Structuring a Corporate Venture Capital Organisation (II) — Define a Clear Investment Focus
By Dr. Patrick Flesner, Dr. Stephan Bank
Corporate Venture Capital
This is the second part in a series of articles on Corporate Venture Capital. You can read Part I here.
Guiding Principle 2: Define a Clear Investment Focus
As a corporation usually establishes a CVC unit in order to pursue both financial and strategic goals, the CVC unit’s investment focus needs to be determined clearly early on.
Firstly, the corporation should define a clear stage focus for the portfolio companies it intends to invest in. It should be clarified whether the CVC unit can invest in early stage, late(r) stage or growth stage companies.
Investing in early stage companies can make sense if the corporation intends to learn about long-term industry trends. In contrast, investing in late(r) and growth stage companies may be the right choice if the corporation intends to focus on becoming a shareholder in potential game changers and capturing value that the corporation is unable to capture itself.
While it is also possible to combine these approaches and invest highly opportunistically and stage-agnostically, concentrating on a specific stage facilitates the development of a clear investor profile vis-à-vis other industry players. Developing a reliable investor profile proves beneficial especially with respect to deal sourcing. If founders and other VCs exactly know what the CVC unit is looking for and where the investment team has the greatest potential to create value for the startup, they will more likely reach out to the CVC unit when it comes to raising funds. Should a corporation, nevertheless, intend to invest across stages, separate funds may be set-up for early stage, late(r) stage and growth stage investments and — potentially — buyouts, ideally with separate dedicated management teams with respective experience and expertise.
Secondly, the corporation needs to define a clear sector focus. It generally makes sense to invest in companies active in the corporation’s field of expertise. On its home turf, a CVC unit can usually leverage the corporate assets, such as in-depth industry and market knowledge, access to sophisticated R&D departments, a large and established customer base, brand association and access to a marketing network. At the same time, a clear focus on the corporation’s primary field of expertise facilitates evaluating investment opportunities and changing industry and market conditions.
In any case, it is of paramount importance that the investment scope is rather broad than narrow. The scope should enable the investment team to invest in companies active in adjacent industries and startups without a clear and immediate potential to cooperate with the sponsoring corporation.
A more complementary and extensive investment focus helps the investment team get a more holistic view of overarching market trends. Past experience shows that disruptions and potential disruptors for a corporation’s core business as well as business opportunities that help develop a corporation’s core business often emerge from adjacent industries. A good example of a corporation that has repeatedly disrupted adjacent industries and continues to disrupt industries is Amazon.
In order to consider an investment a strategic fit, the corporation may ask for a clear cooperation potential. But it should definitely refrain from requesting an immediate business benefit, a signed commercial agreement or an internal sponsor.
In the fast-paced VC ecosystem, startups that thrive get term sheets after weeks rather than months that are often needed to negotiate a commercial cooperation agreement. Requesting an immediate business benefit or a signed commercial agreement may therefore render impossible investing in the best companies.
Asking for an internal sponsor may have the same detrimental effect. In big corporations, employees sometimes go through the ranks if they do not make mistakes. An environment that does not really encourage risk-taking. And a risk-adverse environment may discourage employees from supporting startups and taking on the responsibility for a successful cooperation between the startup and the corporation.
While refraining from requesting immediate business benefits and internal sponsors may entail that not all portfolio companies end up meeting the cooperation’s strategic expectations, this approach allows the CVC unit to live up to the VC ecosystem requirements and create benefits for the corporation at least from a portfolio perspective. If the CVC unit can invest in the best companies, some of them will generate both great strategic and financial returns.
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Sources and Further Readings
- Patrick Flesner, Michael Wade, and Nikolaus Obwegeser: Making Corporate Venture Capital Work
- Patrick Flesner: Making Corporate Venture Capital Work: Give First
- Patrick Flesner, Stephan Bank: How to Structure a Corporate Venture Capital Organisation (I)
Originally published at https://www.smartscaling.net on January 18, 2020.
