Taking Investment From A Corporate VC: All The Pros And Cons

Market intelligence platform CB Insights led one of the most comprehensive pieces of research on Corporate VC. By surveying 365 Corporate Venture Capital arms from some of the largest companies worldwide, they wrote a comprehensive 6-part report encompassing all the CVC operations from governance and management to processes and use of technology.

You can find the full report here, below is our selection of the most significant findings

Part 1: Reporting Structure

The first part of the report looks at the organisational structure of the typical CVC, dissecting its hierarchy and assessing its performance both in the eyes of the CVCs themselves and based on data on win-rate.

When asked about who they report to when they want to get a deal approved, 31% of CVCs said they report directly to the CEO. An additional 27% reports to an investment committee, on which the CEO sits 60% of the times. That means that almost half of all CVCs get their deals approved by the CEO, either directly or via an Investment Committee.

Those who report to the CEO also perceive the highest degree of effectiveness. Their perception, however, clashes with the data. While it is true that having a direct line of communication with the CEO allows CVCs to make quicker and more effective decisions, that doesn’t seem to be in line with what companies really want.

In fact, CVCs who report to their CVC have a win rate of 56%, while those who report to other figures such as dedicated divisions (Corporate Development, or Corporate Strategy), other executives (CTO, CFO) or directly to Business Units achieved a considerably higher win rate of 71%.

Win rate is calculated as successful investment in a funding round once a term sheet has been provided.

The reason for this is likely that the start-ups tend to seek a higher degree of collaboration with individual Business Units and sector-specific resources and expertise from CVCs.

Successfully aligning top-level governance with effective collaboration with the investee seems at the very core of running an effective CVC.

Part 2: Objectives & Measurements

Investment data shows that Corporate VC investment largely follows general financial trends, greatly increasing during financial expansions, but shrinking as much as 84% during financial downturns, like in the early 2000s, after the burst of the DotCom Bubble.

Most Corporate VCs operate for a dual purpose: delivering strategic value and achieving financial returns. Only 6% are solely focused on financial returns while 17% serve a strategic purpose only.

Strategic value translates to a variety of specific objectives, depending on the sector and Corporate Strategy of the business. Almost three quarters of CVCs are looking to collaborate with their portfolio companies to bring new products to the market, while more than half seek access to agile innovation in key sectors or have plans to integrate the start-up into the organisation.

With such a high focus on generating strategic value, many CVCs lack the tools to measure success. While financial returns are relatively easy to assess via metrics such as IRR (Internal Rate of Return), there is a lack of clear measures to evaluate success in areas such as building successful relationships between portfolio companies and business unit.

Although this is considered one of the main drivers for success in a Corporate VC investment, there is no clear way of measuring it. 60% of the CVCs surveyed said that the relationship between investee and BUs has been “somewhat successful”, indicating that most of them see room for improvement in that area.

Part 3: Deal-Making Processes

The third part of CB Insights’ report focuses on the deal-making processes involved in Corporate VC investment.

Data from 2018 shows that Corporate VC investment activity is on the rise, totaling 2,858 deals in 2018 (34% more than in 2017). The 10 most active CVCs accounted for almost a fifth of all deal activity, while the average number of deals per CVC was 5. More than half of all transactions were part of a Series A Funding Round.

When asked about the source of their deals, the vast majority of CVCs answered that they relied on personal connections with traditional VCs as well as other business relationships. 37% said inbound pitches from start-ups are among their main sources, which was higher than the 29% that reported carrying out active outbound prospecting.

There’s roughly a 50/50 split between CVCs that prefer to lead a deal and those who don’t, with older firms being slightly more likely to want to lead. Over half of the surveyed CVCs report that they don’t have a minimum equity stake, and less than one in four report having a defined minimum stake over 10%.

Part 4: Team Structure

CB Insights then looked at the team composition of Corporate VCs, finding that over 75% of CVCs employ teams of 10 or less. This varies according to the size of the committed capital pool. Almost half of CVCs with over $150m in committed capital, for example, have teams of more than 10 full-time employees.

For most CVCs, over three quarters of employees are sourced externally to the organisation. Approximately 3 in 5 team members have a background in Finance, M&A, Investment Banking, Consulting or other investment-related professions.

Differently from traditional VC firms, most CVCs remunerate their staff the same way as they do for other employees, with only 41% awarding performance-based incentives or on fund returns.

Part 5: Internal Processes

By investigating the internal processes of CVCs, CB Insights found that most find their oversight process somewhat or very effective. Almost all (84%) CVCs have an Investment Committee, which typically includes the CEO and the CFO. Even when these are not part of the Investment Committee, their sign-off is usually required to enable a deal.

64% of CVCs are funded independently with a standalone budget which isn’t part of any other Business Unit or department. This enables them to be free of budget that might be given by different types of investment.

One of the main pain-points highlighted in the report is successfully engaging Business Units by sharing insights and innovations acquired via portfolio companies.

Part 6: Use of Technology

The investigation into the tech tools used by Corporate VCs reveals that they are arguably quite bad at tracking the deal-flow of start-ups they engage with. 34% use spreadsheets to keep track of inbound deals, and 17% use a generic CRM solution, while only 23% use either a custom-built or VC-specific solution.

The results of the survey highlight a lack of a specific tech framework that should enable Corporate VCs to work as effectively as their traditional counterpart. This last part of the report supports the common opinion that CVCs are not as well-equipped as traditional VC firms and that often prevents them from providing sufficient support to their portfolio company.

However, there’s no denying that Corporate VCs have become increasingly important players in the start-up space and, especially in specific sectors such as Pharmaceuticals and other IP-focused fields, they provide a safe path to an exit and are extremely valuable in bringing new products to market.