Over the past few years, corporate venture capital funding has steadily increased. Current numbers show that corporate venture capital (CVC) investment now accounts for about 25 percent of global deals, with numbers in North America and Europe consistently above 20 percent in the last few quarters. This is a level of corporate investment not seen since the dotcom crash and has the industry taking note.
While large tech companies are obvious CVC players, as innovation is key to their core business and continued expansion, we are also seeing an increase in corporate investment from companies in traditional industries like energy or industrial goods. Such firms are opening venture capital groups and supporting startups as a strategy to help weather digital disruption and the upheavals caused by emerging technologies.
Yet while corporate investment is up, many entrepreneurs are left to wonder whether CVC investment is an appropriate path for their startup. CVC has strong advantages for some startups – and can spell disaster for others.
Advantages of CVC funding
In addition to much-needed capital, investment from corporate venture capital groups can give startups a significant boost during their early stages. Corporations are looking to get new and innovative products and solutions out into the marketplace and supporting startups can help achieve that goal. The situation is a potential win-win.
One challenge that many startups face, especially with new technologies, is proper testing of their solutions within a “live” business environment. With CVC investment and involvement, the larger corporation can provide the perfect testing ground for the startup’s product. This is extremely important for startups developing products or services for B2B market. Startups can iterate their solution in real time according to real customer feedback, which accelerates development of both the business and the product and results in a solution that is a better market fit.
When working with a corporate venture capital group, startups also are often given access to the larger firm’s business partners and networks, which can open doors, extend reach and further accelerate the development process. Opportunities exist, too, to save money by taking advantage of the larger corporation’s procurement power.
Some say that CVC funding is often like a merger or a “marriage” rather than a traditional investment relationship, with a close connection forged between the startup and the funding company. For this reason, CVC funding is also an excellent direction for startups looking to be acquired.
Risks and challenges
No investment is without its risks. When pursuing or accepting CVC funding, entrepreneurs need to keep in mind that corporate venture capital groups will always be driven by their corporate agenda – and that agenda may come into conflict with the startup’s best interests. This conflict can play out in a number of ways, including restricting or slowing the startups’s expansion into external markets or efforts to keep a disruptive product or technology from being made available to the funder’s competitors.
As CVC funding falls under the governance of the larger corporation, corporate venture capital investments have to comply with more restrictive rules than do traditional venture capital investments. Corporations are usually extremely focused on risk management, and they imply restrictive risk management policies on their CVCs. In addition, key decision makers for funding are generally top-level executives for these large organizations and are thus generally less accessible or available. This can result in delays for approvals and in scheduling, all of which may impact critical production timelines.
The onus is also on the entrepreneur to research any company’s venture capital arm rather than trust the corporate name. We have seen instances where corporate venture capital groups have been poorly set up or poorly managed, with individuals incentivized on results other than the startups’ performance. Entrepreneurs should look for a track record of success – or, in the case of a newly launched venture capital arm, ensure that there is an effective synergy between the startup’s solution and the funding corporation’s innovation strategy.
Great opportunity for the right firms
With CVC funding on the rise, more entrepreneurs are likely to attract potential corporate funders. For startups with a disruptive product for B2C market with worldwide potential, traditional venture capital funding might be likely the best route. But with the right product, industry and funding partner, a corporate venture capital funding may just be what savvy entrepreneurs need to get ahead.
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As head of the TMT sector in Central & Eastern Europe, Jerzy has led several strategic and operational consulting projects for clients across nearly 20 countries. He also leads the Digital & Innovation initiative at KPMG in Poland. In this role, he is responsible for developing advisory services for R&D and innovation management, as well as for digital startups. He was also the founder and CEO of a venture capital fund investing into digital startups and has worked in R&D for technology in Poland and the United States.
Quarterly global report on VC trends published by KPMG Enterprise.