European CVC — corporate venture capital, or when corporates invest directly into startups — funding hit $10bn this year and shows no signs of slowing down. Big ticket rounds included fintech Klarna’s $1bn raise backed by Visa and webinar platform Hopin’s $400m raise, backed by Salesforce.
But as CVC investment gets bigger, so do the options. Startups need to decide which type of CVC fits them best, and how to use their new money to their advantage.
“Large corporations are in full transition of replacing outdated legacy software for integrated SaaS solutions, which is really a good thing for startups,” says Bruno Vandegehuchte, organiser of Belgian startup event The Big Score by Startups.be and Scale-Ups.eu. “As the collaboration wave with startups is getting stronger, so does CVC investment in Europe, hitting a significant €10bn+ record in 2021.”
Make a distinction between collaboration and exclusivity [...] often younger startups don’t think this through
It all depends on what corporates are after, Vandegehuchte says. Some are looking to have new products developed, while others are looking to diversify the products and services they already offer.
So if you’re new to the CVC game — or you’ve just received some corporate cash and aren’t sure what to do next — here’s what the experts say.
Choose your CVC wisely
Corporates will typically invest in startups working in their own industry, according to Filip Van Innis, investment director at Fortino. “Quite often this is to support innovation outside the boundaries of their own operations, in things that they believe are the future and could disrupt the industry,” he adds.
There are around six different kinds of CVC, ranging from a single direct investment (typically combined with a corporate incubator or accelerator) to a portfolio with long-term capital investment based on a defined strategy.
But Lucas Stoops, investment manager at Force Over Mass Capital, says there are two sides of the spectrum and most CVCs fall somewhere in between.
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“Corporate VCs typically have two types; the first is the ones who only invest from a financial point of view, meaning they only care about having more capital,” he says. “And then you have others that are more strategic and will say ‘look, I will only invest in the company if it really does help my own business’.”
He adds it’s important to not look for a CVC too early — even if it’s just for investment — as it could scare off other clients and mould your startup into something it’s not.
“At the later stage it does make sense,” he says. “But in the beginning, market signalling [the information sent from one company to others in the industry] and all those things are quite important.”
Read the fine print
For Vandegehuchte, his advice for startups who are looking for CVC investment is the same as for startups who are negotiating with VCs, and is similar to Stoops: “Don’t get stuck with exclusivity.”
“Make a distinction between collaboration and exclusivity,” he says. “Often, especially younger startups, don’t think this through and they get caught out by all kinds of contractual clauses, which disable them to negotiate with other players.”
Stoops says that when looking at the contract, it’s important to lock in revenue (or a means of making money from your product or service) before the investment.
“If they say 'look, we want to work with you and invest in you', make sure the work part is honoured, then afterwards the investment part,” he says.
Don't stare yourself blind at the brand name [...] make sure you have buy-in from high in the company
Stoops says it’s good practice to talk to investors and to keep in mind that a brand isn’t everything. They need to be excited and prepared to work with you too.
“Talk to your investors, VCs or angels if it makes sense to have a CVC,” he says. “Don’t stare yourself blind at the brand name, make sure the people who you work with are nice and that you have buy-in from high in the company, that ideally senior management knows of your existence and wants to work with you.”
Communicate the role of the CVC to the market
After receiving CVC investment, it’s important to clearly communicate what it will mean to your customers and future investors.
“Make sure you communicate very clearly to the market and internally what the role of the CVC is,” says Stoops. “Communicate very clearly what they do and what they don’t do.”
An example of this is when a CVC has a board seat, he adds. Communicate that they won’t be in board meetings when you’re discussing other clients, so they know you can make independent deals with other companies.
“It’s not a subsidiary, they are one of the investors, you can still go to other brands,” he says. “Remain as flexible and agile as possible.”
It isn’t all about money
When you make a deal with a CVC, there’s more to gain than just capital, says Van Innis.
“Try to get as much value out of your investors as possible,” he says. “We’re living in a world of abundance of capital, so it’s all about the value you can create as an investor.”
Some of this value is the CVC’s experience in the industry that can guide your future as a startup.
“I would expect a CVC to challenge you a lot on the product roadmap,” says Van Innis. “They could be a customer of yours, they can challenge you on how you think about your product, your roadmap and what’s next.”
Try to get as much value out of your investors as possible. We’re living in a world of abundance of capital, so it’s all about the value you can create
At the same time, if the CVC is the customer, Van Innis says it’s important to make sure they don’t drive the product development to their own advantage.
“That’s something you need to be careful with because if you are close with an investor they might feel like they can tweak your roadmap,” he says. “But on the positive side they may have a good perspective on what you need.” Want to pursue CVC?
Consider a scaleup event
If you’re a startup looking for CVC investment — or you already have it — a good place to be is a scaleup event that has corporates on hand, and can help match you with partners. The Big Score, for example, is dedicated to connecting European scaleups with big corporate challenges to find the next innovative solution.
Bao-Y Van Cong, investment director of VC Target Global, says events can be really valuable, but that startups and scaleups should have a clear idea on how to communicate their story.
“Going to The Big Score, I think it’s really important to tell someone the story of your company, and to make it personal,” she says. “I think sometimes people just go straight into ‘this is what we’re doing, these are the numbers’ and that makes it really hard to stand out when you have a lot of back-to-back presentations.”
For more information about The Big Score visit their website here.