April 19, 2022

How do you (really) measure CVC returns?

Corporates look at quarters, VCs at decades. Four CVC experts talk about how to bridge the gap.

Measuring the performance of a corporate venture unit has always been difficult. Unlike venture capital firms — which simply aim to maximise returns for investors — corporate investment teams have a combination of financial and strategic goals. They want to make money and partner with startups that can help their core business. 

What’s more, the timeline for returns in venture is out of step with most corporates. Big corporations operate on a quarter-to-quarter basis while startup investments can take seven to ten years on average to reach their full potential. 

A recent study by Stanford University Graduate School of Business illustrated this clash of priorities well. Three-quarters of senior leaders at US CVC units said the evaluation horizon for their investments was less than two years, and only 10% said it was five years or more. Are corporates willing to be patient enough with their corporate arms?  


This conflict can play out in one of two ways. Either CVCs will skew towards investing in quicker wins (which may be less strategically valuable) or this data does not quite resonate.

To find out if this was really how things worked in practice for corporate investors, we spoke to the partners of four tier-one CVC funds: Diego Diaz Pilas Diaz, global head of ventures and technology at Iberdrola; Manuel Silva, general partner at Mouro Capital (formerly Santander Innoventures); Muriel Atias, chief investment officer at BOLD Business Opportunities for L’Oréal Development; and Shereen El Zarkani, head of Maersk Growth.

This is what we learnt.

CVCs all have financial objectives, but not financial targets

The CVC units we spoke to all had different levels of emphasis on making money from their investments, but all clearly did need to show a return. It is important for the CVC not to be seen as a loss-making exercise because that makes it vulnerable to being shut down by senior management in tough times. As El Zarkani at Maersk put it: “Strategic returns are a necessary but not sufficient condition.”

But they do not have specific financial targets, unlike VCs, which usually say they are aiming to at least triple their investors’ money. Why? Because the impact of €100m-200m of venture capital investment is not material to the profit and loss account of a large company. The objective almost always is to move the parent company into new areas of business. “If we chase a bunch of unicorns, we are not moving a needle”, says Diego Diaz Pilas Diaz at Iberdrola, with a smile.

Measuring the strategic value is important but no one has the magic formula

All of the CVC leaders we spoke to were wrestling with how to measure and quantify the strategic value of their investments. There were several good KPIs, from counting the number of joint projects between the parent company and startups in the portfolio to looking at net promoter scores from both the business units in the corporate and the startups themselves. All of these are quite “soft” measures — think more art than science. Plenty of work to be done here still. 

If your CVC invests short term, you are using the wrong tool

Companies need to have several open innovation tools to reach different goals — not just a CVC arm. CVC is meant for exploring new domains and areas of business together with partners. If a corporate is looking for innovation solutions that can have an immediate impact on business, the tool to use is a venture client, not a CVC. A venture client is a model in which the company partners with a startup but does not invest. This may mean teaming up with a slightly more mature startup or scaleup that has the ability to handle bigger volumes of business. 

“The CVC is the financial arm of open innovation”, says Atias of BOLD L’Oreal. “It is an intermediate tool between venture client and M&A”.

CVC boosts and complements the open innovation strategy suite

So why should a company have a CVC at all? Might a good venture client be enough? But a good venture client programme and a CV unit can, in fact, work together very effectively. A CVC unit is often a great source of intelligence to the parent company on up-and-coming startups. It can advise on which startups the business units should have venture client deals with, and it can also refer opportunities for acquisitions. And to truly understand newly emerging sectors, you need a CVC fund — external advisory boards and consultants won’t be enough. 

Additionally, a (respected) CVC investor gives companies something they can’t have through mere commercial partnerships. For example, securing rights (ie exclusivity for a certain period on certain verticals, longer-term agreements) or (softly) influencing the roadmap. But it is imperative for CVCs to always work at market conditions. “We can’t have anything that isn’t market practice,” says Mouro Capital’s Silva. 

Alberto Onetti is chairman of Mind the Bridge. Maija Palmer is Sifted’s former innovation editor.