Corporate venture funds have become popular over the last few years, especially as some of the established ones such as RBVC and BMW iVentures have achieved portfolio performance that rivals that of the top VC firms.
But CVC is not a one-size-fits-all proposition. It can involve everything from sporadic investments from the corporate balance sheet to a fully autonomous CVC fund that has been spun out from the parent company. One approach that Redstone VC is promoting is a co-investing structure where the corporation collaborates with an experienced VC team.
Companies need to decide which model with suit there needs best. Here is a checklist for evaluating the different models.
1. Single direct investments
This is often the first step corporates take into venture capital. It usually involves minority investments in the startups and is decided on in the same way a corporate would decide on an M&A investment. No specific VC experts are needed. This type of investing is often combined with a corporate incubator or accelerator. This is usually the starting point for a longer journey for corporates and many corporates end up paying a high price for an unstructured, unsystematic and unprofessional approach — VC is not the same as M&A.
- It is a first step into the world of corporate venture capital.
- It creates awareness of startups inside the company and allows the corporate to have some skin in the game.
- It can foster exclusive cooperation with the startup
- It can be a first step towards taking a controlling stake in the startup.
- This is an opportunistic approach and not based on a clear investment thesis. It can lead to quite a random collection of holdings.
- The investment is often at an early stage, which makes it more risky. The real issue is timing. It is optimal to invest in a proof-of-concept-ready startup which already has infrastructure and is big enough cooperate with a large corporate. If the startup is too small it cannot scale with corporate partner
- Limited VC deal making experience at the corporate can also make it risky
- This is used as disguised M&A and leads corporates to pick the wrong investments. They tend to avoid disruptive technology and instead pick for incremental innovation still close to their core business for which they overpay.
- Corporates have the tendancy to do “control deals”. In principle they dislike minority deals, and inexperienced corporate investors will try to get preemptive rights and acquire a big stake (>25%). This makes the startup unattractive to professional VCs. Because they tend to avoid risks they avoid building a large portfolio (VC investment paradox) but instead acquire stakes in startups they believe to be “the silver bullet”. They acquire these at later stages and at higher valuations — but there is still a high risk of failure.
Who does this:
- Abbott, whose investments include a stake in Bigfoot Biomedical, a diabetes startup.
- Mahle, the German automotive parts manufacturer, which has a stake in Inspekto, an automated machine inspection startup
If you are thinking about this model ask yourself:
- How would your organization be affected by a first, unsuccessful investment?
- How much budget can you commit to investments?
- What type of innovation is Corporate seeking? Incremental? Vertical? Radical?
- What role do you want startups to play in your long term strategy?
2. Multiple direct investment
This is a very common practice among corporates that have decided to support internal R&D efforts by repeatedly but still opportunistically investing into start-ups. This is usually a more structured approach than single direct investments and there may be some dedicated internal or external resources dedicated to it. Investments are mostly driven by the R&D department and tend to foster incremental innovation.
- Corporates learn a lot about VC dealmaking and collaboration through this method.
- It can be biased to focus on startups close to the core business of the corporate and ignore other opportunities. The corporation may miss the chance to diversify and to transform.
- Deals are still mostly opportunistic deals and there is no clear investment thesis.
- There is no long-term capital commitment.
- It is hard to get high-quality deal flow when investments are ad-hoc.
Who does this?
- Plastic Omnium (Invested in Taktotek)
- P&G makes some investments in startups like Terracycle but more often acquires companies it finds interesting.
If you are considering this model, ask yourself
- Have you defined an investment thesis?
- Are you seeking long-term capital commitment?
- Which strategic business area justifies multiple direct investments?
- Do you have the internal resources for managing multiple investments?
- How will you get deal flow?
- Who decides on the investments — a business unit or finance? Does any business unit have veto rights over investments?
A portfolio of investments takes the multiple direct investments one stage further, combining it with a long term capital commitment to invest in 2-5 deals every year, based on a defined investment strategy. It can be closely attached to the corporate core business but sometimes is set up as a separate legal entity. Because of the ambitious goals and capital commitments, it needs a qualified internal team or external resources or VC service provider to leverage captive team and resources
- There is a long term capital commitment and clear strategic and financial objectives.
- There is a dedicated internal/ external team.
- The corporate can build its reputation and brand as a professional CVC investor.
- If needed, investments can be cut back.
- There is a clearly defined governance structure and investment process.
- The evergreen structure can mean the fund managers aren’t offered the same attractive incentives they would get in a venture capital firm including high fluctuation.
- This can make it difficult to attract professional VC expertise.
- The team may struggle to get high-quality deals due to a lack of outbound deal sourcing capabilities and adverse selection.
Who does this:
- Leaps by Bayer — they are investing in health, agriculture and life science startups with a thesis based on trying to solve 10 key challenges faced by humanity, such as insect-borne diseases, cancer and reducing the environmental impact of agriculture. Notable investments include Century Therapeutics and Huma.
- Fluxunit of Osram
- Vogel — the VC arm of the German business media group has a number of early-stage investments in collaboration platform startups.
- Roche Venture Fund — has a large portfolio of early to late stage investments in healthcare startups. Some of these have gone on to be fully acquired by Roche.
- Berliner Volksbank Ventures (managed by Redstone)
If you are considering this model, ask yourself:
- How important is a financial return for your portfolio?
- How will you hire internal VC expertise?
- How will you generate global high-quality outbound deal flow?
- Can you prepare 10-12 investment memos (internal documents outlining why you have or haven’t invested in a particular company) per year?
- How will you structure and actively manage the portfolio?
- Can the company make a long term commitment to the portfolio?
Closed fund structures
The fundamental difference between category A “evergreen structures” and B “closed fund structures” is that in B there are always separate legal entities with management fee and carry and independent decision organs in form of an investment committee.
4. LP investment
Corporates can invest as LPs in independent VC funds. This gives them access to the digital ecosystem and access to startup deals.
- It offers easy and fast access to the digital ecosystem and deal flow.
- It is a good way to access new markets and regions and to connect with the local VC ecosystem.
- The VC does the hard work, limiting the cost and risk of building up your own team.
- It is a chance to invest further away from the core business.
- No influence on the investment strategy of the fund.
- Limited relevance of the portfolio of startups for the own business.
- Limited information and knowledge transfer.
- There are limited opportunities to learn about VC investing or the startup ecosystem.
- There may be conflicts of interest between the corporate and the general partners of the fund.
- Long term capital commitment for 8-10 years.
Who does this:
- Henkel Tech Ventures
Questions to ask:
- Will an LP investment meet your strategic goals?
- How much do you want to be involved in decision-making?
- Which topics, sectors or regions justify LP investments?
- Are there trends you don’t want to miss but you are not sure about?
5. Single GP/LP corporate VC fund
A proprietary corporate VC fund has an independent, professional VC structure including an independent investment committee. Business units have no veto rights over the investment decisions.
- There is efficient allocation of capital and professional governance.
- The team can invest more freely in new business models that could disrupt the core business. It can be a step towards the company reinventing itself.
- The corporate can get additional return on investment by collaborating with the startups in the portfolio.
- There is a stronger focus on financial returns without ignoring strategic aspects.
- VC portfolio is regarded as performing asset instead of an R&D expense.
- Substantial capital investment for corporate.
- It can take time to build the team, attract talent and connect with the digital ecosystem.
- There could still be conflicts of interest between the corporate and the independent fund manager.
- Still limited possibility to leverage LP investment with other peers or external financiers.
- Still adverse selection through single LP model.
- Arms-length investments will have less ability to transform the corporate business.
- There is limited ability for M&A. Portfolio companies are generally not acquired.
Who does this?
- M Ventures — Merck’s venture arm has invested in a broad range of startups from Akili, a video game-based medical therapy to Simulate, the creator or vegan chicken nugget alternatives.
- MA Ventures (managed by Redstone)
- Swiss Health Ventures (managed by Redstone)
Questions to ask:
- How important are financial returns?
- Would you allow the CVC unit to have independent branding?
- Are you willing to commit resources for a long-term fund (at least 10 years)?
6. Co-GP fund or strategic LP-participation (Redstone Model)
This is a structure where an external VC dealmaking partner works closely with the corporate, taking advantage of their in-house expertise. Either the corporate takes the role as GP and LP together with external professional VC service providers of corporate invests together with a group of 3-5 peers with similar strategic interest.
- The VC investor brings a good track record and know-how to mitigate the risk of failure.
- The VC investor as an independent professional investment manager provides necessary neutrality to manage interests of multiple corporate LP-investors.
- The corporate, as a GP, has strong influence in the investment focus of the fund.
- Corporate LPs strongly benefit bespoke from data and service offering of professional VC investment manager.
- Both sides actively engage in decision-making through participation in the investment committee.
- The corporate can contribute their industrial expertise.
- You can define a clear investment thesis and have a data-driven evidence-based decision-making process.
- Potential to share management fees.
- You can share risks and write larger tickets.
- The corporate can learn from the expertise of external partner.
- Corporate can support startups to scale.
- You will need to collaborate with an external partner.
- Potential conflict of interest with other peers during exit.
Who does this:
- Future Industry Ventures — this is a co-GP fund between SBI Holdings, the financial services company and Redstone VC
- VR Ventures is a single GP fund of Berliner Volksbank actively co-managed by Redstone with more than 25 other LPs as co-investors
- Tane, the co-GP Fund between KauriCab and Redstone VC
Questions to ask:
- Is the company prepared to collaborate with an experienced partner on a long term basis?