Early Investing

Corporate Venture Capital Can Benefit Startups and Early Investors

Corporate Venture Capital Can Benefit Startups and Early Investors
By Andy Gordon
Date January 29, 2020

Startups have never had more financing options.

Friends and family. Angel investors. Accredited investors. Crowdfunders. Venture capital (VC) funds of all sizes, including specialties that cover the gamut of tech sectors. And corporate venture capitals (CVCs).

CVCs are departments within corporations that invest in external companies for any number of reasons. It could be to gain a front-row seat to the latest technology developments and user trends. It could be to build a pipeline for future acquisitions. CVCs may be used to pursue venture-size returns as either a primary or a secondary objective. Or CVCs could view these startups as future customers, suppliers or partners for the corporation.

Some or only one of these considerations could be in play. And that’s your first lesson. It’s next to impossible to generalize about CVCs. They all have a different mix of priorities and aims. No two are the same.

CVC funding is growing like gangbusters. According to PitchBook, the volume of CVC investments grew from $6.4 billion in 2009 to more than $38 billion in 2018.

And the number of CVCs has grown too – from 100 in 2013 to 429 by 2018, according to CB Insights. That includes tech giants such as Intel (Intel Capital), Google (GV, CapitalG and Gradient Ventures), Salesforce (Salesforce Ventures) and Microsoft (M12). And let’s not forget the financial services giants (Barclays Ventures and a variety of Goldman Sachs groups), insurance companies (Axa Venture Partners, Allianz and AV8 Ventures), health and pharma companies (Pfizer Ventures, Kaiser Permanente Ventures and BlueCross BlueShield Venture Partners), and big media companies (Comcast Ventures and Sky Ventures).

And there’s the giant of giants, SoftBank, and its $100 billion Vision Fund.

Chart - Number of Active Corporate Venture Capital Arms

Total U.S. VC investments reached $135 billion in 2018. And $71.1 billion – 52% – of that total came from CVCs. That was the first time CVC investments exceeded noncorporate VC investments. Today, 77% of Fortune 100 companies invest in VC and 52% have their own investment arms.

So it’s worth understanding the role that CVCs play in the startup ecosystem. After all, they could hold the fate of the startups you’ve backed in their hands.

The Good and the Bad

Unlike other sources of capital, CVCs are not always about making a big profit.

That’s both good and bad for founders… and early investors.

If asked, I tell founders raising funds to pursue compatibility above anything else. Is that easier or harder with corporate capital? What are the advantages and disadvantages?

I also tell founders the following:

  • Don’t make assumptions. Most CVCs do not aim for billion-dollar outcomes. But it’s still dangerous to generalize. Some CVCs have the same structure and financial incentives as traditional VCs.
  • Seek a CVC that aligns with your interests. There’s a CVC out there that could be a perfect fit for your startup. If you don’t want the pressure of becoming the next hot unicorn company, there are plenty of CVCs that de-emphasize a return on funds. Their investment terms will likely be more generous than a VC’s. And the pressure to grow fast and furious will be far less. They can help startups with not just technology, but also business development, networking and more. But there are also limits…
  • Watch out for conflicts of interest. While an alignment of interests can lead to a host of positive synergies, there can also be misalignments. Do you want to pursue sales or a partnership with the corporation’s competitor? That could be a big no-no.

For early investors, I think the rise of CVCs is mostly a good thing. There are potential problems though. For instance, as an early investor, you’re looking for the biggest payday, whereas the corporation may be focusing its attention elsewhere – say, product development rather than scaling the product. Or the corporation may look to absorb the startup into its operations before its valuation has had a chance to take off. Or the CVC may be less willing than a traditional VC firm to provide follow-up financing.

But overall, the impact of CVCs is positive for early investors. In particular, seed-stage investors don’t need a billion-dollar outcome to earn a huge profit. Going from a $10 million valuation to a $300 million exit (less than one-third of the way to unicorn status) still gives investors an enormous return of 15X to 30X (depending on dilution).

And whether we like it or not, VC deal-making is headed to new record highs this year. So founders need to choose their CVCs carefully. The right CVC can increase their chances of success. And early investors stand to benefit too.

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