When Pitchbook published its 2022 figures on European venture capital deals, there was a surprising statistic: a fifth of deals were made via corporate venture capital (CVC).
Although the first CVCs date back to the early 1920se As large American organizations invested in smaller companies in some way related to their operations in the last century, this practice has recently become more established.
Today, companies like Google, Unilever and BP are all investing in venture capital arms and working with fast-growing start-ups operating within their sectors.
What is venture capital for companies?
Corporate venture capital is venture capital provided by large companies. They invest in start-ups that are relevant to their broader strategic objectives and can therefore benefit in the long term.
An example of a CVC is Jaguar Land Rover’s InMotion Ventures. The VC invests in tech start-ups such as a payments company that allows customers to spread the cost of their car repairs, a platform where customers can view all their car-related payments and a company that offers augmented reality head-up displays. According to Beauhurst, the most active CVC in the UK is UK Steel Enterprise (UKSE), a subsidiary of Tata Steel.
The desired outcome of the collaboration is that large companies remain at the forefront of innovation in their field, while start-ups gain sector knowledge, capital and contacts to drive product development and growth.
“CVC is one of those terms that covers a lot of different things depending on who you are,” says Mark Rundall, partner at law firm Bird & Bird. Growth company. “In the broadest sense of the word, it is a company investing its own money, not a venture capital fund investing someone else’s money.
“But within that you have quite a spectrum of different approaches within the market. On the one hand you have very sophisticated CVCs that are essentially venture capital, but they use the company as a capital [limited partner] and they manage it like a venture capital fund – they tend to make a larger number of investments and are often cash-driven. At the other end of the spectrum you have something that looks more like a joint venture or a strategic partnership, where a company makes a small number of investments, but for a specific reason, with that specific counterparty.”
Corporate venture capital versus venture capital
A key difference between traditional VCs and CVCs is that CVCs tend to be more committed to the companies they back, due to the direct effect they have on future innovation within the organization.
Large companies want to see how more agile start-ups operate and how they adapt to the market in which they find themselves. For more traditional venture capital investments, they only make a financial investment.
What are the benefits of venture capital for companies?
For companies, adopting CVC sends a powerful signal to the industry that your technology is disruptive, which can lead to more business. A business investment can add connections, knowledge and growth through collaboration.
“CVC delivers more than just cash,” Rundall explains. “Your traditional venture investor provides strategic guidance through the board, but essentially it’s about the cash investment and maximizing it [that].
“That is still good for the company, because it is in everyone’s interest. You grow this idea together and it’s a partnership. CVC brings something slightly different. Not only is that the case, but there is also a double benefit for the parties involved. In a well-structured business deal, there is something besides the money that is mutually beneficial.
“Whether that’s commercial synergies, because the company has a more advanced, established back office that they can use to grow the business, or because they have more mature policies and understand how the market works. [Perhaps] the startup is doing something that the CVC tried to do but couldn’t find a way to make it work.
“You get this very interesting crossover of a large company and a small, dynamic company coming together to solve each other’s problems.”
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What should start-ups pay attention to?
Typically, CVC is mutually beneficial for both companies and startups. However, in rare cases, companies want to support start-ups with the aim of acquiring them later on favorable terms. While this is not always the case, it should be something you are aware of early on as many consultants advise against agreeing to it if it is stated in the contract.
“You need to make sure you’re in a relationship for the right reasons,” Rundall advises. “That’s not just why you take money from them, but why they invest in you. Those points must match.
“The [deals] that haven’t gone so great are the ones that didn’t have the same stakes to begin with, or weren’t completely transparent about what they were trying to get out of it. Companies that are just looking for cash and get an offer from a CVC and say, “Well, it’s just cash like any other VC,” I think they may be underestimating the size of the relationship that the CVC is looking for is.
“In addition, I think there has to be an element of personal chemistry. If you don’t have that personal chemistry, it’s difficult to build the relationship – this is a relationship-driven market.”
Case study
BP’s venture capital arm, BP Ventures, plans to invest $200 million in disruptive green energy companies this year.
The company is dividing its strategy to reduce manufacturing emissions to zero by 2050 into what it calls five “transition growth engines”: bioenergy, electric vehicle charging, convenience, hydrogen and renewables and energy.
BP wants to invest in start-ups that fall into one of these categories. “Investing in start-ups is a great way to give us insight into what some of the future disruptive opportunities could be,” Gareth Burns, head of BP Ventures, told The timesstating that the CVC wants to support start-ups developing new technologies that have the potential to scale up reasonably quickly and are looking for an energy business partner.
Which companies fit best with CVC?
Crucially, the start-up must already produce technology that is relevant to companies.
“Businesses that are already generating revenue are generally better suited to CVC than those that are in the early stages,” says Ian Cooper, head of CVC Europe at National Grid Partners. “Corporate business units enter into dialogue with companies because they are looking for a solution to a business problem. And usually they want that solution now.
“Companies that are already generating revenue tend to be more successful in their business-level operations. Their product is generally more mature, their processes more structured and their balance sheet stronger.”
Besides making everything work on paper, Rundall says almost any business can benefit from CVC, but there needs to be an element of personal chemistry. “You have to make sure it’s the right relationship for your business… you have to share the same dream,” he says. “At CVC this may be exaggerated because it creates a closer relationship.
“You have to take into account where you are going as a start-up, what your journey will look like and how you will get there. Can the company accelerate growth or is it just another money investor that comes with all those extra things you have to do.
“It’s about being transparent with each other from the start. What do you as a company want from them and what do they want from you? Make sure you have that conversation right at the beginning.
How can you obtain business capital?
According to Cooper, most successful CVCs approach deals in a way that is not much different from financial VCs. “We have similar deal sourcing mechanisms, similar reflexes when it comes to evaluating the financial merits of a deal and similar expectations regarding deal terms and financial performance,” he says. “So if the company is seen as attractive by financial venture capital funds, it is likely that a CVC will also find it an attractive deal.”
However, unlike standard venture capital, companies typically have an affiliation with the CVC. In other words, a start-up must serve a strategic purpose for the large company.
“The reality is that most companies making CVC investments have some sort of relationship with the company before they made their investment,” Rundall explains. “Either because they were already doing something together, or because the big company is one of their key customers or key suppliers and then they realize there are bigger and better things they can do together. In the CVC market, it is less common for it to be a speculative pitch deck.”
An alternative is to look at incubator programs run through companies. Examples of incubator programs include Founders Factory, which matches startups with corporate partners, and Plug & Play Ventures, which manages more than 100 industry-focused accelerator programs.
“Startups interested in CVC funding should first assess whether their product or technology is relevant to the business and, if so, reach out as part of their normal investment round activities,” Cooper concludes. “Today’s CVC is much more advanced than the CVCs of yesteryear, and there is no black magic involved. If you have great technology and a great company, contact us!”
More about venture capital for companies
Active UK venture capital firms – Google, BP and Unilever all have their own CVC divisions supporting UK businesses. These are the ones operating in Britain and what they are looking for
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