This article first appeared in the Union Leader in July 2020
The range of funding sources for a new venture is well known, ranging from early “friends and family” and angel investors, small business loans, and institutional and corporate venture capital.
The involvement and contributions of each source align to the scale of the enterprise, and it is challenging to build your business without them. Generally speaking, there has been a fair amount written about the angel and venture capital communities, but what about corporate venture capital (CVC)?
What is CVC and why does it exist? If you are an entrepreneur or CEO of a startup you may ask what value a CVC can bring to your venture, and why should a CVC be on the cap table alongside other investors? Once you know more about CVCs, you may ask how you can engage with one and what expectations you should have. Let’s take a moment and answer these questions.
CVCs are formalized venture capital investment units established by many companies. Globally there were 1,854 active CVCs in 2019, according to Global Corporate Venturing, a media and database organization for the CVC industry. CB Insights and Pitchbook, two other industry groups, also reported that CVCs participated in more than 3,200 deals worth more than $57 billion in 2019. CVCs have also become a greater part of the venture funding ecosystem and were most active at the early stage, Series A round.
The parent companies of CVCs are leveraging this approach as part of an innovation strategy, and in the past might have been investing ad hoc in early stage companies or as some hybrid connection to their M&A and traditional business development activities. By creating a CVC, these companies have become more formalized with the resources and operations that can invest capital either directly from their corporate balance sheet or through a separate entity whose sole limited partner is the corporate parent.
A good way to think about a CVC is that it acts as a strategic investor, operating as a disruptive sensor for their corporate parent while taking on risk to achieve both strategic and financial gains for their portfolio.
CVCs operate in ways like institutional VCs and early on were considered rigid and slow. Today CVCs are more streamlined, agile and better aligned to the venture funding ecosystem. Like VCs, a CVC provides important funding capital but also offers additional value beyond the financial investment.
A partner recently said in reference to the most well-known tech hub, “Silicon Valley doesn’t need more money.” This statement is completed by stating what it and other venture ecosystems do need: support.
These ecosystems still require capital but, more importantly, the point is to highlight the significant contributions that CVCs offer in addition to capital. First and foremost, established CVC parent companies have customers. These companies have hundreds, even thousands of customers that startups can be introduced to, leading to a means to test product market fit or to launch pilots. Corporations also have channels and an established presence across key geographies that new ventures need access to.
CVC parent companies also have track records of launching new products and securing intellectual property protections and can bring operational experience such as supply chain management and lean manufacturing expertise. These are just some of the ways that a CVC brings value beyond capital, and startups should consider their business plan needs and how a CVC’s offering can be leveraged.
If you are a startup that could be impacted significantly by a CVC, there are a few ways to find one. First, think about your business model and the markets you are going after. A map of those areas can yield some parent companies that might have established CVCs. Many have websites that share backgrounds, key offerings, details about portfolio companies, and ways to contact a team member to see if there is a potential fit. Also, many institutional VCs already have relationships with CVCs that excel in specific areas that they know benefit their portfolio companies.
It will take a strong mix of investors alongside to help you reach your goals, and it’s worth getting a good corporate on your cap table that is aligned to specific needs that other sources cannot provide.
Nathan Pascarella is a Director at Hypertherm Ventures (www.hyperthermventures.com), the CVC of Hypertherm, a manufacturer of industrial cutting systems and software, based in Hanover, NH. He can be contacted at email@example.com