Already in 2015, about 50% of American Corporates had Corporate Venture Capital (CVC) entities and spent €6,9 billion. The trend is now confirming itself as we have observed CVC gaining great momentum not only in the U.S. but also in Europe. Indeed, in Q3 2018, corporate investment accounted for nearly 24% of all venture capital deals in Europe, according to the KPMG Venture Pulse report.
With CVCs becoming key stakeholders of the Private Equity ecosystem, the IPEM, leading private equity trade show in Europe, had to give room for discussion on the topic. That is how the first Corporate Investor Summit was born, with the support of Early Metrics.
On January 23rd around 40 leading CVC and venture capital funds (including L’Oreal, Seb Alliance and Bertelsmann) gathered to share their experience and insights into corporate investment strategy. Here are some of the highlights and key lessons from the event.
Is CVC replacing M&A when it comes to innovation?
Over the last year, we saw a growing involvement of corporations in innovation and startup investment. As stated by Michael Brandkamp, Managing Director at High-Tech Gründerfonds, “the growth of direct investment and the growth of corporate LPs investing in VC funds is proof of this trend”. The CVC strategy can be ten times less expensive than to develop a project internally, while it also provides a competitive advantage towards other corporate competitors. As Joeri Kamp, former Managing Director Eneco Smart Energy, expressed in a KPMG report dedicated to Corporate-Startup collaboration: « We invest in start-ups more for strategic reasons and less for the creation of financial value ».
Direct or indirect investment: which strategy for which objectives?
When looking to invest in technology startups, any corporate should clearly define its objectives and operating model. Then, one question follows: is it better going down the direct investment path or the indirect one? As explained by Minoo Zarbafi, Vice President Bertelsmann Investments, it’s crucial to adapt the strategy to the final objectives of the company. For instance, Bertelsmann chooses its investment approach based on the strategic relevance of the market they are investing in as well as taking into consideration its corporate footprint and positioning in the market. It both invests directly via local teams, as well as via local funds.
The strategy can also depend on the phase of the investment journey or on the company’s DNA. In the first case, you might consider starting with indirect and then going direct. In the second case, and particularly if your company has a strong M&A culture, you will be better off adopting a direct investment strategy.
Workshop – Financial and Corporate Investors: the (im)possible love?
There are many factors that make the relationship between financial and corporate investors difficult. While investors aim for short to mid-term outcomes (generally a successful exit at 5 years), corporates are often more interested in long-term results. This divergence in objectives can lead to thorny issues and even hurt the venture’s chances of success if incompatible milestones are expected by the various investors.
Here are a few tips to make it work that were discussed during the workshop:
1 – A misalignment in goals is one of the main reasons why collaborations break apart, so it’s essential to be clear from the beginning and work towards objectives that are shared by all.
2 – Writing a side letter can be a good way to align objectives and ways of working.
3 – Having a single point of contact can keep you from losing time and prevent misunderstandings.
4 – Cultural barriers can also get in the way. This gap is thankfully closing up because of a common learning curve, but it’s still important to stay open-minded and sensitive on potential cultural bias.
Is corporate investment beneficial to startups?
Corporate investment can be a great resource for startups not only in terms of funding but also in terms of mentorship and scaling opportunities.
However, CVC should come with a few warnings and disclaimers:
– It’s not the best option for very early stage startups
– It should not be the only type of investor involved
– It’s not strongly correlated to a successful exit
– CVCs generally have a global scope in mind, while VCs think more locally
– If you do choose a CVC, don’t expect a higher valuation.
Overall having a mix of both VC and corporate investors can allow startups to benefit from the different expertise and sets of skills. Interestingly the gap in skills and goals between these two types of investors is slowly closing with the normalisation of the interactions between VC, CVC and startups.
Nevertheless, too many cooks can spoil the broth and it can be more complex to align goals with more people at the table. It’s therefore important to make sure tasks are divided in the most efficient manner and one doesn’t impede on the others’ engagement in the startup’s journey.