Startups have long been the engines of innovation, driving change and challenging established industry standards. Their entrepreneurial spirit and fresh ideas have revolutionized various sectors, from finance, healthcare, retail and beyond. This year, corporate venture capital (CVC) will be more important than ever to fuel startups’ ambitious journeys. The relationship between established corporations and nimble startups could reshape the business landscape as we know it. In Q3 2024, global CVC-backed funding ticked up 4% QoQ to $14.6B, according to CBInsights. While small, the increase came against a backdrop of a larger decline in the venture market.
It is significant because CVC offers a unique bridge between the experience and resources of established corporations and the agility and innovation of startups. These collaborations provide startups with the resources and support needed to thrive and enable corporations to stay at the forefront of their industries. It’s a win-win that fosters innovation and drives growth, positioning both startups and corporations for success in an ever-changing world.
What Entrepreneurs Should Know About CVC
Startups are navigating a diverse landscape of funding options which include traditional venture capital (VC) and CVC. Often, they are funded by one or the other. Other times they receive investments from both. Either way, there are clear advantages and trade-offs associated with each funding path.
In the venture capital industry, individuals compete in a market where the primary commodity is money – a resource that is abundantly available. Venture capitalists frequently vie for the opportunity to fund startups by highlighting the distinctive value they can bring, when done right. VC has long been recognized as a major source of funding for startups, but its significance extends far beyond the infusion of capital.
Beyond the financial backing, VC investors bring expertise and industry-specific knowledge to the table. These established investors specialize in specific verticals, offering invaluable insights, strategic guidance, and mentorship to the startups they back. Moreover, many VC firms go the extra mile by providing what is often referred to as “platform” support. This encompasses an array of services, from aiding in recruiting top talent to shaping effective go-to-market strategies, providing access to a vast network of industry connections, and even furnishing subject matter expert support. Furthermore, there’s a distinct reputational advantage in having a renowned VC firm invest in your startup, lending it credibility and trustworthiness in the eyes of future partners, customers, and investors.
Likewise, large, well-established corporations can offer substantial benefits to startups. They can serve as valuable distribution partners, potential customers, and repositories of industry expertise. Being an early customer, for example, not only signifies a prestigious blue-chip endorsement but also provides invaluable insights into achieving the right product-market fit. In the past, there was a narrative that corporate funding came with strings attached, like the right of first refusal and restrictive terms, which made it less appealing. However, this narrative has largely evolved over time.
It’s important to note, however, that these partnerships do not always guarantee success. In most cases, the key lies in having a dedicated CVC team/unit whose primary focus is nurturing and facilitating entrepreneurs. Colloquially, the team is referred to as “platform people.” Their responsibility is not limited to the initial investment decision-making, but extends into identifying the right investments, conducting due diligence, and ensuring a seamless transition into the deal. Platform teams possess a deep understanding of how to navigate the internal workings of the parent company or “mothership.” Their entire professional mandate revolves around guaranteeing the strategic value addition is effectively executed with their KPIs tied to the follow-through and success.
Unlocking Success: Beyond Capital Infusion
Capital is vital for every startup. However, in a startup-investor relationship, the investor’s ability to bring in customers and, in turn, create revenue can be even more important than the infusion of capital. Without customers, the significance of raising and having available capital diminishes.
In the context of CVC, an intriguing dynamic arises: the presence of a commercial deal before an investment is even made. But this all depends on the CVC unit and expectations of the parent company. Some CVC arms might be eager to invest in startups, but they can’t always guarantee that a business partnership will happen between the mothership and a startup. Other CVC units take a more stringent approach by stipulating they’ll invest only if there’s a commercial deal already in place from another part of the corporation. In other words, one of the conditions for the investment is a commitment from the parent company to actively work together with the startup. This ensures that the investment isn’t just about money; it’s also supported and endorsed by the relevant business unit in the parent company.
Without this alignment, scenarios often unfold where an investment is made and excitement builds, but practical adoption falters because the business unit didn’t actively engage or support the partnership. Entrepreneurs should be aware of the CVC unit’s specific mandate. In most cases, the justification of CVC is to strategically integrate the startups within the wider ecosystem of the organization. This often implies that the mothership would become a customer or collaborator in some form or fashion that advances both the startup and corporation, but entrepreneurs would be wise to explore the specific opportunities for collaboration or deals.
CVC Surges Past R&D: A New Path to Innovation
According to research from CB Insights, Pitchbook and other sources, funding from CVC has seen significant growth over the past two decades, surpassing growth in research and development (R&D) spending by a threefold margin. Part of this is due to the lower initial investment base, but it highlights the challenges faced by large corporations in creating truly innovative products or solutions. If we look at major innovations developed by big companies have come from in recent years, the list is relatively short. Consequently, companies are starting to see the potential of CVC to drive innovation.
Historically, institutional venture capitalists favored consumer-oriented enterprises, but today’s landscape places great emphasis on the business-to-business endeavors, particularly enterprise software.
Sustainability, with a strong focus on climate technology, for example, has emerged as a favorable domain for CVC funding. Unlike some industries where startups seek to disrupt established players, climate technology often revolves around constructing solutions. Notably, the primary clientele for such innovations are the major corporations striving to meet their sustainability goals. Challenges such as the scarcity of sustainable aviation fuel present unique opportunities. Corporations are not only investing in these solutions but also securing agreements to obtain early access to these groundbreaking products, thereby ensuring they can meet their aggressive net-zero targets.
BP Pulse, the prominent electric vehicle (EV) charging company, for example, has its origins in a strategic investment in a startup. In its early stages, BP recognized the potential of the growing EV market and decided to invest in an emerging organization that focused on EV charging infrastructure. This investment was part of BP’s broader strategy to position itself in the rapidly evolving electric mobility sector. Consequently, the startup and BP’s broader EV charging initiatives were merged to create a dedicated and standalone entity, which was named “BP Pulse.” This strategic move allowed BP to develop a more comprehensive and competitive offering in the EV charging market. BP Pulse has since become a major player in the industry, providing a network of charging stations across various regions, facilitating the transition to electric mobility, and supporting BP’s commitment to sustainable and eco-friendly transportation solutions.
For startup founders seeking investment and partnership opportunities with established corporations, the growing prevalence of CVC is a promising trend. As we look ahead, there are more CVC entities than ever before, making it an opportune time for startups to explore these strategic collaborations. This evolving landscape is offering entrepreneurs new avenues to not only secure funding but also align their businesses with corporate giants, creating mutually beneficial partnerships that drive innovation and industry transformation.
ABOUT THE AUTHORS
Neal Hansch, CEO, and Managing Partner of Silicon Foundry, a Kearney company, joins forces with Evan Gutoff, Partner and co-lead of Kearney’s Transformation Practice, to offer readers a dynamic blend of expertise tied to the world of corporate venture capital. With 25+ years of venture capital, product management, technology operations, and corporate development experience, Hansch brings a wealth of knowledge from his leadership roles at MEST, Rustic Canyon Partners, and Macromedia. In tandem, Evan Gutoff specializes in the office of the chief transformation officer, large-scale transformation programs, and corporate venture capital.
