Practical Guide to Corporate Venture Capital
By: John Steedman
Over the last few years venture capitalists (VC’s) have shifted their focus towards areas like components, digital media and fintech, leaving a gap for companies engaged in longer term technology development. This gap is increasingly filled by the ever expanding angel investor community, as well as corporate venture capital (CVC) who can invest in earlier stage opportunities and higher risk/higher reward portfolios.
Corporate venturing presents an opportunity to fund a business while also building key strategic partnerships for scaling up, and is a funding source often overlooked by entrepreneurs and startups. This guide will provide insight into the motivations and things to consider when looking at corporate venturing.
Examples of established corporate venture units (CVC)
Industry Sector CVC Business Units Advanced Materials BASF, Evonik Agriculture, Biosciences Syngenta, DSM Consumer Goods Unilever Control Systems Siemens, Schneider Electric Electronics Intel, Robert Bosch, Samsung Life Sciences SR One (GSK) Oil and Gas BP, Chevron, Total Power ABB, GE
When do corporates come in?
Corporate interest starts after seed and angel funding once there is proof of concept and before debt or pure growth investment. Both pre- and post-revenue opportunities are considered on merit. Within A or B rounds, £2m to £5m will secure minority equity, typically ranging from 15 to 25%.
Why do they do it?
Why are more and more corporates engaged in venturing? First and foremost, such investment provides strategic insight to emerging technology. Many technologies are now cross-cutting in areas such as information and communication, and biotech and beyond the corporate’s horizon. Long gone is the notion of doing all R&D in house and the mistaken belief that one company has all the answers. Venturing provides valuable additionality.
Secondly, it is cost effective to understand a threat or an opportunity, and its potential to impact core business before making much larger financial commitments. With an open innovation approach, it becomes possible to share risk and apply more readily for grants and other forms of support.
Most venture management time is spent scanning and scouting hundreds, sometimes even thousands of opportunities per year. The majority of these will not pass the all-important strategic filter. About 5% will and undergo due diligence with the emphasis on management, technology/IP, market and financials, culminating in eventual investment in the top 1%.
Of course there are some downsides to consider. Corporate Venturing does not build extensive internal capability and is more limiting on options and ownership. There is also the question of managing different viewpoints between the corporate and co-investors on issues such as the optimal timing of an exit.
Will they provide all of our funding?
It is unlikely and unhealthy that the corporate provides all the funding required over several rounds. The majority do not want to consolidate ventures into their group accounts and the venture needs to maintain flexibility in product and market development. The result is often a capital structure construct joining the entrepreneur, a CVC and a financial co-investor. Ensuring good governance and that objectives are aligned at this early stage will pay dividend in the longer term.
What extra value do they provide beyond funding?
The value of a corporate increases substantially if they can offer the opportunity to test, scale-up and deploy a technology. In addition, they also provide an exit option, however, financial investors especially will insist it is not the only one.
Most corporates are clear on the focus of their investment. It is either adjacent to their core business or has the potential to create a new business aligned with their strategy. Unless the entrepreneur has something on this radar they are most probably wasting their time. In preparation for an investment round, market research to identify and rank the most likely strategic investors is strongly advised.
Is a particular CVC right for us?
Apart from a good strategic fit, there are other criteria with which to assess CVC and its match to the business plan.
- Autonomous business unit — faster than normal decision making
- KPI — success is measured in terms of the venture ROI not the parent
- Track record — if possible an established rather than new CVC to benefit from lessons learned and avoid sharing their growing pains
- Co-operative links to corporate parent to leverage functional support and fill capability gaps
- Consistent in terms of follow on investment — withdrawal of a corporate gives out a very negative message
John Steedman is a technology commercialisation consultant currently working with a range of technology based SMEs as a coach and mentor in their formative stage or during transformation. His expertise was developed through a 30-year international career in BP where he held senior level positions in strategy development and R&D and across sales, marketing, and business management.
Originally published at quantiply.co.