In the turbulent world of venture capital financing, there has been a steady increase in the number of corporations creating CVCs. In this article, we share more about what a CVC is, how it helps these corporations diversify their capital as well as other benefits, and what this type of financial institution does to facilitate innovation in the startup ecosystem.
Defining CVCs
Broadly speaking, a CVC is a subset of VC. Their funding comes from large corporates that are investing in startups which are relevant and beneficial to their group.
CVCs offer funding in exchange for a share in the business and can provide startups with their expertise, network, and contacts. What CVCs often look out for are businesses that can prove they will help the corporate, either through market insight, market reach, or innovative technology.
In terms of objectives, CVCs strive to achieve goals both strategically and financially. A strategically driven CVC aims to increase the sales and profits of the venturing company directly or indirectly by making deals with startups that are creating new technologies, entering new markets, identifying acquisition targets, and accessing new resources.
Financially driven CVCs on the other hand, invest in new companies for leverage. They gain this leverage through investment exits, such as initial public offerings, or the sale of a company’s stakes to interested parties. Both strategic and financial objectives are usually combined which helps bring higher financial returns to investors.
There are three big drivers for CVCs to invest in a startup:
- Market sensing: Will the company be able to help the corporate understand how its markets are innovating?
- Channel cooperation: Has the corporate found an opportunity to help the startup expand its distribution network and increase its reach?
- Technological knowhow: Can the company help the corporate innovate with the latest technology?
Stages that CVCs Invest in:
#1 Early-Stage Financing
Startups in this stage are operating but have not begun commercial production and sales. They consume a large amount of cash for product development and initial marketing.
#2 Seed Capital Funding
In this round, funding amounts are usually small and are exchanged for an equity stake in the business. This stage can be viewed as risky by investors so some of them wait until the business has been established before investing large amounts of capital.
#3 Expansion Financing
Companies at this stage need financing as they are expanding through launching new products, expanding physical plants, improving products, or launching marketing campaigns.
#4 Initial Public Offering
In the long run, this is the stage that CVCs will be attempting to reach. When the startup’s stocks are made available to the public, the investing company (the corporate) will sell their investments to earn significant returns. The earnings from this sale will be reinvested in new ventures where future returns are expected.
#5 Mergers and Acquisitions
For this stage, CVCs finance a startup’s acquisitions through an investment fund, and they also align the startup with a complimentary product or business line that will project a similar brand for both entities. If there is a party interested in buying the startup, the CVC then takes the opportunity cash in by selling their stakes. Mergers also provide other benefits for CVCs, as they can share resources, processes, and technologies with the startup, which then results in cost savings, liquidity, and market positioning.
How Investments from CVCs Benefit Both Sides
For the investee, receiving funding from a CVC gains them access to seasoned corporate professionals and they can learn from the teams within the organisation and its networks. Additionally, they can meet contacts through the corporate which cover a wide range of functions, from distribution networks, to experts, to partners, that can help take their business to the next level.
Additionally, by working with a big corporate, companies can tap into further innovation to develop their offering and even speed up time-to-market. Eventually, businesses invested in by CVCs will be evaluated in terms of their potential, which could mean that the corporate will purchase the business; as such, for entrepreneurs this particular benefit could be especially attractive if they are looking to exit their business.
The CVC Journey
Amongst the growing number of CVCs appearing worldwide, here are three companies that established their venture arm during the early days of the startup boom.
2002 – Roche Venture Fund
Fund Size: CHF 750 million
As a global leader in bringing medicines and in vitro diagnostics to the benefit of patients, Roche established Roche Venture Fund to make investments in life sciences companies that are aiming to create value by fostering innovation; they seek to guide successful businesses and at the same time, generate financial returns for Roche. Their fund mandate currently includes investments in companies in the pharmaceuticals, diagnostics, and digital health fields.
Roche Venture Fund also looks beyond providing funding to startups by providing their team’s expertise to founders and their teams. In terms of geographic locations, Roche Venture Fund has two offices, one located in Basel, Switzerland, and the other in South San Francisco, US.
2009 – M Ventures
Fund Size: €300 million
The brainchild of yet another giant in the healthcare world, M Ventures is the strategic CVC arm of Merck. The fund invests globally in transformational ideas driven by innovative entrepreneurs, and teams up with its portfolio companies and co-investors to translate scientific discoveries into commercial success. M Ventures invests with dual strategic and financial foci in companies that are trying to find new ways to treat the most challenging diseases; those empowering scientists with cutting-edge research and development tools; and entities that are developing new solutions to change the way in which information is accessed, stored, processed, and displayed. Their mandate currently includes four focus areas: Healthcare, Life Sciences, Electronics, Frontier Tech, and Sustainability, in line with the strategic interests of Merck’s business areas.
To date, M Ventures has played a key role in the creation and progress of 80 global companies and has helped advance multiple medicines and technologies to market launch. M Ventures operates out of its headquarters in the Netherlands and offices in Germany, the US, and Israel.
2009 – Google Ventures (GV)
Fund Size: US$500 million/year
Originally launched as Google Ventures, GV was launched as the CVC arm of Google before becoming an independent venture capital firm for innovative founders. Today, Alphabet is still the firm’s sole limited partner and they focus on meeting and supporting founders at the earliest stages of company-building. They work to support startups across design, equity, diversity & inclusion, talent, and engineering. GV also helps companies interface with Google and provides them access both technology and talent.
What makes GV stand apart is its aim to operate on long-time horizons and deals in decades – not rounds. At launch, GV had a US$60 million capital commitment, and to date GV has over US$8 billion in assets under management (AUM) and 400 active portfolio companies across North America and Europe.
CVCs Have a Lot to Offer
Whether as a startup or an investor, the prospect of attracting a CVC to invest in a business holds a lot of promise. With benefits such as expertise, a wide network of partners, and a well-known brand name, corporate investors can offer a lot to the right business that meets their own objectives and goals. Furthermore, their investment catalyses innovation and the birth of new startups focusing on using technology to improve the progress of a variety of industries, fostering a new era of ideas and brilliant execution.
Sources:
2. Corporate Finance Institute
4. M Ventures
5. GV
6. SaaStr
