When Pitchbook published its 2022 figures on European VC deals, there was a surprise statistic: one fifth of deals were made via corporate venture capital (CVC).
Although the first CVCs can be traced back to the early 20th century when large American organisations made investments into smaller companies which had some relation to their operations, the practice has become more established of late.
Today, firms such as Google, Unilever and BP all have venture capital arms investing and partnering with high-growth start-ups operating within their industries.
What is corporate venture capital?
Corporate venture capital is venture capital supplied by large corporates. They invest in start-ups relevant to their wider strategic aims and can therefore benefit from in the long-term.
One example of a CVC is InMotion Ventures by Jaguar Land Rover. The VC invests in tech start-ups such as a payments company which enables customers to spread the cost of their car repairs, a platform for customers to view all their car-related payments and a company offering augmented reality head-up displays. The UK’s most active CVC, according to Beauhurst, is UK Steel Enterprise (UKSE), a subsidiary of Tata Steel.
The desired result of the partnership is that large corporates stay at the forefront of innovation in their field, while start-ups gain industry knowledge, capital and contacts to boost product development and growth.
“CVC is one of those terms that covers a multitude of different things depending on who you are,” Mark Rundall, partner of lawyer firm Bird & Bird tells Growth Business. “In the broadest sense it’s a corporate investing its own money, rather than a VC that’s investing someone else’s money.
“But within that you’ve got quite a spectrum of different approaches within the market. At the one end you’ve got very sophisticated CVCs which are basically venture capitals but use the corporate as a [limited partner] and they run it like a venture capital fund – they tend to make a larger number of investments and tend to be cash driven. On the other end of the spectrum, you have something that is more like a joint venture or a strategic partnership where a corporate is making a small number of investments but for a particular reason with that particular counterparty.”
Corporate venture capital vs venture capital
One key difference between traditional VCs and CVCs is that CVCs typically involve themselves more in the companies they back, because of the direct effect they have on future innovation within the organisation.
Big corporates want to see how more agile start-ups operate and how they’re adapting to the market they’re in. For more traditional VCs, they’re solely making a financial investment.
What are the benefits of corporate venture capital?
For companies, taking on CVC sends a strong signal to industry that your technology is disruptive, which can drive up more trade. A corporate investment can add connections, knowledge and growth through collaboration.
“CVC brings more than just cash,” Rundall explains. “Your traditional venture investor will bring strategic guidance through the board but basically, it’s about the cash investment and maximising [that].
“That’s still good for the company because it’s for the benefit for everyone – you’re growing this idea together and it’s a partnership. CVC just brings something slightly different – it’s not only that but also there’s some sort of dual benefit to the parties involved. In a well-structured corporate deal, there is something in addition to the cash that is of benefit to both sides.
“Whether that’s commercial synergies, because the corporate has got a more sophisticated, established back office that they can use to help grow the company or they’ve got more mature policies and understand how the market works. [Perhaps] the start-up is doing something the CVC was trying to do but couldn’t find a way to make it work.
“You get that really interesting crossover of a big corporate and a small, dynamic business coming together to fix each other’s problems.”
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What should start-ups be wary of?
Typically, CVC is mutually beneficial to both corporates and start-ups. However, in rare cases, corporates may want to back start-ups with the aim to acquire them on favourable terms further down the line. While this is not always the case, it should be something you’re aware of early on with many consultants advising not to agree to it if it’s stated in the contract.
“You’ve got to make sure you’re getting into relationships for the right reasons,” Rundall advises. “That’s not just why you’re taking money from them but why they’re investing in you. Those points have got to match up.
“The [deals] that haven’t gone so great are those that didn’t have an alignment of interest at the beginning, or they weren’t fully transparent about what they were trying to get from it. Companies that are just looking for cash and get an offer from a CVC and saying ‘well, it’s just cash like any other VC,’ I think they perhaps underestimate the extent of the relationship that the CVC’s looking for.
“In addition to that I think there has to be an element of personal chemistry. If you don’t have that personal chemistry, it’s difficult to then build the relationship – this is a relationship-driven market.”
Case study
BP’s venture capital arm, BP Ventures, plans to invest $200m into disruptive green energy companies this year.
The corporate breaks down its strategy of cutting production emissions to net zero by 2050 down into what it calls five ‘transition growth engines’ – bioenergy, electric vehicle charging, convenience, hydrogen and renewables and power.
BP looks to invest in start-ups which fall into one of these categories. “Investing in start-ups is a great way of giving us insight into what some of the future disruptive opportunities may be,” Gareth Burns, head of BP Ventures explained to The Times, stating the CVC is looking to back start-ups developing new technologies which have the potential to scale reasonably quickly and are looking for an energy company partner.
Which companies are best suited to CVC?
Crucially, the start-up will need to already be producing technology that is relevant to corporates.
“Typically, companies that are already revenue producing are better suited to CVC than seed stage companies,” says Ian Cooper, head of CVC Europe at National Grid Partners. “Corporate business units engage with companies because they’re looking for a solution to a business problem. And they usually want that solution now.
“Companies that are already revenue producing tend to be more successful in their engagements at a business level. Their product is usually more mature, their processes more structured and their balance sheet stronger.”
Along with everything working on paper, Rundall says almost every business can benefit from CVC but there has to be an element of personal chemistry. “You’ve got to make sure it’s the right relationship for your business … you’ve got to share the same dream,” he says. “That’s perhaps exaggerated in CVC because there will be a closer relationship.
“You’ve got to take into account where are you on your journey as a start-up, what’s your journey going to look like and how do you get there. Can the corporate accelerate the growth or are they just another cash investor coming with all these extra things you’re going to have to do.
“It’s about being transparent with each other from the outset. What is it that you as a company want from them and what is it that they want from you? Make sure you’re having that conversation right at the beginning.”
How can you get corporate venture capital?
According to Cooper, most successful CVCs approach deals in a manner not too dissimilar to financial VCs. “We have similar deal-sourcing mechanisms, similar reflexes when it comes to evaluating the financial merits of a deal and similar expectations for deal terms and financial performance,” he says. “So if the company is seen by financial VCs to be attractive, it’s likely a CVC will find it to be an attractive deal too.”
Unlike standard venture capital, however, businesses tend to have a connection with the CVC. In other words, a start-up needs to serve a strategic purpose for the large corporate.
“The reality of it is most companies which take on CVC investment have some sort of connection with the company before they took their investment,” Rundall explains. “Either because they were doing something together already or because the big corporate is one of their key customers or key suppliers and then they realise there are bigger and better things they can do together. It’s less common in the CVC market that it’s a speculative pitch deck.”
An alternative is to look into incubator programmes run through corporates. Examples of incubator programmes include Founders Factory, which links start-ups with corporate partners, and Plug & Play Ventures, which runs over 100 industry-focused accelerator programmes.
“Start-ups interested in CVC funding should first assess whether their product or technology is relevant to the corporate and, if so, reach out as part of their normal investment round activities,” Cooper concludes. “Today’s CVC is much more sophisticated than the CVCs of yore, and there’s no black magic involved. If you have a great technology and a great company, reach out!”
More on corporate venture capital
Active UK corporate venture capital firms – Google, BP and Unilever all have their own CVC divisions backing UK-based companies. Here are those active in the UK and what they look for
