Venture capital comes in different sizes. We have operator VCs on one side, and on the other, we have pure financial investors. Then, we have Corporate Venture Capital (CVC) firms—venture capital divisions of big corporations.
Most big tech companies, including Intel, Google, Microsoft, Dell, Facebook, etc., have a CVC fund, and invest in startups for mainly two reasons:
- Strategic reasons: Corporations invest in startups that are either building products that they want to create in the future or can complement their existing products. Although they are fine making money on these investments, getting a good return on capital is not the primary motive.
- Financial reasons: Many big corporations also invest in startups purely for financial reasons. They believe they can get a better return than other VCs in certain sectors because of their expertise in manufacturing, supply chain, distribution, and branding.
Thus, instead of investing through other VCs, many corporations create their venture capital fund to invest in startups for these reasons.
But the big question is—what is it in for startups? Why should startups prefer corporate venture capital over regular VC?
CVCs have a few advantages over traditional VCs.
Venture capital is supposed to be patient, long-term capital. VCs know startup investments take time to give returns. But even the best and biggest VCs have a fund timeline.
They have to return the capital to their investors, also known as LPs, within 10 years. When a VC fund invests in a startup towards the end of its fund lifecycle, there is always some pressure on the startup to give an exit to the VC.
A lot of this growth, an at-all-costs strategy, is driven by the VC. They force founders to chase revenue growth because it leads to valuation growth.
Early-stage VCs get an exit (sell their shares in a startup at a higher valuation) when a larger VC buys their stake. But we all have seen how this growth-at-all-costs plan can lead to a disaster when the market worsens and venture funding dries up.
Startups hire so many people to chase growth that they have to do mass layoffs to survive. Sometimes, they go bust when they can’t find new investors.
Here’s when corporate venture capital comes in handy. If a corporation invests in some startup for strategic reasons, the founders don’t have the pressure to grow quickly.
CVC funds don’t have a fund lifespan. They don’t have to return a certain of their LPs within a certain time frame. These companies are answerable to their boards and shareholders.
But, in most cases, their total investments in startups are not a big part of their capital. Hence, they don’t face shareholder pressure for a quick exit on their startup investments.
As long as their portfolio startups are making decent progress on product development and sales, the CVC management is fine with letting the founders grow the company.
An even bigger advantage of CVC is the other benefits they bring to the table. A financial VC invests the money and forgets about it. Operator VCs have a team of ex-founders who help their portfolio startups in hiring, fundraising, and strategy. However, they don’t have the infrastructure of a CVC.
CVC companies are massive corporations with a global presence. They invest in startups when they see some synergies with their existing businesses. Further, startups can benefit from the wide network and expertise of these corporations.
CVCs can be a huge help to hardware startups as they can help them in mass producing their products through their manufacturing, vendor, and supplier network.
Then, they have massive sales and distribution networks, which can help startups sell their product across the globe and help them expand globally through their worldwide presence.
They understand the challenges and pitfalls of global sales and distribution, and their experience can be invaluable to their portfolio startups.
But everything is not rosy with CVC.
Sometimes, CVCs invest in startups because they see a potential competitor. They invest in early-stage startups to acquire them if they reach a certain scale. They can either integrate the startup’s products under their brand or close their business, which limits the founders’ upside as they can’t create a billion-dollar company, even when their product has potential.
Pushkar Singh is a Partner at Tremis Capital.