How can CVCs track and show the value of their portfolio?
By Early Metrics Team - 30 June 2020
By Arthur Puig, Associate VC Analyst at Early Metrics
As the coronavirus pandemic brings a new era of economic uncertainty, more and more entrepreneurs are seeking funding from corporate venture capital (CVC) to make up for their lack of cash and increase their chances of survival. In a Belgian study conducted in April with 980+ startups interviewed, half of them declared that they will be out of cash in September 2020. For entrepreneurs, these evergreen investors have an edge over traditional VC funds as they can also facilitate long-term contracts with their parent companies.
Meanwhile, global VC activity has also been negatively affected by Covid-19. Indeed, the overall number of deals has decreased from 1,751 in Q1 2019 to 1,337 in Q1 2020.
The crisis has forced large corporates to cut budgets for their innovation initiatives as well as adjust their investment strategies. For instance, Total Group, which has a CVC arm, has announced to cut 20% versus its pre-crisis investment at a company level.
Proving the value of their portfolio is therefore paramount for CVCs to protect their activity. Below we share some key factors to take into account when measuring the value of a CVC portfolio.
Where does the value lie in a CVC portfolio?
CVC funds have a different definition of value than traditional investors. Indeed, while they are interested in an investment return (business as usual), the main value lies in the potential synergies between their parent company and the innovative players that they will be able to bring from each of their investments.
Measuring the value of their portfolio can, therefore, be done through a financial valuation of each venture. But this should also be complemented by an assessment of the breakthroughs brought by the startups. As they are evergreen, CVCs are not under pressure for a quick exit so they are more concerned about the quality of the services or goods of the portfolio startups than by their potential exit valuation. It’s important to note that this can bring complexity when there are other investors around the table with conflicting or differing interests.
As CVCs are interested in meeting milestones in the technical roadmap, they can value their portfolio in relations to their R&D advancement: valuing the IP, ramp-up speed, number of features… CVCs often invest in startups that have already reached a fairly advanced degree of maturity, meaning post-series A and with a stable product or MVP. Indeed, in the US in S1 2019, the average amount invested was approximately $40m per deal ($30.7bn poured in 770 different deals) whereas the average Venture Capital deal came to $20m ($130bn invested in 5,900 deals).
As the corporates are often users of the startup solutions, they can also ask their internal workforce to give them first-hand feedback on added new features. This provides them with better insights into the development stage of the startups in their portfolio than traditional VCs would have.
Moreover, as large corporates are eager to keep an edge on their competition, CVCs could value competitive advantages brought by the startup and its innovation, such as the performance increase resulting from the implementation of a startup’s product.
Frequently, large companies also draw group-wide goals to give long term impetus to their employees and a common direction to their different subsidiaries. Invested startups as close partners can be aligned with this global strategy. This kind of alliance gives more dynamism to their strategy and brings credibility to the parent group in its ability to have a proper impact.
How can CVCs showcase the value of their portfolio?
Large corporates plough millions into their communication, but few dedicate a significant amount to promote their CVC activities. Communicating internally and externally on their startup portfolio can be mutually beneficial for the parent company and the startups.
From an external point of view, by showcasing their support to exciting startups, a CVC can enhance the innovativeness of the parent company’s brand image. For example, Total Group has been actively positioning its brand in the renewable energy space which is why its CVC arm has invested in Sunfire – a German startup specialised in transforming CO2 into hydrogen, syngas and liquid fuels. Leveraging this investment could, therefore, prove to customers that they really are taking concrete steps in their renewable energy transformation efforts.
On the other hand, internal communication about the portfolio can foster more openness to innovation in the company culture and increase the chances of business unit buy-in of the startup products.
To show the value of their startups, they could use metrics relating to the direct impact that has been seen by the parent company thanks to the startups’ solutions. These metrics could include the number of users gained, the number of times the solution was used internally, the value of practical use cases within the parent company, the time saved by employees…
Moreover, CVCs should show the value that they bring to the startups, beyond financial support. As funds compete for the best in class investment targets, they need to demonstrate what their synergies bring to their startups in portfolio (number of contracts, number of products bought by the parent company, etc.). Beyond the figures, they could showcase how the group is partnering with small ventures to meet its strategic goals.
How can CVCs benefit from partnering with ecosystem third parties?
To detect new trends and opportunities fitting with their investment criteria, CVCs can greatly benefit from specialised external services, such as the tech consultancy firm Sia Partners. Furthermore, to get an updated financial overview of their portfolio, using continuous analysis by an unbiased external player can provide more transparent and representative results. For instance, Early Metrics offers startup scouting alongside long-term portfolio tracking services to funds.
Then, to reap the fruit of their VC arm’s work, parent companies should naturally aim to implement POCs and enhance synergies with their invested startups. Deployment is one of the riskiest parts of corporate-startup collaboration. So, here again, third parties that have built expertise and processes to this end can provide valuable support. Our partner White Space, for example, is specialised in innovation implementation within large groups. They can, therefore, accelerate and facilitate technical partnerships between small ventures and corporates.
To summarise, the valuation of a CVC portfolio can be carried by:
– Conducting regular financial valuation updates, where the enterprise value of their invested startups is measured by financial experts
– Assessing breakthroughs from the technical roadmap, where the value of each new feature is taken into account
– Assessing the competitive edge brought by the investee, such as the number of users gained, performance improvements compared to the competition…
– Assessing the startup’s alignment with the corporate strategy, to demonstrate the potential for long term synergies.
Finally, third party experts in the innovation ecosystem, such as Early Metrics, can be helpful for CVCs to continuously and objectively assess these different values in their fast-growing startups.