Venturing into Corporate Investing

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CVC Map

You might have read an article recently that Apple buys a company every month. If you have as much money on your balance sheet as most countries have in their central reserves, what do you do with it? You could copy Airbnb and start an internal hedge fund (that purportedly generates $5M a month!!), you could emulate American Airlines and spend $12.4BN in 5 years on stock buybacks (FYI this didn’t end so well) … or, you could follow the vogue and get venturing!

According to CB Insights, there were over 970 Corporate VC (CVC) funds active last year, investing just over $73BN across around 3300 deals .

Not everyone thinks they have a place. In fact, here’s a short and entertaining clip of Fred Wilson giving his opinions on corporate investing. 

We love CVCs at swiftraise. They offer a unique value proposition in the funding landscape, often writing smaller tickets in late-stage rounds. It’s unlikely you’d find a VC fund that would invest less than $5M in a Series C round – this is fairly common for CVCs.

But boy oh boy do we HATE the acronym. In fact, it’s one of the worst acronyms around, painting a picture that all corporate-backed funds are the same, or all fall into the same class.

The classic picture of a large business investing from their balance sheet into disruptive, value-add startups appears to be becoming a rarer structure. In fact, there are a few corporate-backed funds that prefer us not to associate them with the CVC title all together (HV, Axa Venture Partners, Next47, and there are more). 

But as we all know, complaining is useless without a solution. So we’ve racked our brains to see if we can add some flavour to the corporate VC world with some tasty new acronyms of our own. 

And we’ve come up with 3 distinct groups:

CVCs – the classics. 

We may not like the acronym, but it for sure has a place. Balance sheet investing in startups that operate in / disrupt their main industry. Good examples – ABB Technology Ventures, Cemex Ventures

SVCs (Strategic VCs) – the newcomers. 

Raise a more classic VC fund structure, but still focus on making strategic investments. Invest in the core areas of the parent lender, but also in other fields where they can add value through network or partnership opportunities. Good examples – Mouro Capital (Santander), Unilever Ventures

cVCs (Pretty much VCs) – the next gen. 

Raise funds, sometimes even from multiple LPs. They don’t always make investments aligned to the industry of their parent lender (the lowercase ‘c’ an homage to this corporate <> investor autonomy), and have the ability to invest purely for financial ROI. Good examples – HV (Holtzbrinck), NGP Capital (Nokia)

CVC Mind Blown
Credit – Antonio Centeno (RMRS)

How would corporate venture look with our new breakdown?

We pulled together research from top corporate VCs we polled or recently spoke with to see what’s going on. 

1. There’s a clear division of Balance Sheet (B/S) investors and Independent Funds

Balance Sheet Investors Vs Fund
B/S21
Fund19

In fact, it’s almost a 50/50 split, and that was very much not designed from our side. Of the 40 we collected data from, 21 invest from the B/S and 19 have a fund. 

What’s interesting are the numbers around industry alignment and strategic focus. We’d have expected a higher rate of industry alignment for classic CVCs (i.e. they exclusively invest in the core business areas of the parent company – think Telco giants investing in Telco innovators, Pharma giants investing in Health and MedTech for example). 

But of the 21 B/S investors, only 10 told us they were principally industry focused. And that’s quite a key component of what we would want to class as the old school, classic CVC.

What is less surprising, is that there was 100% strategic focus for B/S investors – regardless of the industry they invested in, there needed to be some strategic angle too (like the parent company being a potential customer for the startup). 

But if we are saying only 10 count as classic CVCs, what to do with the other 11 B/S investors I hear you say…

2. Strategic VCs are definitely a thing

Our initial thinking was to reserve the SVC label for corporate investors who had a classic fund structure, but it’s quite clear that B/S investors can also fall more appropriately into this category. What makes a classic CVC is the unique combo of B/S + industry focus. 

SVCs are born, and we already start with 11. As a class of corporate VCs it makes a huge amount of sense – in fact, it’s probably how they’d describe themselves.

So we turn to the 19 investors who don’t invest off the B/S. Surprisingly, there’s fewer SVCs than we would have anticipated. Of the 19, just over 50% have strategic alignment (and interestingly 7 are also industry focused). 

Fund Investors (19 in total)
Strategic Alignment10
Industry Focused7

So totting up, that’s 21 SVCs in total – 11 of which invest from a B/S, 10 invest from an independent fund. We’ll be digging more into the reasons behind this in coming articles to find out what advantages and disadvantages there are for both sides of the coin.

When we started this research, we didn’t expect this many cVCs – 9 in total. That might not seem like a huge amount (and I know some will say that 40 isn’t a very big sample size…true), but for almost a quarter of corporate venture funds to be completely autonomous of their parent company is unignorable. 

Not only do they invest from an independent fund (sometimes not exclusive to a single LP relationship), they also don’t invest with strategic alignment in mind. They are very much VC funds, and act like them in every way. The only difference is that the financial returns are normally just for a single lender (the parent company). 

And with the opportunity to be making amazing gains in venture capital, this definitely isn’t a CVC that’s just gone AWOL – it’s a considered strategy to focus on financial return in lieu of any other benefits.

What’s next?

Good question. A bit more research we think, focussing on each of our new classes. There are subtle differences between investors in each class as well (Not all SVCs are the same…), so it could get more complex. 

But our results here should help contextualise some corporate funds hatred of being labelled a CVC. Perhaps (and hopefully) being seen as an SVC or a cVC would be more palatable. 

But there is a bigger goal here, and that is to also help founders understand the kind of fund they are speaking to. If founders think all CVCs are the same, all after a buyout or some form of strategic relationship, they might miss out speaking to investors who actually would have been an ideal fit for their round. 

And sometimes we need semantic changes for that. 

Small changes we hope can have a big impact.

CVC Butterfly Effect

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