as Warren Buffett likes to mention. This is what has happened exactly with our WeDo Technologies investment, where Sonae IM has been an investor for almost 15 years.

That’s a huge advantage for any entrepreneur, as he will not be pressured to fundraise or to “sell” our position to another investor. This doesn’t mean that the entrepreneur cannot bring in another investor halfway through the company’s life. In fact, in most cases, it is even encouraged as a signal that the company has been achieving its milestones.

So when should you decide to approach a Corporate VC? Again, it all comes back to the type of Corporate VC, but to approach Sonae IM, for example, you should have a very sector focused product, where you believe a strategic investor can really enhance your company’s capabilities by giving you experienced expertise — smart money -, introducing you to sector experts that can complement your team’s skills and helping you reinforcing your company’s market overall positioning.

To conclude, a Corporate VC has numerous advantages over a regular VC, in spite both have their merits. Having said this, a Corporate VC might not always be the best for your company.

In fact, one of the best approaches an entrepreneur can have when fundraising is to bring in a mix of both. A great example of this was the approach that Movvo had, by bringing aboard both a corporate investor (Sonae IM) and a regular VC (Caixa Capital), hence bringing in the advantages of both investment models.

So, is a Corporate VC good for you or not?

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