As the funding environment for startups remains challenging, corporate venture capital (CVC) has become a popular — and for many — at first glance, an attractive option. According to Dealroom data, CVCs have been involved in one in four European startup deals so far this year, and account for over a quarter of startup funding.
Despite this, the inner workings of how CVC units operate remains widely misunderstood by many outside the industry — and can make them a bad fit for some startups.
So, if you’re a founder raising capital, here are four reasons why you shouldn’t take CVC money.
1/ You lack alignment
Whilst it isn’t unusual for corporate investors to operate like traditional VCs over time, the ambition of the parent company will always determine the setup of the venture unit; its level of autonomy, whether it is a discrete fund or investing off the balance sheet, and how it selects who to back. (Historically, CVC units have been separated into two camps: strategic and financial — although the lines are starting to blur. Here, I’m talking predominantly about CVCs that over-index on strategic vs financial returns.)
CVCs are born from a specific need or desire at the parent company — and it’s important to understand why a corporate venturing unit exists. Reasons can vary, from short term strategic investments into technologies that boost efficiency or profitability, to a longer term approach focused on innovation far beyond the parent company's core offering. The common thread is a mandate from a higher power.
As the investment arm of JLR, we are sent everything under the sun to do with mobility. I sometimes joke with the team that if we get sent one more micromobility startup, I’ll cry. That is because at a completely superfluous level, you may associate us with any and all mobility. In reality, we invest in early-stage industrial, enterprise and climate technologies that will be critical to the longer term transformation of our parent company, and that extends beyond the consumer facing side of the business. We’re very clear on our verticals and why we invest, however it’s important founders do their own research on the corporate venturing unit and avoid making assumptions based on the end-product of the parent company. Doing so will save all parties a huge amount of time.
2/ You don’t believe that the house always wins
Corporations have functions in place to defend themselves from harm, and companies in traditional, regulated industries have developed self-defence mechanisms to protect against risk. With these in place, startups can sometimes come up against parent company antibodies, with anything other than traditional incumbent suppliers perceived as potential sources of risk and harm. These functions, such as procurement, risk management and legal, will always win at a strategically-minded CVC.
Corporates can add incredible value to founders: be it through market validation, proof of concepts and commercial opportunities, or access to deep domain expertise. But it’s important for any founder to remember that their business — if it chooses to take strategic capital — needs to offer more than strong financial performance in return. The last thing you want is a CVC on the cap table that is unable to positively impact your trajectory in the way you hoped.
3/ You want things to move fast
CVCs have worked hard to address criticisms of the speed at which investments have historically been made, and many CVCs have learned from VCs in terms of governance and decision making. But CVC investment committees (IC) do tend to involve at least one member of the parent company who also have day jobs, meaning they can't drop everything at a moment’s notice — getting an IC convened within a week should be possible, but it’s not guaranteed by any means.
Legal due diligence can also take longer; if a startup’s cap table includes other corporates, or investors from countries which could have sanctions imposed, a corporate might not be able to invest. Risks that financial funds may consider an acceptable part of deal making are often viewed through a different lens by corporate legal teams, who are likely to be less familiar with startup term sheets. That’s not to say they can’t be overcome, but it’s important to remember how large corporations view risk.
4/ You are looking for traditional M&A routes
For both VCs and CVCs, who’s on your cap table is important. The presence of a corporaten investor who is known to acquire companies they invest in can be offputting, for one simple reason: What if they don't? Will you have a large zombie investor looking to get out, and what does it say about the startup if they don't acquire it? Will they look to dominate the direction and push others out?
As a founder, you should think twice about taking corporate investment if the sole ambition is exiting to the parent company. We know of many CVCs that do not use venturing as a precursor to M&A but do not always publicise that information externally. The tenure of a corporate venturing arm is also linked to the parent company's CEO. Positions on new technologies often change, and whether a technology is acquirable or not may ultimately be a subjective decision; the last thing you want as a founder is to exhaust all your options.
