Lesson 5: Why Startups and VCs Should Work More with CVCs ?
Photo by Samson on UnsplashOn Wednesday, July 1st, the baby vc team had the pleasure to host one of its “meet & greet” session. The concept: to welcome a VC or an entrepreneur every week during lunchtime for a one-hour live session to ask any questions you may have about VC, fundraising, the latest technological trends, and much more.
That day, you were listening to Mathieu Berthelot, Chief of Platform at Orange Ventures, a leading European corporate venture capital fund covering themes such as Fintech, Cybersecurity, Telecom, Enterprise Software, and Impact startups.
Hereunder are a few key points to remember from this session, but first let’s get to know Mathieu Berthelot and Orange Ventures better.
Who is Mathieu Berthelot ?
Mathieu, an engineer by training, decided to become a consultant after graduating, which is quite useful for working in operations. He started working at Orange in Africa, especially on mobile financial services, on the launch of Orange Bank in France with the Orange Innovation teams and by relying on a lot of fintech with which he was able to collaborate. Two and a half years ago Mathieu joined Orange Ventures, Orange’s corporate venture fund as Head of Platform.
What is Orange Ventures ?
With 350m€ assets under management, Orange Ventures is in the top 10 corporate ventures in Europe with the investment strategy focused on helping future global tech champions from Series B and above, fostering innovation in the Middle East&Africa and supporting new sustainable and responsible business models. A few startups in the portfolio: Monzo, Raisin, Actility, Famoco, Wynd, PayJoy, Intercloud and much more!
Disclaimer: If we can easily assume that this article can cross-reference some other CVC funds’ strategies, please keep in mind this is not an exact science.
Takeaway #1 : What is a CVC and What’s Their Story?
Photo by Charles Forerunner on UnsplashIn the past, large corporate groups were reluctant to launch investment activities directly, so they entrusted the management of their investments to external management companies.
When corporate venture funds were created, some large groups recruited external management teams and others like Orange recruited internally.
A CVC that only recruits externally would find it difficult to activate the synergy and support part of the relationship.
For example, Orange, like many corporations, the venture activity started with a fund of funds activity. Orange has invested in Iris Capital, Innovacom. This is a first way to support innovation, to have exchanges with startups but in a rather indirect way. For Orange, this fund of fund activity is still active today, with investment in funds such as Partech, SeedCamp and the french BPI.
After a few years, corporates often decide to take the plunge. Today, 48 large companies in France have a CVC fund. In the case of Orange, it dates back to 2015.
Today, 48 large companies in France have a CVC fund.
Test project at the beginning, 20m€ under management for the 1st year. The project has proved its worth by investing in fine start-ups like Monzo, by providing operational support to companies, they helped them to develop, it also created synergies with the group to which they are attached. They went from 20m€ to 50m€ AUM and then 100m€ AUM.
Following the successful track record (flashy investments, above-average market KPIs and 2 successful exits), Orange Ventures becomes part of the group’s new strategic plan Engage2025 as Orange decides to strengthen its capital venture activity. The fund’s endowment passed to 350m€ with extended investment scope to address the companies working within fields of Orange expertise as well as beyond it.
If the fund had been founded 10–15 years ago, it would have invested only in telecommunications.
Today, even if Orange Ventures invest in telecommunications, they also invest in Fintech, cybersecurity, cloud enterprise and broader investment verticals in Africa (ODVA).
They mainly do B2B from the series B. Corporate VCs will invest more in late-stage companies, to seek ROI and synergies. There is a willingness to make partnerships and go-to-market together.
Corporate VCs will invest more in late stage companies, to seek ROI and synergies.
Unlike VC where there is a whole population of very early stage and seed investors. In CVC, they reserve themselves for more mature companies.
Takeaway #2 : CVC Trends.
CVC funds will invest heavily in the areas of their parent group, but since most CVCs are attached to large groups, the scope is quite broad.
When Orange Ventures made its first fintech investments, Orange Bank wasn’t even live.
Orange Ventures has been looking for a long time at the healthtech subjects on which the group is not yet very present, on the fintech part they look a lot at the insurtech startups on which the group is not yet very present.
Cleantech and cybersecurity are the main trends in french CVC.
Cybersecurity is a very French trend, but investors around the world have been less interested in it.
At Orange Ventures, one of the investment manager, Rémi Prunier, specialises in Cybersecurity issues and another, Takfarinas Chabane, is launching a consumer vertical and a fund dedicated to positive environmental and social impact addressing Cleantech issues among others.
Takeaway #3 : How Can a CVC Contribute to the Success Of a Startup?
Photo by Hello I'm Nick on UnsplashVery concretely, a success story, Follow Analytics which is the Google Analytics of the mobile. The startup allows any developer to finely analyze the use that a user makes of his application and to interact with him through push notifications.
Orange uses the startup’s services for its own applications such as My Orange or Orange Money which concerns millions of customers. This represents a significant turnover for the startup and to validate its model on large transaction volumes.
Once this was done, the Orange Business Service sales teams went to sell the Follow analytics offer to their customer.
They were able to sell to RATP, the french employment agency (Pôle Emploi), institutional companies that might have hesitated to choose the offer of a young startup. But the fact that it was a response to a call for tenders with the name Orange reassured them and gave credibility to the startup.
Takeaway #4 : Why CVC is Complementary to VC.
Photo by Sebastian Hermann on UnsplashThere is great complementarity between a VC and a CVC.
The VC will mainly rely on the team’s own skills, especially if they set up a support team, they will go and find experienced entrepreneurs, former sales managers, so that they can use and share their own experiences with the entrepreneurs. This has a lot of advantages because they are people who know the business, who have a strong network and who will be able to offer close coaching.
At CVC funds, the team will make the link with the people in the group. They will be people who will perhaps have less time but who will have very varied profiles.
At Alliance Ventures, about a hundred people have part of their working time dedicated to supporting the startups in their portfolio.
At Orange Ventures, they collaborate with about a hundred people, cybersecurity specialists, from Africa, network etc.
The advantage is to access a very large network of consultants free of charge.
Another example, Morphisec which is offering a transformational approach to cybersecurity, the products are resold by Orange Belgium, Orange Norway etc. so this gives them a very strong international expansion.
For Payjoy, an American startup allowing to finance on credit the purchase of a smartphone. Orange enabled them to project themselves in Ivory Coast. Being able to provide assistance for expansion in Africa is one of the key advantages of Orange as an investor, for startups looking for development in this continent.
Very few investors are able to support their startups in selling their product in Norway, Belgium and then at the same time support an American startup in its African expansion.
CVC funds have a very broad scope and it’s not a question of dispersion because for each subject they have really specialised teams ready to support their startups.
Takeaway #5 : VCs Reluctant to Co-Invest With CVCs Should Do Their Due Diligence.
Photo by Wes Hicks on UnsplashThe CVCs do not all have the same maturity in the development of their investment activity. As it is a younger industry than traditional VCs, CVCs have been groping around more in recent years and have suffered from several shortcomings of large groups such as cumbersome processes, the fact of multiplying the number of POCs without moving on to concrete partnerships, and so on.
So there have been shortcomings in the past, but the industry is evolving tremendously.
In the four years that Orange Ventures has been conducting this CVC barometer with Deloitte, they have seen a lot of positive developments, decision times have shortened, the size of mandates under management has increased, and the POCs have a transformation rate approaching 70–80%.
There are good and not so good CVCs at the moment as in any field but the advice for VCs is “do your due diligence, contact the current co-investors, the startups in the CVC portfolio and ask them for their feedback” most VCs would be surprised.
Do your due diligence, contact the current co-investors, the startups in the CVC portfolio and ask them for their feedback.
Most CVCs behave very well, they are faster and standard on terms and bring a lot of value on synergistic and business development parts.
Takeaway #6 : How Do I Start a CVC Fund With Real Smart Money?
Photo by You X Ventures on UnsplashAll the players claim to do more than just financial support, it has become a convenience to bring in smart money.
Before launching its support activity, Orange carried out a benchmark and surveyed the startups in their portfolio.
Orange Ventures asked them to testify to the reality of the support they were receiving from other investors. The result?
- Everyone promises
- Few VCs deliver value after investment
- Lack of visibility on what the VC/CVC can provide. Startups discover it as they go along.
Orange Ventures has therefore worked on these subjects. They looked at how they could be complementary to the VC funds in supporting startups, they released an onboarding kit for the entrepreneurs they support where they list all the topics where they are legitimate to support.
There are 6 big blocks:
- Access to technical expertise, business: Orange Ventures will find in the 160,000 employees of the Orange group an expert on their theme: mobile payment expert, blockchain, 5G then will provide the startup with this expert for a few hours or a few days.
- Having Orange as a customer. Having Orange as a customer accelerates business development, increases revenues and is a market reference that will enable them to attract other major accounts.
- Distribution channel. Orange Ventures will help them market their product to other players by relying on Orange. Orange Business Service has most of the CAC40 companies as customers, international companies. Orange will, therefore, be able to help the startups it supports to promote their products, we are talking about 2000–3000 Orange Business Services (OBS) salespeople, depending on their field, who will be able to sell the startup’s products.
- Orange works with other corporate partners, in the VC environment there is a lot of competition and partnership, it’s the same in CVC, there is competition on deals but also a lot of collaboration on business development because it’s in the common interest. Orange is going to rely on this community of corporate investors for the development of the business, for example working with Deutsche Telekom capital partners, with next47 for Siemens, with Alliance Venture for the Renault-Nissan-Mitsubishi group who will help us to develop the turnover of their companies within their corporate.
- On communication and events: rather generic, Orange has large resources and strong expertise in terms of communication. An enormous range of visibility at Vivatech, mobile world congress etc. Orange also organises intra-corporate events with its customers.
- Provided access to group services. Support mobile flow, cloud. Orange also collaborates with AWS and Azure to give discounts to their startups.
Mathieu thinks that these 6 axes are expectations of entrepreneurs and where Orange is legitimate to propose them.
HR, strategic, legal support in these areas Orange Ventures has not built today a competitive advantage, it will bring a partner on board to provide support on these topics.
Takeaway #7 : State of play, Barometer CVC of June 2020.
In partnership with Deloitte, Orange Ventures contacts the forty or so French CVC funds every year with a questionnaire that they update year over year.
The barometer helps to understand how the CVCs structure their teams, where they invest, how they support their startups etc.
At a global level, CVC is an activity that continues to grow both in volume and value.
1 out of 4 fundraising events is done with a CVC around the table. In 1 case out of 10 it is the only funder. This increases year after year.
They are more and more present at the late stage.
By geography, the most dynamic market has been Europe. On the other hand, CVC funds have experienced a slowdown in growth in the United States, which is normally the historical market where CVC activity has developed. Asia, and particularly China, also experienced a slowdown in the CVC activities.
Europe remains a very dynamic continent and France in particular.
The most dynamic geographies for CVC are the same as for VC, the United Kingdom, Germany, France and then Switzerland and the Nordic countries.
Takeaway #8 : COVID Impact on CVC
Photo by Neil Thomas on UnsplashLike the VCs, the CVCs mainly dealt with the startups in their portfolio.
Figures make people lie when they say that CVCs are not there for the long term, half of the French CVCs are more than 5 years old and 50% of CVC investments were reinvestment.
Besides that, 70% of the VCs continued to look at the dealflow and analyse opportunities during the COVID period. So paradoxically, there is no reluctance on the part of the sponsoring groups.
For example, Orange Ventures invested in InsideBoard during the COVID.
In addition, Orange was able to fast track its payment process for the startups of OV portfolio with which it had a commercial relationship.
Takeaway #9 : Why a CVC Will Help You Sign Contracts With Its Own Competitors.
Photo by Thomas Heurak on UnsplashDeutsche Telekom is a competitor of Orange, particularly in the services offered by Orange Business Service, yet Orange Ventures has introduced to them one of their portfolio startups, Follow Analytics.
In Africa, Mathieu has had exchanges with MTN, an Orange competitor. Gebeya has also become a partner of Free in Senegal, a market where Orange has a strong presence.
It is above all a sign of good development for a CVC to see its startups signing with its competitors, and they are ready to help them do so!
Takeaway #10 : Can You Raise Money With a CVC If You Are Not Looking For Synergies?
Photo by Markus Spiske on UnsplashThe short answer is an unambiguous yes.
At Orange Ventures, they invest based on financial criteria, they will look for a startup with good growth potential, a good team and good technical fundamentals, a good business plan.
They will rely on the Orange teams to judge the deal and then the decision is purely financial, no consideration of synergies at this stage.
Post-investment, if there is a willingness on both sides to work together, Orange Ventures will invest heavily to have common contracts, a GTM, but it’s really tailor-made, service on demand.
An example with the first unicorn in the Orange Ventures portfolio, Monzo, the challenger bank from the UK, the team invested in Monzo a few months before launching Orange Bank in France.
No synergies were envisaged in the short term, competition may even emerge between the two when they consider their European expansion, yet Orange Ventures made the deal, behaved like a good investor and was therefore able to reinvest in Monzo on several occasions.
They didn’t look for synergies or knowledge sharing with the group and it was good for Monzo and Orange.
More and more CVCs have this same logic, a CVC can invest only with a financial prism.
Thank you Mathieu for your time ! Feel free to connect on LinkedIn and do not hesitate to give me a feedback about my article. I hope you will find it useful :)
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Don’t hesitate to go and discover the Orange Ventures website to learn more about them and to read the French CVC Barometer published in June 2020 here!
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And don’t forget to learn how to create momentum while fundraising with @phareall CEO & co-founder of @getluko (raised €20m in Series A) in my previous article!
Best,
Mathis
