Corporate venture capital (CVC) is the investment of corporate funds directly in external startup companies.Chesbrough, Henry. Making Sense of Corporate Venture Capital . Harvard Business Review, 2002. CVC is defined by the Business Dictionary as the "practice where a large firm takes an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise; the objective is to gain a specific competitive advantage."" Examples of CVCs include GV, Intel Capital, and Salesforce Ventures.
Definition CVC refers to the investment of corporate funds directly in external startup companies. The definition of CVC can also be clarified by distinguishing it from other forms of investment. An investment made through an external fund managed by a third party, even when the investment vehicle is funded by a single investing company, is not considered CVC.Chesbrough, Making Sense of Corporate Venture Capital CVC is not synonymous with venture capital (VC); rather, it is a specific subset of venture capital.
In essence, Corporate Venturing is about setting up structural collaborations with external ventures or parties to drive mutual growth. These external ventures are startups (early-stage companies) or scaleups (companies that have found product/market fit) that come from outside the organization.Sridharan, Amit; Burgelman, Robert (2019). Overview of Corporate Venture Capital Stanford Business School Case Studies, 2019. Due to its hybrid nature involving both elements of corporate rigidity and startup culture, managing a successful CVC unit is a difficult task that involves a number of hurdles and often fails to deliver the expected outcomes.
Objectives
As Henry Chesbrough, professor at Haas School of Business at UC Berkeley, explains in his "Making Sense of Corporate Venture Capital" article, CVC has two hallmarks: (1) its objective; and (2) the degree to which the operations of the start up and investing company are connected. CVC differs from private VC in that, in addition to financial returns, it commonly seeks to advance strategic objectives. Strategically driven CVC investments are made primarily to increase, directly or indirectly, the sales and profits of the incumbent firm's business. A well-established firm making a strategic CVC investment seeks to identify and exploit synergies between itself and the new venture. The goal is to exploit the potential for additional growth within the parent firm. For instance, investing firms may want to obtain a window on new technologies, enter new markets, identify acquisition targets, or access new resources.De Kalbermatten, M. (2013). Corporate VentureCapital in Europe: Objectives, Characteristics and Performance. Saarbrücken, Germany: AV Akademikerverlag.
Financially-driven CVC investments are investments where parent firms are looking for leverage on returns. The full potential of leverage is often achieved through exits such as initial public offering (IPO) or sales of stakes to third parties. The objective is to exploit the independent revenue and profit in the new venture itself. Specifically for CVC, the parent company seeks to do as well as if not better than private VC investors, hence the motivation to keep its VC efforts "in house". The CVC division often believes it has a competitive advantage over private VC firms due to what it considers to be superior knowledge of markets and technologies, its strong balance sheet, and its ability to be a patient investor. Chesbrough points out that a company's brand may signal the quality of the start-up to other investors and potential customers; this may eventually result in rewards to the initial investor. He gives the example of Dell Ventures, Dell Computer's in-house VC division, which made multiple Internet investments with the expectation of earning favorable returns. Although Dell hoped the seed money will help its own business grow, the primary motivation for the investments was the opportunity to earn high financial returns.
Reaching strategic goals is not necessarily in opposition to financial objectives. As literature demonstrates, both objectives can go hand in hand and offer complementary motivations.Allen, S. A. & Hevert, K. T. (2007). Venturecapital investing by information technology companies: did it pay? Journal of Business Venturing, 22: 262–282. In the long run, all strategic investments produce financial added value. This is not to say that, occasionally the short-term concordance between financial and strategic objectives might be questionable. For instance, a strong focus on achieving short-term financial goals might have a counterproductive impact on the ability to achieve long-term strategic objectives, which would in turn reduce long-term financial returns.Ernst, H., Witt, P., Brachtendorf, G. (2005). Corporate venturecapital as a strategy for external innovation. R&D Management, 35: 233–242. In lieu of this dilemma, parent firms first screen venture proposals for strategic rationales. Then when an investment proposal fits strategic objectives, corporate firms analyze it according to financial investment standards, using methods analogous to independent venture capitalists.
A recent empirical study has examined the degree to which European incumbent firms emphasize on strategic and financial objectives. Results show that 54% of European parent firms invest primarily for strategic reasons, yet with financial concerns, 33% invest primarily for financial reasons with strategic concerns and 13% invest purely financial. None invest solely for strategic rationals. In comparison with an American study, results show significant differences in investment styles. In fact, 50% of US parent firms invest primarily strategic with financial concerns, 20% financial with strategic concerns, 15% purely financial and 15% purely strategic.McMillan, I., Roberts, E., Livada, V., Wang, A. (2008). Corporate venture capital: Seeking innovation and corporate growth. National Institute for Standards and Technology, US Department of Commerce As a rule, incumbent firms, whether European or American, invest primarily for strategic reasons.
The second hallmark of corporate VC investments is the extent to which companies in the investment portfolio are linked to the investing company's current operational abilities. For example, a start-up with strong links to the investing company might make use of that company's manufacturing plants, distribution channels, technology, or brand. It might adopt the investing company's business practices to build, sell, or service its products. An external venture may offer the investing company an opportunity to build new and different capabilities—ones that could threaten the viability of current corporate capabilities. Housing these capabilities in a separate legal entity can insulate them from internal efforts to undermine them. If the venture and its processes fare well, the corporation can then evaluate whether and how to adapt its own processes to be more like those of the start-up. Although it happens far less than commonly thought, the CVC parent company may attempt to acquire the new venture.
(1969~99) 20 Largest venturing firms (from Dushnitsky, 2006) 1. Intel 2. Cisco 3. Microsoft 4. Comdisco 5. Dell 6. MCIworld.com 7. AOL 8. Motorola 9. Sony 10. Qualcomm 11. Safeguard 12. Sun Micro 13. J&J 14. Global-Tech 15. Yahoo 16. Xerox 17. Compaq 18. Citigroup 19. Ford Motor 20. Comcast
Investing and Financing Types of Investing
By combining the two dimensions of CVC investing - strategic and financial objectives - four distinct investment motivationsRöhm, P., Köhn, A., Kuckertz, A. and Dehnen, H. S. (2017) A world of difference? The impact of corporate venture capitalists’ investment motivation on startup valuation . Journal of Business Economics. doi:10.1007/s11573-017-0857-5 and strategies can be outlined.
A. Driving Investments This type of CVC investing pertains to the investment that involves a strategic driver. Driving investments are pursued by CVCs for strategic alignment that is tightly linked between the investment company's operations and the startup company that is being invested in. The purpose of this investing option is to advance the strategy of the current business. The CVC looks for key growth areas within the startup companies and then hopes to combine them with the company's initiatives. Appropriately selected investing and alignment can benefit the investing company by furthering the corporate strategy. On the other hand, this could result in failure. Closely linked investments essentially roll into the current strategy in place. This would not be useful in dealing with already disruptive strategies in place, or in finding new ones when the investing company needs to update processes when trying to keep up with a changing environment. Thus, if CVCs are looking to “transcend current strategies and processes,” they would need to look to other investing strategies.
B. Enabling Investments Enabling investments are also made for strategic purpose, but in this case, they are not linked closely with the investing company's operations. The thought process is that a tight link is not necessary for a successful investment to help the investing company to succeed. Although this may seem counterintuitive, the idea is to take advantage of complementary products. Enabling investments complement the strategy of the current business. Ideally, the popularity of the investments will help to create demand for the investing company's products by stimulating the industry in which the products are used. The limits of enabling investments are that they will only be successful if they “capture a substantial portion of the market growth they stimulate”.
C. Emergent Investments While Emergent investments do not promote current strategies, they do link tightly with the investing company's operations. If the business environment or company's strategy changes, the investment could become strategically valuable. This design helps create a sort of option strategy that is independent of financial returns. Emergent investments allow investing companies to explore new untapped markets that they are unable to enter due to their focus on the current markets they serve. Investment products can be sold in new markets to help gather vital information that could not be otherwise obtained. If the information looks promising, the company could look to shift towards this new direction. Emergent investments are initially made for financial gains but could ultimately result in strategic gains as well. On the contrary, if they do not prove to be important for the company strategy, they should be left untouched to generate whatever financial returns possible. In summary, emergent investments require “balancing financial discipline and strategic potential.”
D. Passive Investments Passive investments are connected to neither the investing company's strategy nor their operations. Thus, these investments do not help the investing company to actively advance their own business and can only provide financial returns. Essentially, passive investments are no different from typical investments whose financial returns are contingent on the volatility of the private equity market. Due to the lack of any strategic advantages with this kind of investing, passive investments are not very practical or advantageous.
Stages of financing Corporate venture capital firms provide funding to startup companies during various phases of development. Each phase has its own financing requirements, and CVCs will often indicate the stage of financing needed and the types of investments they prefer to make. Later stages of financing usually mean less risky investments, and investment in these companies typically costs more because of higher company or product valuations.