Corporate Venture Capital (CVCs)

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Mysterious World of Corporate Venture Capital Explained by an Insider
Corporate venturing is quite a controversial topic among both traditional venture investors and promising young startups. There are some valid reasons for this, but much like most things, it’s driven by who you ask. Some critiques include stick to what you’re good at or that these corporate ventures’ arms are seen as dumb money, exemplified by the prominent investor Fred Wilson: “Corporate investing is dumb, I think corporations should buy companies. Investing in companies makes no sense. Don’t waste your money being a minority investor in something you don’t control. You’re a corporation! You want the asset? Buy it.”

Another critique is that many corporate venture arms over-promise and under-deliver on potential commercial opportunities, which is usually the incentive for startups to take their money and bare the brunt of the immense due diligence requirements (many CEOs have told me it’s an order of magnitude more than their other investors, one just a few weeks ago).

There is quite the spectrum of corporate venture capital (CVC) firms, and it’s very important to understand where they sit on the spectrum of strictly strategic (don’t care about returning capital, just want a courtside seat) vs. purely financial (all about the money baby!). As you embark on potentially joining a CVC, this exercise is critical as it will give you a lens on what you’ll be doing. For simplicity’s sake, the strictly strategic firms are borderline corporate development, and you won’t be dealing with the potential home run outcomes and the strike zone for potential deals is very small (will scan through a lot of deals and may pull the trigger on one or two a year). A heuristic that I’ve observed is that the more legacy the mothership (LP of the fund) is, the more strategic-minded the investments are, as there is more weight on these investments to be successful and help out the parent company in the very near term.

It’s worth noting that being on this spectrum is not static, and my firm has slid towards being more strategic since the beginning of the pandemic. I’ve spent the past two years working for a CVC, focused on the climate technology sector, with the parent company in transition towards being a well-rounded, multi-offering, energy company. As mentioned above, we have slid from mainly financial to finding investments in the near term that can help our new businesses thrive. This is not a horrible thing, and can be more thought-provoking at times, but if you plan to join a financial institution or raise a fund of your own, track record is of utmost importance (strategic investments do not tend to be 10 baggers).

Furthermore, a common misnomer of a CVC, is that they buy a good portion of their portfolio companies. This rarely happens, in part because of oversight (corporations do not take a lot or risk), and ROFRs have become poisonous to the startup ecosystem. The logistics of acquiring a company if you have a Board seat becomes incredibly complicated and opens the mothership up to significant liabilities if it’s deemed that there is nefarious activity to buy the company on the cheap or that there was not a fair and open bidding process. So sometimes the juice is not worth the squeeze, and you may stick to a long-term partnership agreement in the end.

Below are some pros and cons to help you guide your decision going from ibanking/similar roles to the mysterious world of corporate venture capital:

PROS:

  • Great training grounds if you eventually want a role at a traditional venture firm, or lead corporate development efforts
  • Do not need to fundraise, most funds are structured with an annual, use it or lose it, budget. Tend to be pitched as evergreen funds
  • In-house experts to leverage during due diligence, which can really help you understand the investment sector you’re focused on
  • Higher salary than traditional venture for junior roles
  • See most deals given the brand/credibility your company can bring…most startups take the call because they at least want you as a customer. A lot of deal flow can come from the business units
  • Can move up quickly as leadership usually moves to other, higher profile, roles at the company.
  • Can work on more complex transactions that include commercial agreements.
  • High visibility to the c-suite, especially when there is a successful outcome

CONS

  • No carry! No carry! No carry!
  • Can be viewed as a cost center internally and may be subject to be cut if the mothership is not doing well. Good to see how long the firm has been around, but can happen to anyone (see GE Ventures)
  • Strategic deals can impair your track record, as value is not tied to returning the investment. Attribution is blurred, as most deals come from business units or inbound
  • Decision-making is very complex and takes a lot of time. A big disadvantage in this market where time to close has been the shortest in history (thanks Tiger)
  • Level of diligence can be similar to M&A process, great for learning, but not in practice. Most founders do not want to deal with this

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