The corporate venture capital (CVC) market is booming.
Yesterday, The Exchange dug into the data behind the CVC market’s very busy 2021. With corporate venture fund creation rebounding to near record levels and the value of deals that CVCs participated in soaring, we wanted to look more deeply into why companies are building their own investing arms.
To learn more, we put questions to Arjun Kapur, a managing director at Comcast’s Forecast Labs; Andrés Saborido, a global director at Telefónica’s Wayra; and Serge Tanjga, a finance exec at MongoDB, a company that recently put together its own venture capital arm.
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After parsing the data, it’s clear that CVCs are busy and increasingly common. But that’s just data. We wanted to learn more: How do active CVC investors view what their investment type is for? Which companies are the best candidates for creating their own venture team? How are today’s corporate investors approaching their remit — are CVCs still blending strategic and financial goals as they have in the past, or is the ratio changing?
A key startup narrative in the last few years has been the rising tide of funds aimed at high-growth private companies. But it’s not a pure venture capital story. Crossover funds are busy in the same space, investing earlier and earlier as time passes. CVCs are also in the mix, helping boost round sizes and, perhaps, lining up later M&A and generally providing a tailwind to all the data we’ve seen concerning rising venture totals around the world.
What’s the modern CVC for?
Our perspective heading into our dig into the CVC market was that the pace of technological advancement is increasing, leading to shorter cycles between what we might call product and business-model innovation. Given that, it makes general sense that more corporations are building venture arms. Not because cash-rich companies are in need of balance-sheet enhancement, but because they need more protection than ever from creative destruction; the faster the current way of working and living is torn up, the more that incumbent firms need to have an early-warning system for change that could upset their extant cash flows.
But does our perspective line up with what active corporate investors think? Our collected CVC players stressed the importance of financial returns, arguing that they fit neatly into strategic goals, more closely linking profits to potential strategic returns than we might have anticipated in today’s era of corporate wealth.
Kapur was clear on the point, writing that “unless your investments are philanthropic in nature, there isn’t much distinction between strategic and financial goals of being a CVC.” Why is that the case? In his view, intelligent “strategic investments are also good long-term financial investments” for corporate investors, and it’s uncommon for “an investment that is not financially prudent to be strategically prudent.”
More simply, if you put your money to work in the areas where your company has concerns or optimism – defense and offense, respectively – and you have the right perspective, you should get the strategic benefits while also collecting a worthwhile internal rate of return.
Saborido struck a similar tone, saying that “strategic goals and financial goals” at a corporate venture investor “always go hand in hand, like two sides of the same coin.” He connected them in a slightly different manner than Kapur, saying that while the “trigger” for a particular CVC investment may be strategic, “financial goals are a necessary condition to be pursued in any case.”
Tanjga drew a slightly larger circle around corporate venture goals, writing that “there is a subset of CVCs that have purely financial goals,” though he quickly followed up that point by implying that such cases are rare, adding that “everyone else [in the CVC market] has some mix of financial and strategic” goals.
The requirement that CVCs be financial and strategic was stronger than we anticipated; it’s simple from the outside to presume that wealthy corporations have the ability to be somewhat loose with cash when they’d like. Apparently, when it comes to investing, the strategic benefits that may be earned have to come with at least the ability to pay for themselves.
But that doesn’t mean that nothing is changing in the CVC market during these boom times. Saborido made an interesting argument that the “creation of new venture arms in companies is natural with a VC market that has already matured.” In a sense, then, the rise in crossover capital and gains in CVC investing are driven by similar dynamics inside the venture capital market itself – things like the commodification of capital and the fact that software startups, in particular, can be easily classified, vetted and compared based on now-standard metrics.
Provided that a CVC can generate enough returns to pay its own bills, and, we presume, cover its own capital costs, we were right in that major companies are disruption-hunting. Saborido said that for CVC work at both younger and older companies, “the ultimate goal is the search for competitiveness,” which they think can come from reducing time to market for new products or consolidating a particular space in the short-term, helping to engender whole-cloth company transformation over a slightly longer time frame or even maintaining “leadership in the long term by leading market disruption.”
So while there is more corporate venture money than ever flowing into global startups, it doesn’t appear that there has been too large of a shakeup in their goals. Folks are just doing more of it, thanks in part to evolving venture dynamics more broadly, but also to simply avoid falling behind. Looking ahead, we’d argue that innovation is not about to slow, so it wouldn’t be too much of a shock to see another strong year of CVC creation in 2022.
But which companies are next up in the CVC game?
CVCs for all?
As we noted in our previous piece, it’s not just public companies that are setting up CVCs. “We’re also seeing some pre-IPO companies such as FabFitFun setting up venture arms,” Kapur confirmed.
Does this mean that all tech companies should set up their own funds? Kapur doesn’t think so: “Venture investing is not something that a tech company needs to do by default,” he told TechCrunch. “It’s not for everyone.”
How can a company decide whether a CVC is the right choice? Kapur has some advice: “Before setting up a venture arm, it’s important to be very clear on the objectives that the company is trying to achieve that it cannot [reach] without an investment in an external business.” If that goal can be completed through partnerships or business development, maybe a CVC effort isn’t warranted, he explained.
Kapur is aware that CVCs can have other goals, but thinks that they need to be identified from the very start in order to pursue the right metrics. “If the purpose is not to try and solve for a business goal – such as tech, innovation, expansion and more – but rather to support entrepreneurship, then that purpose needs to also be clearly stated and laid out.”
In our opinion, the range of goals for which CVC is relevant means that a large range of companies will want to establish one. Is there still space for them to do so? Or will they face too much competition? Maybe not, according to Saborido: “The market has grown not only from the demand side but also from the supply side, so there is more competition but also more opportunities.”
For Saborido, the most challenging competition facing corporate arms will be on the talent side, “especially in [hubs] that are developing, such as Sao Paulo and Latin America in general.” His advice to address this is that “a CVC’s approach to its team must be closer to that of a VC than to that of the corporation.”
There’s another reason why corporations might want to take a page from VCs: value add. MongoDB’s Tanjga is critical of some CVC efforts that miss the mark. “We believe most corporate vendors that jump into VC efforts don’t go far enough to support their portfolio investments and, in our opinion, are missing out on a key benefit they can bring to their portfolio companies.”
Standing out
Back in the day, merely having capital for private companies made VCs unique; they didn’t have much competition. That’s changed. CVCs, as we’ve stressed, are increasingly common, putting pressure on traditional VCs to get the allocation they want in deal, let alone deal access. But the same dynamic is at play among CVCs – they will also have to stand out from their competitive pack.
This is perhaps why Tanjga told The Exchange that MongoDB plans to be very engaged with its portfolio companies, offering to “pair entrepreneurs with MongoDB executive mentors, support product and go-to-market initiatives, and provide exposure to partners and customers” in addition to funding. That sounds like, well, a similar sort of package to what non-corporate VCs provide? All you have to do is swap out corporate execs with an executive talent pool and change out partner exposure with hiring help, and the list is pretty much the same.
So we should see, in the future, CVCs expanding their remit to ensure that they are also offering more than just cash; we spent much of the last two days thinking about why corporations might build their own venture vehicle, but that focus presumes that founders in hot companies will want to take their money. Perhaps we’ll now see an arms race among CVCs to ensure that they stand out inside their own product or market niche.
What will that lead to? Larger CVC funds so that returns can cover costs? If so, well, it will pit corporate investors against their peers more, yes, but also against non-corporate VCs. There’s some irony in that, which we appreciate.
The venture capital boom will eventually slow; business cycles always slow. But the dynamics driving CVC forward appear strong, and with corporate venture arms built to pay for themselves, at least in theory, they will be hard to shake out of the market. For founders, it’s great news. For other capital sources chasing ownership, it’s perhaps less welcome.
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