What to Consider When Evaluating an Investment from a Corporate VC?

It’s natural to think that all funding entities are the same. However, the investor you choose may have significant implications in the long-term

Corporate Venture Capital (CVC), the investment arm of a corporate, is the instrument which a usually-established corporate may use to encourage and integrate innovation, gain exposure and make returns. It enables corporates in a variety of industries to create and maintain their competitive advantages by investing in start-up companies: By taking an equity stake in an innovative firm from outside of the organization and actively investing in technology, these corporates can compete in a fast-paced world which changes constantly.

The Pivotal Role of Corporate VCs

CVCs play a significant role in the global and Israeli ecosystems: According to Pitchbook, CVCs’ participation in VC deals hit a record high in 2018, with 1,725 deals worth $70 billion. If we exclude the $12.8 billion deal (JUUL) that took place in 2018, it is likely that the CVC participation in 2019 surpasses 2018’s total in terms of value. As of Dec 3rd, 2019, CVCs have participated in 1,496 VC deals worth $57 billion.

According to the recent ZAG-IVC Report, the Israeli eco-system which has raised $8.3 billion in capital in 2019 has also witnessed an increase in the value of investments made by foreign CVCs. A total of $983 million were invested by CVCs in the country in 196 deals according to IVC’s MNC Report for 2019. Israel is a steadily maturing market in many aspects, certainly since it became a reliable scouting ground for multinational corporates seeking to maintain an edge over competition with innovative technologies and solutions.

Some CVCs are getting off the ground investing in funds as a Strategic LP (Fund of Funds) to complement their direct investments and deepen their relationship with the local eco-system. It creates a network effect for the CVC through their venture relationships and provides capital for strategic investments.

Other corporates are establishing their CVCs as more independent and financially driven entities, that share strategic insights and collaboration opportunities with the corporate.

There are also CVCs that are merely under the corporate’s branding but operate independently, with the sole objective to pursue financial returns (instead of strategic synergy, very similar to VC funds). Two examples are Google Ventures and Microsoft’s M12.

The Advantage of Fast-Moving Corporate VCs

It may be hard to identify who’s moving slow and who’s moving fast: The way CVCs are perceived in investments varies significantly. Some are considered slow, as they require approvals from various business units to make an investment decision, which may cost them in losing potential deals. Others are nimble, fast movers and bring strategic value.

At Grove Ventures, we had the opportunity to work with Amazon, Microsoft’s M12, Intel Capital, Samsung, Qualcomm and Porsche as co-investors on multiple funding deals. They have been superb partners, helping whenever needed and supporting our companies with valuable insights on their use cases, internal operations, customers and involving additional relevant partners.

Things You Should Know About Corporate VCs

Some founders are hesitant on whether they should pursue an investment from a CVC, as their missions and objectives vary.

My main takeaways when considering funding from a CVC are as follows:

• Ask questions to understand the CVC’s main objectives for making the investment. An ROI-driven CVC will most probably be better aligned with other VC investors your company may have.
• Some CVCs invest in start-ups which develop products that their corporate is interested in. As a result, the engagement is not solely financial and may potentially involve continuous cooperation. Therefore, it’s important to check which type of value can be added from this investment:
  tech development, manufacturing OEM, design partner, sales/distribution channels, etc. The strategic cooperation has the potential to contribute significantly to your direction and operations, as long as it supports your interests and allows you to make future decisions.

• Learn how the CVC you’re considering is making an investment decision. Understand its investment approval process, who is your “champion” in the investing corporate and in the business unit, if relevant, and ensure that you provide them with the needed information in advance so that they can facilitate the process.
• It’s important to know whether the CVC puts aside funding for future follow-on rounds as part of its investment strategy.
• It is highly recommended to get a better feel of their role as an investor and as a strategic partner by speaking to founders of companies which have been previously funded by the same CVC.
• If you have decided to pursue the investment opportunity after evaluating the pros and cons, verify that the CVC is ready to invest according to market practice terms and try to avoid any terms that may limit or restrict your future moves.
• Make sure that the information you plan to share with the CVC doesn’t impact your ability to do business with the corporate and its competitors, and that M&A decision will be as independent as possible.
• If the CVC was chosen to lead the round, ensure that the company’s valuation is reflecting the normal market value at this stage as perceived by a financial VC. This allows you to attract additional financial investors to the round and in the future to raise follow-on round with a valuation which reflects your company’s status. A combination of financial VC with CVC can keep the interests balanced.
• Make sure that you do not rely on your relationship with one specific person in the CVC and that you foster relationships with a wide range of corporate members. This way, you will not be dependent solely on one person, who may suddenly move on to new endeavors.

Strategic investors may be quite a super-weapon when you partner in the right way. If you come prepared to your discussions with the CVC — you’ll increase your chances to create a win-win situation for both your company and its investors.