After a decade of easy money, start-ups are suddenly faced with a strange new reality: funding is drying up. Global venture capital funding fell 23% to $108.5 billion in the second quarter of the year, the second biggest drop in a decade. Although the figure is still higher than levels seen before the pandemic, entrepreneurs could be forgiven for feeling more anxious about their business being cut off from financial support.
The landscape does have its silver lining though, namely the rise of corporate venture capital (CVC). Between 2010 and 2020, the number of private investors increased more than sixfold to more than 4,000. Collectively, they invested a record US$169.3 billion in 2021, up 142% from 2020 Even though investment appetite cooled in the first quarter of this year, there were a record 1,317 CVC-backed deals. However, funding fell 19% to $37 billion.
CVCs offer funding, access to resources such as experienced business unit leaders, marketing and development support, and the halo effect of an established brand. But interested start-ups should be aware of the potential downsides. We conducted an in-depth survey of the HVAC landscape in conjunction with market intelligence firm Global Corporate Venturing. Our results show that more than half of the 4,062 CVCs that invested between January 2020 and June 2021 were doing so for the very first time, and only 48% had been in operation for at least two years at the time of the investment.
These HVAC newcomers may struggle to even understand venture capital standards. In a separate survey of global HVAC leaders, 61% said they didn’t feel senior executives at their parent company understood industry standards. Many CVCs can also be more impatient than traditional VCs for quick returns.
Finally, existing investors in a startup may be hesitant to have a CVC on board. One founder we interviewed explained, “We had to turn down a CVC because our existing investors thought engaging them would dilute exit returns and lead to a negative perception of the eventual exit.”
How can entrepreneurs decide if corporate finance is right for their startup? If yes, which HVAC? The first step is to determine if the primary purpose of the HVAC you are considering fits your needs.
Types of HVAC and their purposes
CVCs can be categorized into four distinct objective categories: strategic, financial, hybrid or transitional. A strategic CVC prioritizes investments that directly support the growth of the parent company. An example is the eponymous German chemical and consumer goods multinational Henkel Ventures.
“We don’t see how we can add value as a financial CVC,” says Paolo Bavaj, Henkel’s Head of Corporate Venturing for Germany. “The motivation for our investments is purely strategic, we are here for the long term.”
This approach works well for start-ups that need a longer-term perspective. Taymur Ahmad, CEO of nanotech start-up actnano, told us he opted for CVC over venture capitalists because he felt he needed “patient and strategic capital”. to guide his business through an industry fraught with supply chain, regulatory and technical challenges.
Financial CVCs, on the other hand, aim to maximize the return on their investments. These funds generally operate much more independently of their parent companies and their investment decisions favor financial returns rather than strategic alignment. Strategic collaboration and sharing of resources with the parent company is limited. As Jim Adler, founding CEO of Toyota Ventures, said, “Financial performance must precede strategic performance”.
A financial CVC is generally suitable for start-ups that have less in common with the parent company’s mission and/or have less to gain from the resources it has to offer. In general, these start-ups are only looking for financial backing and tend to be more comfortable being evaluated on their financial performance first and foremost.
The third type of CVC takes a hybrid approach, prioritizing financial returns while adding substantial strategic value to their portfolio companies. These CVCs have looser ties to their parent companies to enable faster, finance-focused decision-making, but they still provide parent company resources and support as needed.
Hybrid HVACs generally have the broadest market appeal. For example, Qualcomm Ventures offers its portfolio startups significant opportunities to collaborate 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 longer-term, more strategic perspective to support its investments.
Since its inception in 2000, Qualcomm Ventures has completed 122 successful exits, including two dozen unicorns (start-ups valued at over $1 billion). As Vice President Carlos Kokron explained, “We’re here to make money, but also to look for start-ups that are part of the ecosystem…start-ups that we can help with product or marketing operations.”
Finally, some CVCs are in transition between a strategic, financial and/or hybrid approach. Entrepreneurs considering such CVCs need to be aware of how the potential investor they approach today may change tomorrow. For example, in 2021, Boeing announced that, in an effort to attract more outside investors, it would transform its CVC strategic arm into a more independent, finance-focused fund.
Read also: Founder or investor, who should be the “guardian” of a company?
Due Diligence: A Step-by-Step Guide
After choosing the right type of HVAC for your startup, here’s how to determine if a specific HVAC fits your needs.
1. Explore the relationship between the CVC and its parent company
Speak with parent company employees to learn more about the CVC’s internal reputation, its connectivity within the organization, and any KPIs or expectations the parent company has for its venture capital arm. An outfit with KPIs that require frequent knowledge transfer between the CVC and the parent company might not be the best fit for a founder looking for unconditional capital, but it might be perfect for a start-up. -up looking for hands-on experience. corporate sponsor.
To get a sense of the relationship between the CVC and the parent company, ask questions that explore how the CVC has been able to convey its vision internally, the breadth and depth of its connections with the different divisions of the parent company, and if the CVC will be able to deliver on the internal network you require. You will also want to ask how the parent company measures the success of the CVC and what types of communication and reporting are expected.
Tian Yu, CEO of aviation startup Autoflight, explained the importance of conversations with company employees. “We met with the investment team, key employees in the business groups we care about, and got a sense of how a collaboration works,” he said. “This series of pre-investment meetings only reinforced our confidence that the CVC cared about our project and would help us accelerate our journey.”
2. Determine CCV structure and expectations
After determining the CVC’s place within its home organization, you also need to consider the unique structure and expectations of the CVC itself. Is it independent in its decision-making, or closely tied to the parent company, perhaps operating under the aegis of a strategy or corporate development department? If the latter, what strategic objectives is the CVC supposed 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 on to its portfolio companies and what are its expectations regarding exit times and results?
Bart Geerts, founder and CEO of Healthplus.ai, said his company declined a CVC because “we felt it limited our exit options in the future”.
3. Talk to everyone you can
Make sure you have the opportunity to speak with key CVC and parent company leaders to understand their vision and culture. Most importantly, reach out to the CEOs of one or two of the companies in the CVC’s existing portfolio. These conversations can mean the difference between successful collaboration and complete frustration.
One entrepreneur we interviewed explained that his team “loved the pitch from a potential CVC investor…but meeting with the board was an eye-opening experience as their questions highlighted the risk-averse nature of the company. ‘company. We didn’t make the deal. »
To conclude, CVCs can bring substantial resources and support to the table, but start-ups would be wise to screen potential partners carefully – even in a lukewarm investment climate.
This is adapted from an article published in Harvard Business Review.
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[This article is republished courtesy of INSEAD Knowledge
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