Corporate venture capital (CVC)
Finance from large corporates. Learn what it is, what businesses it suits and what CVC investors look for and offer.
What is corporate venture capital? +
Corporate venture capital (or CVC) is a subset of venture capital (VC). CVC funding comes from large corporates, who invest in smaller businesses that are relevant and beneficial to the parent group.
The corporate offers funding in exchange for a share in the business. As well as finance, the business can also access the expertise, network and contacts of the corporate group.
Businesses looking for CVC funding need to prove how they can help the big corporate through either market insight, market reach or innovative technology. Corporates will be aware of successful, disruptive businesses.
Why do corporates invest in businesses?
There are lots of reasons why CVCs look to invest, but three of the biggest drivers are as follows:
Can the business help the corporate understand how the market is innovating?
Has the corporate spotted an opportunity to help the business distribute its product and increase its reach?
Will the business help the corporate innovate with cutting-edge technology?
How is it different to venture capital? +
Where the money comes from
A venture capitalist (VC) is a third party who manages money on behalf of external investors. Corporate venture capitalists (CVCs) use money from the corporate to fund investments.
How long the relationship lasts
VCs invest in fund cycles of up to 10 years. CVCs often have shorter lifecycles.
Time to finance
VCs typically take six to 12 months to do a deal. With CVC, it can take around two to three months longer.
Expertise and risk
VCs can be investors by trade or they can have a sector background that means they understand the businesses they are investing in.
CVCs, however, are nearly always experts in their field, which can have benefits and downsides for you, as an entrepreneur. On the one hand, CVCs can bring vital knowhow to a business, but you should also be aware that you’re exposing your intellectual property (IP) or unique selling proposition (USP) to a channel competitor.
Why they’re investing
VCs invest in businesses that will provide a financial return. When a CVC looks for a business to invest in, they consider the return on investment (ROI) and whether the business will benefit its strategic capabilities. If the business won’t help develop its strategic capabilities, the CVC is unlikely to invest.
What are the benefits? +
You can access the knowhow of a big corporate and learn from its teams and networks.
From distribution networks to experts to partners, you can meet the contacts to help you take your business to the next level.
You can broaden the reach of your product and service.
By working with experts, you can tap into further innovation to develop your offering.
The CVC will try to convince the corporate to purchase businesses with potential. If you're an entrepreneur looking to exit your business, this can be very attractive.
What are the risks? +
Equity and growth
You are giving away a share in your business in return for finance. There is no guarantee that your business will grow and succeed because of the investment.
Intellectual property (IP)
As you're exposing your IP to a third party, you need to be comfortable that you have adequate IP protection.
Is it right for me? +
About your business
- Business stage: Any stage of growth
- Annual turnover: Depends on the business
- Sectors: All
- Regions: All
About the finance
- Purpose of finance: Acquisition, research and development
- Amount available: £1m or more, depending on the business
- Duration of finance: 3–5 years
- Cost of finance: No fees
- Time it can take to get finance: 6-12 months
How do I choose the right deal? +
Ask an expert: Tony Askew, founder partner at REV Venture Partners
Do your research on the firm
What’s their track record like? How long have they been around and how many businesses do they invest in? What’s their commitment to their businesses?
Make sure you’re aligned
Be certain that the investment team has the same views on the relationship as you do. Make sure they have the same ideas about how long the relationship will last. Ask your lead investor how they’re compensated and check that it’s linked to your success – that will tell you how committed they are to your business.
Think beyond valuation
Select the right partner, rather than choosing an investor based on a big valuation or because they’re the first person who approached you.
What do I need to consider? +
Terms of the deal
You must be very clear about what you’re giving up and what you’re getting in return, especially where blocking rights and intellectual property (IP) clauses are concerned.
Close commercial interests
Because the corporate has similar interests to your business, you must be sure that you’re working with someone you trust, to better protect your IP.
Be aware of ‘corporate roles’ and the potential that your lead investor may be planning the next move of their career at their organisation, rather than focusing on your business.
Because there is a crossover of interests between the CVC and your business, you should be prepared for a longer negotiation period and quibbles over small details.
How do I get it? +
Either the CVC or you, as entrepreneur, can make the first approach. Accelerators and meet-ups can be particularly helpful in this regard.
It often takes up to a year to do the deal, although this timeframe can differ depending on the circumstances.
The journey to securing corporate venture capital can be about proving how your business can help the corporate through market insight, market reach or innovative technology. Before you start, use this checklist to help identify some potential benefits and common pitfalls, and understand whether the process is something your business could achieve.
“When you look at corporate venture capital, chemistry and alignment are everything. Entrepreneurs that focus on that first and foremost are the ones that tend to do better later on.”
|Tony Askew Founding partner, REV Venture Partners|
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