Traditionally, startups have looked to three main sources of funding: venture capital (VC) firms, angel investors, and family offices. But in recent years, a fourth option has become increasingly popular: corporate venture capital funds, or CVCs. Between 2010 and 2020, the number of CVCs grew more than sixfold to more than 4,000and these CVCs signed more than 2,000 deals worth $79 billion in the first half of 2021, surpassing all previous annual accounts.
These corporate investors not only offer financing, but also access to resources such as subsidiaries that can serve as market and customer validators, marketing and development support, and a credible existing brand. However, along with this added value, CVCs can also carry some risk. To explore these advantages and disadvantages, we collaborated with the market intelligence company Global Corporate Venturing to conduct a quantitative study. Deep analysis of the CVC landscape, as well as a series of qualitative interviews with CVC founders and executives.
We found that of the 4,062 CVCs that invested between January 2020 and June 2021, more than half were investing for the first time, and only 48% had been in business for at least two years at the time of investment. In other words, if you’re considering a CVC partner right now, there’s a good chance your potential investor has little or no experience making similar investments and supporting similar startups. And while more experienced CVCs are likely to have the resources and credibility that founders might expect, relatively new ones can struggle with even a basic understanding of risk regulations.
In fact, in a survey of global CVC executives, 61% reported that they did not feel that senior executives at their corporate parent understood industry norms. Furthermore, due to the business imperatives of its parent companies, many CVCs They may also be more impatient for quick returns than traditional venture capitalists, which could hinder their ability to provide long-term support to the startups they invest in. Furthermore, even a patient and veteran CVC can pose problems if other existing investors are not on board. As one founder we interviewed explained: “We had to turn down a CVC because our existing investors believed that accepting it would dilute exit returns and result in a negative perception of the final exit.”
Clearly, CVCs can be unpredictable. How can entrepreneurs decide if corporate financing is a good option for their start-up and, if so, which CVC to choose? The first step is to determine if the core objective of the CVC you are considering aligns with your needs. Broadly speaking, CVCs can be classified into four categories, with four different types of objectives: strategic, financial, hybrid or transitional.
Four types of CVC
A strategic CVC prioritizes investments that directly support the growth of the parent company. For example, Henkel Ventures is candid about its focus on strategic rather than financial investments. “We don’t see how we can add value as a financial CVC,” Explain Paolo Bavaj, Head of Corporate Venturing at Henkel for Germany. “The motivation for our investments is purely strategic, we are here for the long term.” Similarly, Unilever Companies it explicitly prioritizes brands that complement the consumer goods giant’s existing businesses.
This approach works well for startups that require a longer-term perspective. For example, the CEO of nanotech startup Actnano Taymur Ahmad told us that he opted for CVC investors over VCs because he felt he needed “patient, strategic capital” to guide his business through an industry fraught with technical challenges, regulatory and supply chain
Instead, financial CVCs are explicitly driven by maximizing returns on their investments. These funds typically operate much more independently of their parent companies, with their investment decisions prioritizing financial returns rather than strategic alignment. Financial CVCs still offer some connection to the parent company, but strategic collaboration and sharing of resources is much more limited. As Toyota Ventures founding managing director Jim Adler put it succinctly, “financial performance must precede strategic performance.”
A financial CVC is generally a good option for startups that have less in common with the parent company’s mission and/or less to gain from the resources it has to offer. These startups are generally just looking for financial backing, and tend to be more comfortable with evaluating their financial performance above all else.
The third type of CVC takes a hybrid focus, prioritizing financial returns while adding substantial strategic value to its portfolio companies. Hybrid CVCs often maintain looser connections with their parent companies to enable quicker decision-making and financials, but still make sure to provide parent resources and support as needed.
While certain startups will benefit from a purely strategic or financial CVC partner, hybrid CVCs generally have the broadest market appeal. For example, Qualcomm Ventures offers its startup portfolio significant opportunities for collaboration with other business divisions, as well as access to a wide range of technology solutions. It is not constrained by its parent company’s demands for short-term financial returns, allowing CVC to take a more strategic, longer-term perspective to support its investments. At the same time, Qualcomm Ventures still values financial returns, having achieved 122 successful starts since its founding in 2000 (including two dozen unicorns, i.e. startups valued at more than a billion dollars). As Vice President Carlos Kokron explained, “We’re in this to make money, but we’re also looking for startups that are part of the ecosystem… startups that we can help with product operations or go-to-market.”
Finally, some CVCs are in transition between a strategic, financial and/or hybrid approach. As the entire investor landscape continues to grow and evolve, it is important for entrepreneurs to keep an eye on these transitioning CVCs and ensure they are aware of how the potential investor they are speaking with today may transform tomorrow. For example, in 2021 Boeing Announced that in a bid to attract more outside investors, it would turn its strategic CVC division into a more independent, finance-focused fund.
Choose the right combination
Once you’ve determined whether you want to work with a strategic CVC, a financial CVC, or something in between, there are several steps you can take to determine if a specific CVC is right for your startup.
1. Explore the relationship between the CVC and its parent company.
Entrepreneurs should start by talking to employees of the parent company to learn more about CVC’s internal reputation, its connection within the parent organization, and the KPIs or expectations the parent has for its venture arm. A team with KPIs that require frequent transfer of knowledge between CVC and the parent company might not be the best fit for a founder looking for no-strings-attached capital, but it might be perfect for a start-up looking for a hands-on corporate sponsor. .
To get a sense of the relationship between the CVC and the parent company, ask questions that explore the extent to which the CVC has managed to convey its vision internally, the breadth and depth of its ties with the various divisions of the parent company, and whether the CVC will be able to provide you with the internal network you need. You’ll also want to ask how the parent company measures the success of the CVC and what kind of communication and reporting is expected.
For example, Tian Yu, CEO of aviation startup Autoflight, explained the importance of in-depth interviews with employees across the company to guide his decision to go ahead with a CVC: “We met the investment team, the key employees from the trade groups we cared about and got an idea of how a collaboration would work. This series of pre-investment meetings only raised our confidence levels that CVC cared about our project and would help us expedite our journey.”
2. Determine the structure and expectations of the CVC.
Once you have determined the CVC’s place within your larger organization, it is important to delve into the unique structure and expectations of the CVC itself. Is it independent in its decision-making, or is it closely tied to the parent company, perhaps operating under the umbrella of a strategy or corporate development department? If the latter, what are the strategic objectives that the CVC should support? What are your decision-making processes, not only for selecting investments, but also for giving portfolio companies access to internal networks and resources? How long do you typically hold CVC in your portfolio companies and what are your expectations regarding exit times and results?
For example, after Healthplus.ai founder and CEO Bart Geerts delved into the expectations of a potential CVC investor, he ultimately decided to decline funding: “We felt it limited our options for exit going forward,” he explained. , adding that CVCs can be more bureaucratic than VCs, and for his business, the benefits such as greater market access did not outweigh the disadvantages.
3. Talk to everyone you can.
Ultimately, people are the most important component of any potential deal. Before moving forward with a CVC investor, make sure you have the opportunity to speak with key executives from both CVC and the parent company to understand their vision and culture. It can also be helpful to chat with the CEOs of one or two of CVC’s existing portfolio companies, to gain inside information on issues you might not otherwise discover.
Sure, it can sometimes be awkward to request meetings beyond the typical investor due diligence process, but these conversations can be critical. For example, one entrepreneur explained that his team “loved the pitch from a potential CVC investor, there seemed to be a great match between our strategic goals and theirs. We got on well with the CVC leader, but meeting with the board (which was not meant to be part of the process) was an eye-opening experience, as his questions highlighted the risk-averse nature of the company. We are not going through with the deal.” Don’t be afraid to go beyond what is presented in a speech and ask the tough questions of a potential partner.
As CVCs become more prevalent, entrepreneurs are likely to be faced with a growing number of business financing opportunities alongside traditional options. These investors can bring substantial value in the form of resources and support, but not all CVCs will be suitable for all startups. To build a successful partnership, founders must determine CVC’s relationship with its parent company, the structure and expectations that will guide its decision-making, and most importantly, its cultural and strategic alignment with the key people involved.
Authors Note: If you have experience with CVC, please consider contributing to the authors’ ongoing research by completing This survey.