Suffolk Technologies wants to have its cake and eat it, too.
Corporate VCs and traditional investors help startups in different ways. While venture capitalists are better equipped to help startups land their next funding round or make their next hire, CVCs can ask their corporate overlords to serve as early product testers or customers. Suffolk Technologies, Boston-based construction giant Suffolk Construction’s new VC arm, hopes to offer its portfolio companies the best of both — and reap the benefits of both, too.
Suffolk Technologies this week launched its debut $110 million fund to back construction tech startups across stages. While the fund shares some of its parent’s resources, like marketing, the firm mainly raised capital from external investors and is operating as a stand-alone fund.
Jit Kee Chin, the fund’s co-founder and managing partner, said Suffolk Construction started investing off its balance sheet a few years ago after it began to notice a couple of trends: All of the interesting innovation in construction was coming from startups, and venture capitalists seemed eager to back those companies.
“We saw the potential, we saw the strategic value for us going in and decided to start investing in early 2019,” Chin told TechCrunch+. “That was really the genesis of Suffolk Technologies, but we invested from 2019 onward as we tested out our investment thesis.”
During that time, the company backed 30 companies. Chin said that once the portfolio started showing momentum, they departed from the usual CVC route and started raising external capital.
While Suffolk Technologies isn’t the first fund with CVC roots to raise outside capital, it’s still uncommon. Plus, it’s interesting to decide to take on the additional investment risk of having outside investors, especially given today’s rough climate.
But Chin maintains the view that this is what made the most sense for the fund.
For one, it broadens the firm’s investment scale. She said there was only so much capital Suffolk was going to be able to invest off the balance sheet, so adding external LPs allowed the fund to be more active while still bringing the financial rewards home.
She said this approach also helps the portfolio companies. About half of the fund’s LP base consists of investors in the construction industry, which means more potential customers and real industry feedback for their companies.
“By inviting others to invest with us, it helps us gain the insight and the expertise, and help the companies we invest in get the support they need,” Chin said.
One of the firm’s LPs is Holcim, a sustainable cement business. Chin said Holcim can offer support to companies looking to make construction more sustainable, or startups looking to innovate on building materials, things that Suffolk as a CVC wouldn’t be able to advise on as well.
The last reason, Chin said, is that this approach creates better alignment with the fund’s goal: to make real financial returns.
This makes a lot of sense. Long gone are the days where corporate VCs were just interested in backing companies that would strategically help the broader corporation, but anecdotally, many founders still get that vibe from CVCs. Moreover, some CVCs, like Databricks Ventures, make it clear that while it wants to make money, it’s a strategic investor first.
This is also likely welcome news to startups looking to potentially partner with Suffolk Technologies. While founders don’t generally shy away from CVCs, it’s a different kind of money than traditional VC dollars.
CVCs allow startups the resources of a big company and the ability to potentially land a large customer earlier than they would have otherwise, but some corporate investors can shape a startup’s narrative in their own favor by either prepping the smaller company for an acquisition or making decisions to help the larger entity.
Suffolk Technologies’ strategy eliminates that. Startups get the resources of the larger company, but the same mission as any other investor: Grow as much as possible.
This is, of course, not without challenges. Taking on outside investors brings a different level of risk than investing off a balance sheet. Not that CVCs don’t care if their companies do well, but for CVCs, returns are more of a nice-to-have rather than a need-to-have, unlike when you have LPs expecting their money back. Plus, a $110 million pool will only do so much as companies scale.
It’s interesting to consider whether more CVCs will look to take on external capital for similar reasons. The category has been exploding in recent years, with more than 100 new CVC funds hitting the market in 2022 alone, including household names like Home Depot, Chipotle and Ulta. Many of these firms operate small funds (compared to their parent companies) and may experience the same size constraints that Suffolk Technologies sought to avoid by bringing on LPs.
While raising outside capital is much more difficult than moving some numbers around in a spreadsheet, it also allows for more potential upside. For Suffolk Technologies, Chin thinks it is the right approach.
“We bring the best of both worlds,” Chin said. “The team provides the standard benefits from a traditional VC: How to raise capital, making connections to our network, etc. In addition, we bring what CVCs tend to offer.”