Intro to Corporate VC: Motivations, Models, Global Trends & Thailand Players (Part 1)

Photo by Wiennat Mongkulmann

With growing dependency on new innovation and traditional R&D rarely able to deliver, more numbers of corporations are relocating resources from internal R&D to external venture investment to get early access to potential disruptive technologies and strengthen their market leadership. According to GCV data in 2015, over 1,000 corporations worldwide have a CVC unit in operation or hold a stake in a startup venture.

Part 1 of this introductory post will cover the basic foundation of CVC including the objectives, mechanics and distinction from traditional VC, so a more informed decision can be made whether a startup is suited for CVC investment or not. For the latter part about global CVC trends and Thailand players, please visit here.

What are Corporate VCs and their goals?

For a concise definition, corporate VCs are venture capital investments made by corporations into external startup companies.

Why do corporations invest in startups?

Digital disruption is happening in literally every industry and corporations desperately need to identify what could affect their core businesses before it is too late to act. Building relationship with startup companies through investment and partnership does not only allow corporations to determine the ‘winning’ partners but also to understand the fast shifting market.

Motivations

Unlike traditional VC funds which focus solely on exits and wealth creation for their investors, the objectives of CVCs are comprised of both strategic and financial elements.

• Financial goal — Corporations with extra cash on hand may afford to look into exploring bigger returns at the cost of higher risks.
• Strategic goal — From a management perspective, identifying and backing early-stage companies with strategic alignment helps corporations better understand the ongoing transformative changes in their industry, develop insights into new technologies, and ultimately make more informed decisions, e.g., whether to build, buy or shift in each existing or new area.

Benefits & Drawbacks

Some of the major arguments about pros & cons of CVC compared to traditional VC in my opinion.

Benefits

• Credentials for B2B businesses and future fundraising (‘locally backed’)
• Access to suppliers from their network and value chain
• Distribution channel to customers, e.g., mobile and bank customers
• Industry-specific resources such as expertise and infrastructure
• Potentially becoming the lead customer
• Longer term view and less pressure to exit

Drawbacks

• Limitation of customers due to competition/rivalry
• Limitation of fundraising and exit options due to competition/rivalry
• Longer process for investment decision — only around half of even the most active CVCs take within 2 months to reach an investment decision
• Higher demand for control, e.g., involvement on the board level
• Generally more conservative mindset
• Slower movement when support is needed

Operating Models

Understanding the CVC operating models is critical to have a realistic view of the decision drivers and what to expect with the different types of CVC.

1) Direct Investment

The most straightforward, direct investment CVCs make investment from their balance sheet. The main purpose is to gain strategic insights in (and possibly tap into) particular areas of interests of the company, with investment decision usually relying on various internal stakeholders from different business units as well as strategy and innovation resources.

Decision Driver: Strategic value >> Financial return

Pros: Strong synergy support, Less exit pressure

Cons: Slow decision, High control requirement

Cases: InVent, Ascend Capital

2) Internal Fund (Strategic)

Internal fund model, equipped with more authority in investment decision, provides a more agile investment arm for corporations. However, the speed from the spin-off subsidiary may come at the cost of weaker ties with the business units due to their less involvement in the investment decisions.

Decision Driver: Strategic value >= Financial return

Pros: Moderate agility, Moderate control requirement

Cons: Weaker tie with actual business units

Cases: GE Ventures, Qualcomm Ventures, Intel Capital

3) External Fund (Financial)

External fund model involves hiring professional VC to manage the fund. This allows the corporate side to enjoy the benefit of being a more passive limited partner (LP) while still expanding their network and gaining insights into emerging innovation and market trends. Investment decisions are entirely financial-driven and independent of the input from the corporate side.

Decision Driver: Strategic value < Financial return

Pros: Familiar VC style/pace, Least control demand, No synergy requirement

Cons: Weak synergy support, Typical exit pressure

Cases: GREE Ventures, Google Ventures

Connecting with CVC

• Start with a working relationship — If possible at all, establish a working relationship with any business unit will be a considerable plus before you approach the CVC team for investment opportunity.
• Build real businesses — Often called slow and conservative, corporate people are alternatively more detailed and realistic compared to venture capitalists and CVC generally doesn’t bet in cash-burning businesses without a foreseeable sustainability.
• Understand the mechanics — As explained above, not all CVCs have a strategic requirement and it’s crucial for the founders to clearly know the operating model and what motivates their target CVC’s decision.
• Identify what to give and take — If your target CVC emphasizes the strategic aspect, analyze the common interests/goals (e.g., product lines, distribution channels, customer base) and how can the two parties create value to each other. This is what excites them to push the deal through.
• Set mutual realistic goals — Be transparent about what you expect to give and take from the CVC as well as the anticipated opportunities and pitfalls. Determine the key metrics how they measure the success of the deal and carefully evaluate if you could really meet the expectation.

This post is a part of my Venture Fundraising Basics series where I will try to share the fundamentals of raising venture capital for entrepreneurs and some local perspectives from my experience in Southeast Asia. For the complete outline and links to other posts, please visit here.

Note: All contents and opinions expressed in this story are humbly of my own and do not represent those of any of my current or previous employers.