Corporate venture capital

Corporate venture capital (CVC) is a type of investment strategy where a large corporation invests its own capital in external, usually smaller, startups or emerging companies. CVC involves a company taking an equity stake in a startup company and providing resources such as capital, managerial expertise, and access to its customer base in exchange for a share of the startup’s profits. The corporation invests in the startup as part of its long-term strategy of staying ahead of competitors and identifying new opportunities to grow its business. CVC strategies are typically formed as joint ventures between the two companies, or as a limited partnership between the corporation and the startup.

Example of corporate venture capital

• Alphabet Inc. (formerly Google) is a prime example of a successful corporate venture capital (CVC) strategy. Alphabet has invested in numerous startups and emerging companies, such as Uber, Slack, and Airbnb. In some cases, Alphabet has taken an equity stake in these companies, while in others it has provided resources such as marketing, technology, and managerial expertise in exchange for equity.
• Microsoft is another example of a successful CVC strategy. Microsoft has invested in a variety of startups such as LinkedIn, GitHub, and DocuSign. Microsoft has also provided resources such as technology and customer access to these startups in exchange for equity.
• Amazon is another example of a company that has utilized CVC strategies. Amazon has invested in numerous startups such as Deliveroo, Twitch, and PillPack. Amazon has provided resources such as access to its customer base, technology, and logistics expertise in exchange for equity.

When to use corporate venture capital

Corporate venture capital (CVC) strategies can be used in a number of different scenarios. CVC can be beneficial for a corporation looking to identify and capitalize on new markets and opportunities. It can also be useful for a startup seeking access to resources, capital, and customers that it may not otherwise have access to. Here are some of the most common applications of CVC.

• Identifying and capitalizing on new markets: Corporations can use CVC to identify and invest in new markets or opportunities. This can help them stay ahead of the competition and gain a foothold in emerging industries.
• Advancing scientific research: Corporations can use CVC to invest in scientific research, enabling them to access and utilize cutting-edge technologies or products that may not otherwise be available to them.
• Developing new products and services: Corporations can use CVC to invest in new products or services, enabling them to develop innovative solutions to meet customer needs.
• Accessing new customers and markets: Corporations can use CVC to access new customers and markets, giving them access to a larger customer base.
• Supporting promising startups: Corporations can use CVC to invest in promising startups, helping them to develop their ideas and realize their potential.
• Protecting Intellectual Property: Corporations can use CVC to protect their intellectual property by investing in startups that are developing similar technologies or products.

Types of corporate venture capital

Corporate venture capital is an important tool used by large corporations to invest in external startups and emerging companies. There are several types of CVC strategies, such as joint venture, limited partnership, venture capital fund, and direct investment.

• Joint Venture: A joint venture is a partnership between two or more entities, whereby the corporation and the startup both contribute capital and share profits. In a joint venture, the corporation and the startup share responsibility for the operations and management of the startup.
• Limited Partnership: A limited partnership is a form of corporate venture capital in which the corporation is a limited partner and the startup is the general partner. The limited partner contributes capital and provides managerial expertise, while the general partner is responsible for the day-to-day operations of the startup.
• Venture Capital Fund: A venture capital fund is a pool of money managed by a professional venture capital firm, which invests in startups and emerging companies. The venture capital fund typically takes a minority equity stake in the startup and provides capital, management expertise, and access to its network of contacts.
• Direct Investment: Direct investment is a form of corporate venture capital in which the corporation invests its own capital directly into the startup. This type of CVC is often used to gain access to new technologies or to develop strategic partnerships.

Steps for using corporate venture capital

There are several steps to corporate venture capital, including:

• Identifying and Evaluating Potential Investment Opportunities - This involves researching the markets and sectors in which the corporation is interested and assessing which companies could be a good fit for the corporation’s investment strategy.
• Establishing Investment Criteria - It is important to establish criteria for what type of investments the corporation will be willing to make and the expected return on investment.
• Negotiating and Structuring the Investment - Once an investment opportunity has been identified and evaluated, it is then important to negotiate the terms of the investment and structure the deal to ensure that the corporation's interests are protected.
• Executing the Investment - This involves making the investment, monitoring the investment, and providing support and guidance.
• Exiting the Investment - This involves determining when it is time to exit the investment, either through a sale of the shares or a liquidation of the investment.

Advantages of corporate venture capital

Corporate venture capital can provide many advantages to both the investor and the startup company. Some of the major advantages of CVC include:

• Access to capital: Corporations often have the financial resources to invest in companies that may not be able to access traditional sources of capital such as venture capital firms.
• Knowledge sharing: CVC can help startups access the knowledge and expertise of the corporate investor, which can help them navigate the complexities of launching and scaling a business.
• Increased visibility: Corporations can help startups gain access to their customer base, as well as increased visibility in the market.
• Risk diversification: CVC can help corporations diversify their investment portfolio and spread out risk.
• Long-term partnerships: Investing in a startup can help forge long-term partnerships between the two companies, allowing them to work together to create new products and services.

Limitations of corporate venture capital

Corporate venture capital can be a powerful tool for investing in innovative ideas, but it has its limitations. The following are some of the key limitations of corporate venture capital:

• Limited access to capital - Corporations typically have limited capital to invest and may not have the resources to invest in a wide range of startups.
• High return expectations - Corporations typically expect a high return on their investments compared to traditional venture capital funds, which can limit the number of potential investments.
• Conflict of interest - Corporate venture capital investments may create conflicts of interest between the corporation and the startup due to their different goals and objectives.
• Reduced ownership - Corporations may take a smaller ownership stake in startups than traditional venture capital funds, which can limit the company’s ability to influence the direction of the startup.
• Regulatory compliance - Corporations must adhere to regulatory requirements when investing in startups, which can constrain the types of investments they can make.

Other approaches related to corporate venture capital

In addition to corporate venture capital, there are several other approaches that can be used to create a successful relationship between a large corporation and a smaller startup. These include:

• Strategic investments - Here, the larger company invests in the startup in order to gain access to a particular technology or product, or to establish a strategic partnership that can benefit both companies.
• Joint venture agreements - Here, the larger company and the startup join forces to create a new venture that combines the strengths of both companies.
• Acquisition - The larger company may also choose to acquire the startup, which involves taking ownership of the startup’s assets in exchange for a financial consideration.

Corporate venture capital — recommended articles

Venture capital investments — Inorganic growth — Brown field investment — International joint venture — Types of acquisition — Strategic Buyer — Medium-sized enterprise — Financing of innovation — Small business owners

References

• Chesbrough, H. W. (2002). Making sense of corporate venture capital. Harvard business review, 80(3), 90-99.
• Chemmanur, T. J., Loutskina, E., & Tian, X. (2014). Corporate venture capital, value creation, and innovation. The Review of Financial Studies, 27(8), 2434-2473.