Corporate Venture Capital: Unique Benefits of CVC Funds
What unique benefits can CVC funds provide, and is it the right funding choice for your startup?
Standard venture capital (VC) firms are typically formed for the purpose of investing in startups to generate positive returns on behalf of investors. In the case of corporate VC (CVC) funds, the parent company is still looking for a positive return, but there are also significant strategic considerations when evaluating potential investments. Investing in startups provides corporations with added agility in their strategy to pursue growth opportunities, without building out new teams and divisions from scratch. They can make smaller investments in startups to trial new segments or technologies before making larger investments. There are three key benefits of a CVC fund investment for a startup: access to assets of the parent company, increased credibility with other investors, and a potential built-in exit opportunity of being acquired by the parent company in the future.
Beyond returns, CVC funds select target companies that have strategic benefits to the investing company’s existing business or provide them with a presence in a segment or industry in which they do not currently operate. For a CVC fund to maximize its investment in a startup, the fund will usually provide access to the parent company’s assets, personnel, and connections to help the startup grow. This is an added benefit to the startup because it can open doors to partnerships that otherwise would not be accessible to them. Being able to leverage the operational capabilities of a larger company can give a startup a significant competitive advantage in the market. It is crucial for startups to evaluate the potential benefits of partnering with a more established company and understand what value those synergies and connections will bring to the startup during the negotiation of deal terms with a CVC fund.
Another benefit of attracting CVC investment is the added validation with other prospective investors and industry partners - when a large, established company in a particular industry invests in a startup, other investors will potentially be more interested and willing to invest. This is especially true when dealing with investors who are not as familiar with a startup’s journey and industry specifics, as it offers validation that an in-industry firm is vetting the startup as having a valuable business proposition; it also helps boost how the startup is perceived in the industry and with third-party partners, especially those who work with the parent company.
The final benefit of CVC investment is laying the foundation for a potential exit opportunity. A startup should always be cognizant of what exit opportunities are available to them and bringing on a CVC investor could be a great way to open the door for an acquisition by the parent company. CVC is usually a vehicle for companies to identify, develop relationships, and invest in acquisition targets. This can also reinforce the startup value because other investors see the potential exit opportunity being developed when there is a CVC fund invested.
CVC brings a set of benefits to startups beyond just capital, and unique strategic benefits standard VC firms do not provide. CVC funds can provide startups with resources and connections that otherwise would not be available. They also provide startups with recognition within their industry, and with investors, as they grow and continue raising successive rounds of investment. CVC investment can also lay the groundwork for a startup to be eventually acquired by the parent company. Such unique benefits of CVC make it an increasingly popular funding option for startups as they look to not only raise capital but to also gain strategic benefits from their investors.
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At Lodestone Advisory Group, we support our clients in thinking through the ever-changing dynamics in the world of business; we also help them devise and execute strategies to address complex business issues to compete in a global marketplace. Over the years, among several other things that we take pride in accomplishing, we have supported our partners in designing and launching international accelerators and innovation hubs, we have advised and invested in successful start-ups and supported them in their quest for sustainable growth, we have advised on public-private partnerships that led to successful commercialization efforts, we have supported business turnaround/transformation efforts, and we have advised on transactions and collaborations between large organizations and small businesses providing small businesses with access to global resources and large organizations with long-term value creation opportunities. To learn more, please follow us on LinkedIn and Twitter and feel free to contact us at info@lodestoneadvisory.com or reach out to one of our team members.