Corporate venturing – also known as corporate venture capital – is the practice of directly investing corporate funds into external startup companies. This is usually done by large companies who wish to invest small, but innovative, startup firms. They do so through joint venture agreements and the acquisition of equity stakes. The investing company may also provide the startup with management and marketing expertise, strategic direction, and/or a line of credit.
How Corporate Venturing Came About
As a subset of Venture Capital, Corporate Venture Capital (CVC) was started due to the vast emergence of startup companies in the technology field. The main goal of CVC is to gain a competitive advantage and/or access to new, innovative companies that may become potential competitors in the future.
CVC does not use third-party investment firms and does not own the startup companies it is investing in – as compared to pure Venture Capital investments.
Some of the biggest Corporate Venture Capital players are:
There are other industries where CVCs are popular as well, such as biotechnology and telecommunication companies. Currently, CVC has a fast-growing market influence, boasting over 475 new funds and 1,100 veteran funds.
What are the Objectives of Corporate Venture Capital?
Unlike Venture Capital, Corporate Venture Capital strives to achieve goals both strategically and financially. A strategically driven CVC primarily aims to directly or indirectly increase the sales and profits of the venturing company by making deals with startups that use new technologies, entering new markets, identifying acquisition targets, and accessing new resources, while financially driven CVCs invest in new companies for leverage.
This is often achieved 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 often combined to bring higher financial returns to investors.
What Stages of a Startup do CVC Firms Specialize In?
Corporate Venturing Corporations may invest in startup companies in the following stages of a company’s growth and development:
#1 Early-Stage Financing
Startup companies that are able to begin operations, yet are not at the stage of commercial production and sales. At this stage, a startup consumes a large amount of cash for product development and initial marketing.
#2 Seed Capital Funding
Initial capital or money used to cover initial operating expenses and to attract venture capitalists. The amount of funding is usually small at first and is exchanged for an equity stake in the business. Investors view this seed capital as risky, which is why some want to wait until the business has been established before infusing large capital investments.
#3 Expansion Financing
Capital provided to companies that are expanding through launching new products, physical plant expansion, product improvement, or marketing.
#4 Initial Public Offering
This is the ideal stage that most CVCs are trying to reach in the long run. When the startup company’s stocks become available to the public, the investing company will sell their investments to earn significant returns. Earnings will then be reinvested in new ventures where future returns are expected.
#5 Mergers and Acquisitions
This involves financing a startup company’s acquisitions through an investment fund, as well as aligning the startup with a complimentary product or business line that will project a similar brand for both companies. When an interested firm decides to buy the startup, the investing company will take the chance to cash in by selling their stakes. Mergers also benefit the investing company by sharing resources, processes, and technologies with the startup company. This will bring some advantages, such as cost savings, liquidity, and market positioning.
What are the Value-Added Benefits of CVCs to Startups?
A startup firm can enjoy the large investing company’s industry expertise, prestigious name brand, stable financial standing, network of connections, and ecosystem of developed products. This relationship can even lead to a partnership between the CVC and its parent firm, which, in turn, can instantly boost a company’s value.
For investing companies, CVCs serve as a gateway for the possible acquisition of smaller, innovative startups. With CVCs strategically and financially driven objectives, these capitalists can maintain their position as a market leader, even if there are small companies stealing the scene and overtaking the pioneering giants. One example of this is Snapchat and Instagram, both of which are now owned by Facebook.
Thank you for reading CFI’s guide to Corporate Venturing. To keep learning and developing your career in corporate finance, CFI highly recommends these additional CFI resources: