Traditionally, startups have looked to three primary sources for funding: venture capital firms (VCs), angel investors, and family offices. But in recent years, a fourth option has grown increasingly popular: corporate venture capital funds, or CVCs. Between 2010 and 2020, the number of CVCs grew more than six times to over 4,000, and these CVCs inked more than 2,000 deals worth $79 billion in the first half of 2021, surpassing all previous annual tallies.
These corporate investors offer not only funding, but also access to resources such as subsidiaries that can serve as market validators and customers, marketing and development support, and a credible existing brand. However, alongside this added value, CVCs can also come with some risk. To explore these tradeoffs, we collaborated with market intelligence company Global Corporate Venturing to conduct a quantitative in-depth analysis of the CVC landscape, as well as a series of qualitative interviews with both founders and CVC executives.
We found that of the 4,062 CVCs that invested between January 2020 and June 2021, more than half were doing so for the very first time, with just 48% having been in operation 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 decent chance that your potential investor has little to no experience making similar investments and supporting similar startups. And while more-experienced CVCs are likely to come with the resources and credibility that founders might expect, relative newcomers may struggle with even a basic understanding of venture norms.
Indeed, in a survey of global CVC executives, 61% reported that they didn’t feel like the senior executives of their corporate parent understood industry norms. In addition, because of their parent companies’ business imperatives, many CVCs may also be more impatient for quick returns than traditional VCs, potentially hindering their ability to provide long-term support to the startups in which they invest. Moreover, even a patient, veteran CVC can pose problems if other existing investors aren’t on board. As one founder we interviewed explained, “We had to turn down a CVC because our existing investors believed that taking them on would dilute exit returns and result in a negative perception on the eventual exit.”
Clearly, CVCs can be hit or miss. How can entrepreneurs decide whether corporate funding is a good fit for their startup, and if so, which CVC to pick? The first step is to determine whether the core objective of the CVC you’re considering aligns with your needs. Broadly speaking, CVCs can be sorted into four categories, with four distinct types of objectives: strategic, financial, hybrid, or in transition.
Four Kinds of CVCs
A strategic CVC prioritizes investments that directly support the growth of the parent. For example, Henkel Ventures is upfront about its focus on strategic rather than financial investments. “We don’t see how we can add value as a financial CVC,” explains Paolo Bavaj, Henkel’s Head of Corporate Venturing for Germany. “The motivation for our investments is purely strategic, we are here for the long run.” Similarly, Unilever Ventures 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, CEO of nanotechnology startup Actnano Taymur Ahmad told us that he opted for CVC rather than VC investors because he felt he needed “patient and strategic capital” to guide his business through an industry fraught with supply chain, regulatory, and technical challenges.
Conversely, financial CVCs are explicitly driven by maximizing the returns on their investments. These funds typically operate much more independently from their parent companies, and their investment decisions prioritize financial returns rather than strategic alignment. Financial CVCs still offer some connection to the parent company, but strategic collaboration and resource sharing are much more limited. As Founding Managing Director of Toyota Ventures Jim Adler succinctly put it, “financial return must precede strategic return.”
A financial CVC is generally a good fit for startups that have less in common with the mission of the parent company, and/or less to gain from the resources it has to offer. These startups are generally just looking for financial support, and they tend to be more comfortable with being assessed on their financial performance above all else.
The third type of CVC takes a hybrid approach, prioritizing financial returns while still adding substantial strategic value to their portfolio companies. Hybrid CVCs often maintain looser connections with their parent companies to enable faster, financially-driven decision-making, but they still make sure to provide resources and support from the parent 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 portfolio startups substantial opportunities for collaboration with other business divisions, as well as access to a wide array of technological solutions. It isn’t constrained by demands for short-term financial returns from its parent company, allowing the CVC to take a longer-term, more strategic perspective in supporting its investments. At the same time, Qualcomm Ventures still values financial returns, having achieved 122 successful exits since its founding in 2000 (including two dozen unicorns — that is, startups valued over $1 billion). As VP Carlos Kokron explained, “We are in this to make money, but also look for startups that are part of the ecosystem…startups we can help with product or go-to-market operations.”
Finally, some CVCs are in transition between a strategic, financial, and/or a hybrid approach. As the entire investor landscape continues to grow and evolve, it’s important for entrepreneurs to be on the lookout for these in-transition CVCs and ensure that they’re aware of how the potential investor they’re talking to today may transform tomorrow. For example, in 2021 Boeing announced that in a bid to attract more external investors, it would spin off its strategic CVC arm into a more independent, financially-focused fund.
Picking the Right Match
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 figure out whether a specific CVC is a good fit for your startup.
1. Explore the relationship between the CVC and its parent company.
Entrepreneurs should start by speaking with employees at the parent company to learn more about the CVC’s internal reputation, its connectedness within the parent organization, and the KPIs or expectations that the parent has for its venture arm. An outfit with KPIs that demand frequent knowledge transfer between the CVC and parent company might not be the best match for a founder looking for no-strings-attached capital — but it could be perfect for a startup in search of a hands-on corporate sponsor.
To get a sense for the relationship between the CVC and parent firm, ask questions that explore the extent to which the CVC has managed to convey its vision internally, the breadth and depth of its links to the various divisions of the parent, and whether the CVC will be able to offer the internal network you need. You’ll also want to ask how the parent company measures the success of the CVC, and what sorts of communication and reporting are expected.
For example, Tian Yu, CEO of aviation startup Autoflight, explained the importance of in-depth interviews with employees across the business in guiding his decision to move forward with a CVC: “We met the investment team, the key employees from business groups that we cared about, and gathered a sense of how a collaboration would work. This series of pre-investment meetings only raised our confidence levels that the CVC cared about our project and would help us accelerate our journey.”
2. Determine the CVC’s structure and expectations.
Once you’ve determined the CVC’s place within its larger organization, it’s important to delve into the unique structure and expectations of the CVC itself. Is it independent in its decision-making, or tightly linked to the corporate parent, perhaps operating under the umbrella of a corporate strategy or development department? If the latter, what are the strategic objectives that the CVC is meant to support? What are its decision-making processes, not just for selecting investments, but for giving portfolio companies access to internal networks and resources? How long does the CVC typically hold onto its portfolio companies, and what are its expectations regarding exit timelines and outcomes?
For example, after Healthplus.ai Founder and CEO Bart Geerts delved into the expectations of a potential CVC investor, he ultimately decided to turn the funding down: “We felt that it limited our exit options in the future,” he explained, adding that CVCs can be more bureaucratic than VCs, and that for his business, benefits such as greater market access weren’t worth the downsides.
3. Talk to everyone you can.
Ultimately, the people are the most important component of any potential deal. Before moving forward with a CVC investor, make sure you have a chance to speak with key executives from both the CVC and the parent company, in order to understand their vision and culture. It can also be helpful to chat with the CEOs of one or two of the CVC’s existing portfolio companies, to get an inside scoop on issues you might not otherwise uncover.
To be sure, it can sometimes feel uncomfortable to ask for meetings beyond an investor’s typical due diligence process — but these conversations can be pivotal. For example, one entrepreneur explained that their team “loved the pitch from a potential CVC investor, there appeared to be a great match between our strategic objectives and theirs. We got along well with the CVC lead, but meeting the board (which was not intended to be a part of the process) was an eye-opening experience as their questions highlighted the risk averse nature of the company. We did not proceed with the deal.” Don’t be afraid to push beyond what’s presented in a pitch and ask the hard questions of a potential partner.
As CVCs become more and more prevalent, entrepreneurs are likely to be faced with a growing number of corporate funding opportunities alongside traditional options. These investors can bring substantial value in the form of resources and support — but not every CVC will be the right fit for every startup. To build a successful partnership, founders must determine the CVC’s relationship to its parent company, the structure and expectations that will guide its decision-making, and most importantly, their cultural and strategic alignment with the key people involved.
Authors’ Note: If you have experience engaging with CVCs, please consider contributing to the authors’ ongoing research by completing this survey.