Structuring a Cortporate Venture Capital Organization (IV) — Ensure Long-term Commitment
By Dr. Patrick Flesner and Dr. Stephan Bank
Many executives that want to initiate corporate venturing activities already struggle answering the question how to set-up a CVC organization for success. The six guiding principles described in this series of articles are supposed to help answer this question.
Guiding Principle 1: Create a Traditional Venture Capital Fund Structure
Guiding Principle 2: Define a Clear Investment Focus
Guiding Principle 3: Embrace Fast Decision-Making
Guiding Principle 4: Ensure Long-term Commitment
When dealing with corporate venture capital (CVC) units, traditional industry players often wonder whether the corporate can - at any time - pull the plug on the CVC unit’s activities. The answer to this question often has significant repercussions on the CVC unit’s reputation in the market, its success in competing for the most attractive startups and, eventually, its performance. If startups and traditional VCs do not believe in the long-term commitment of the CVC unit, it is bound to fail from the start.
Apart from the fact that a move away from a commitment to support a startup as a reliable partner along the way to a potential exit results in a branding as an unreliable investor (which in itself should prove a robust deterrent), long-term commitment can be demonstrated by introducing safeguards in the CVC unit’s governance.
Structuring the CVC unit as a typical venture capital fund (Guiding Principle 1) and hiring VC professionals that are incentivised in accordance with VC market practice, in our view, are well-suited means to underscore a sustainable and continuous commitment by the corporate. Typical venture capital funds are set up for a duration of 10–12 years. Also, aligning the investment team’s remuneration to the success of the fund over its entire lifecycle should give the relevant market players significant comfort that the corporate and the fund management team are in for the long run.
There are corporate players that intend to go a step further by providing the fund management team with full autonomy in utilising the entire volume of the funds. In essence, this can mean that once the decision is taken by the corporate to commit certain funds to the CVC unit, this decision is binding and, in principle, irreversible. Other corporates are more reserved to grant such authority to the fund management team. However, professional VC managers who join CVCs will usually look for protective provisions in the CVC unit’s governing documentation to ensure that the management team will be involved in fundamental decisions relating to the CVC unit.
We believe that the exact structures and procedures to ensure a continuing commitment must be chosen on a case-by-case basis taking into account the respective corporation’s peculiarities. Without long-term commitment, however, the probability of success is significantly limited.
