Have you ever wondered what drives the decisions that Fortune 500 companies make when they invest in tech startups? It’s no secret that corporate investing and corporate venture capital (CVC) is playing an increasingly important role in spurring innovation and providing access to new markets for big businesses. But how does it work?
This post will explain how corporate venture capital works from the perspective of founders—including key insights on how and why some organizations offer attractive deals to growing startups and some of the investing company’s business practices.
To learn more about other terms commonly used in venture capital, check out our complete VC Glossary.
Corporate venturing, or corporate venture capital, is an increasingly popular practice among large companies looking to invest in innovative startup firms. It is the investment of corporate funds (by the investing company) directly in external startup companies (portfolio company).
These investments involve a joint agreement between the two entities and the acquisition of equity stakes by the larger company.
Corporate venture capital (CVC) is becoming an increasingly popular way for Fortune 500 companies to have an equity stake in innovative startups and gain access to new technologies and markets. There are several strategic and financial objectives why parent firms start a venture capital arm, including:
1) Access to emerging trends and technology: Innovative start up companies can provide corporate venture capital units with the opportunity to assess and invest in technology trends before they become mainstream. Investing in these technologies early on gives the parent company a competitive edge as they can use this technology for their products or services.
2) Equity ownership: By investing in startups through corporate vc, the corporate parent has the potential to benefit from the success of their investments without having to develop the technology in-house. This also allows corporate entities to gain equity ownership or have a seat on the board of rapidly growing startup companies.
3) Market access: Investing in external startup companies through corporate vc allows corporate entities to gain market intelligence and access potential customers that may be out of reach otherwise. Additionally, corporate entities can use their funds and resources to help drive partnerships between themselves and smaller firms that may not otherwise have had access to corporate clients.
4) Talent pipeline: One of the most overlooked benefits of corporate vc is its ability to act as a talent pipeline for corporations looking for skilled tech professionals. By investing in startup companies, corporate entities also have the opportunity to partner with entrepreneurs who have valuable skills or experience that can be beneficial for their operations.
5) Financial returns: Last but not least, corporate vc offers numerous financial returns when done correctly. Corporations can potentially earn financial returns through equity ownership or licensing fees associated with products developed by the startups they invest in. Additionally, successful investments may lead corporations to receive dividends when exits are achieved either through IPOs or acquisitions by other firms.
Ultimately, corporate venturing has become an important part of how many Fortune 500 companies operate today, providing them with access to innovative technology trends, equity ownership opportunities, market access, a talent pipeline, as well as potential financial returns when managed properly.
Startups and other early-stage companies may choose corporate venture capital (CVC) for several reasons.
Ultimately, corporate VC offers startups a way to benefit from corporate resources while minimizing risk.
Overall, corporate venture capital provides an attractive opportunity for corporations to invest in innovative companies without needing to develop it in-house. Corporates are much more likely to consider a strategic investment, and their success does not entirely depend on financial returns.
Corporate venturing can take many forms; some of the most common types include corporate venture capital (CVC), corporate venture building, corporate-startup collaborations, and corporate incubators.
This type of corporate venturing involves investing corporate capital directly into external startups in exchange for equity ownership. CVC can help corporations gain access to new technologies, trends, and markets while providing a way to benefit from the success of these innovative companies.
This type of corporate venturing involves the development of new products or services through partnerships with external startups. It is a more hands-on form of corporate venturing that allows corporations to leverage startup expertise as they create innovative solutions.
These involve two separate entities working together on projects or products that require both parties’ input and resources. This type of corporate venturing helps both the corporation and the startup company grow by allowing them to pool their resources together on a particular project or product.
Corporate incubators are organizations created by corporations to nurture startups to bring new ideas and technologies to market. In these cases, corporate funds are used not only for investing in external startups but also for other aspects such as mentoring, networking, management and marketing expertise and advice – all designed to help startups reach their full potential.
Overall, corporate venturing provides an attractive opportunity for corporations looking for innovative solutions without needing to develop them in-house. By leveraging the experience, resources, and market access provided by corporate investors, startups can be propelled forward while taking advantage of corporate support systems at the same time.
Venture capital (VC) is an investment made in a business or venture with a high risk of failure but also a high potential for reward. VC firms provide capital to startups and early-stage companies through equity investments, intending to eventually realize gains when the company either goes public or is sold. VCs typically focus on early-stage, high-growth businesses and are mostly independent investment firms.
Corporate venture capital (CVC) is an investment of corporate funds into a startup or early-stage company in exchange for equity ownership. A corporate VC offers money, corporate resources, market access, and experience to help startups succeed in addition to providing capital. CVCs are corporate-backed venture capital firms, so corporate investors are the main providers of funding.
These two entities also differ in their goals, investment horizons, fund structure, and exit strategies.
The primary difference between a VC firms and corporate venture capital companies is the value-creation goals they have. VC firms are usually independent investment firms that focus on early-stage, high-growth businesses to realize gains when the company either goes public or is sold. Their goal is to generate financial returns through equity investments in short-term projects.
CVCs, on the other hand, have a more long-term value creation goal. They provide corporate investors with a way to access innovation and trends without needing to develop them in-house. By investing in startups, corporate venture capitalists can gain a first look into the latest trends and technologies on the market which allows them to stay competitive in the long run.
The investment horizons between a VC firm and corporate venture capital are quite different. Venture capital firms focus on short-term projects to realize gains when the company either goes public or is sold. They invest in early-stage, high-growth businesses that can provide financial returns in a relatively short period.
Corporate VC firms focus on long-term investments to stay competitive and gain access to the latest innovation and technologies. They are also more likely to invest in late-stage companies that have already developed a successful product or service. Corporate venture capitalists provide corporate investors with money, corporate resources, market access, and experience to help startups succeed in addition to providing capital.
The fund structure between a venture capital firm and a corporate venture capital firm is quite different.
Venture capital firms typically provide external financing to entrepreneurs who have a specific business idea. They invest in early-stage, high-growth businesses, hoping to realize gains when the company either goes public or is sold. Generally, their funds are structured as limited partnerships, with the general partner (GP) managing the fund, and the limited partners (LPs) contributing capital.
Corporate venture capital differs from traditional VC in that corporate investors are the main providers of funding. Corporate venture capitalists usually have a more flexible fund structure than VCs as corporate investors provide not only money but also corporate resources, market access, and experience to help startups succeed in addition to providing capital.
For VC firms, the main goal is to realize gains when the company either goes public or is sold. This means that they are looking for early-stage, high-growth businesses with the potential to achieve a high return on investment in a relatively short period.
Meanwhile, corporate venture capital firms have different exit scenarios. Since corporate investors are the main providers of funding, corporate venture capitalists are looking for investments that can generate long-term value for their corporate investors and parent firm. This may include acquisitions or partnerships with corporate investors to help startups succeed and gain access to corporate resources. Corporate venture capitalists may also look for strategic investments or corporate venturing opportunities to stay competitive in the long run.
Overall, corporate venture capital is different from traditional venture capital in terms of value-creation goals, investment horizons, fund structure, and exit scenarios goals.
While VC firms generally focus on short-term projects, corporate venture capitalists are looking for investments that can generate long-term value for corporate investors.
Therefore, corporate venture capital provides corporate investors with a way to access innovation and trends without needing to develop them in-house.
The downsides of corporate VC include the lack of alignment between corporate investors and entrepreneurs (not always having the same goals), the limited access to corporate resources for startups, the high cost associated with corporate investment, and the long-term nature of corporate investments.
Additionally, corporate investors and thus, parent companies, are often reluctant to share corporate resources with startups to protect corporate interests.
The high costs associated with corporate investment can also be a downside for entrepreneurs, as corporate VC requires more time and money compared to traditional VC.
Finally, corporate investments tend to be more focused on long-term gains and can have a longer exit timeline than traditional venture capital.
Overall, corporate venture capital is an attractive option for corporate investors looking to access innovation without needing to develop it in-house.
However, there are certain downsides that corporate investors should consider when investing in startups, including a potential lack of alignment between corporate investors and entrepreneurs, a different corporate culture, limited access to corporate resources for startups, high costs associated with the corporate investment, and longer exit scenarios.
The main differences between traditional venture capital (VC) and corporate venture capital (CVC) are their value-creation goals, investment horizons, fund structures, and exit scenario goals.
When it comes to value-creation goals, VCs typically focus on generating financial returns through equity investments while CVCs strive to bring innovation and corporate strategies to the corporate investor.
In terms of investment horizons, VCs typically invest in early-stage startups and look for a quick return on their investments while CVCs focus on longer-term investments and partnerships.
The fund structure of VCs is generally more flexible than that of CVCs, as corporate VC capital often requires corporate investors to approve investments.
Finally, the exit scenario goals of VCs are typically focused on a quick sale through initial public offerings or mergers and acquisitions while CVCs tend to focus on longer-term returns from strategic corporate partnerships.
Corporate Venture Capital (CVC) funds often don’t provide their employees with the same upside potential of traditional VCs – in a 2 and 20 model where management fees are 2% on assets under management and a bonus for performance. CVC teams are typically rewarded with salary and bonuses, like other departments within companies instead of incentives tied directly to returns above benchmark as found in traditional VC funds.
Read more: Confluence.VC 2023 Salary Data
One of the most notable corporate venture capital firms is Alphabet’s GV (formerly Google Ventures). Founded in 2009, GV focuses on early and growth-stage investments across a variety of industries, from healthcare to enterprise software. GV is also known for its corporate partnerships, such as its investments in health-tracking wearable company Fitbit and corporate travel platform Concur.
Intel Capital is another corporate venture capital firm that has made some notable investments, such as its $100 million investment in June 2017 into the autonomous vehicle startup Mobileye. Intel Capital has invested in over 600 startups since 1991 and currently manages a portfolio of over 150 companies.
In addition to GV and Intel Capital, corporate venture capital firms like Microsoft Ventures and Qualcomm Ventures have also made notable investments in startups. For example, Microsoft Ventures has invested in companies such as social media analytics platform Sprinklr and AI-powered search engine Nara Logics, while Qualcomm Ventures has invested in companies like health care technology company AliveCor and cloud computing provider Cloudian.
Softbank is another of the large companies that has a corporate venture arm, Softbank Vision Fund. Founded in 2017, it is one of the world’s largest corporate venture capital funds with total assets under management of over $100 billion. Softbank Vision Fund invests in some of the most promising companies and technologies across different industries such as artificial intelligence, robotics, ecommerce, financial technology, and healthcare.
Overall, corporate venture capital provides corporate investors with access to innovative businesses and technologies to help them reach their corporate strategies. By investing in startups, corporate venture capital firms can bring corporate resources and expertise to the table while also providing financial returns on investments. Additionally, corporate venture capital offers entrepreneurs an alternative source of funding and corporate partnerships that can help their businesses reach new heights.
Read more: Find Lists of Corporate VCs
The challenge of staying ahead in a competitive industry can be daunting, and many organizations are turning to corporate venture capital (VC) as an answer.
Unlike traditional VCs that focus on financial returns, the purpose behind CVC is to advance the parent company’s strategy by leveraging startup innovation – creating maximum impact with minimal effort. By investing in these agile startups they gain incredible insights into future trends while profiting from any successful ventures along the way.
An operating agreement is a legal document used by companies to define their organizational structure, roles and duties of owners and other key parties involved in the business, and methods for handling all transactions that occur within the company.
Stock options in startups work as a form of equity payment that allows an employee to purchase a certain number of shares of company stock at a specified price.
An over-allotment option allows companies to issue extra shares of their stocks beyond those that they initially planned or announced when they go public (or offer other securities). It’s also known as a “greenshoe option”.
Participating preferred stock is a type of preferred stock that gives the holder the option to receive dividends equal to or greater than the customarily defined rate at which preferred dividends will be paid to preferred shareholders.
