Corporate VC Fundamental for Industrial Growth, Development
The practice of corporate venture capital (CVC) is, indeed, a fundamental component among the set of innovation tools available to top companies worldwide.
CVC refers to the investment of corporate funds in external startups. This practice is based on a win-win relationship where companies, in addition to capital, bring value-added benefits to the startup, such as industry expertise, access to a valuable business network, a position of leadership, and infrastructure to scale up the business. The startup, in turn, not only hands over a stake in its business, together with the potential financial return involved, but also provides access to technologies, products and services of high strategic value.
According to The State of CVC: 2022, a report by SVB and Counterpart, the presence of CVC units within corporations headquartered in developed economies is now commonplace. In the US alone, more than 70 percent of Fortune 100 companies have corporate venture capital units and take part, on average, in 3 out of every 10 VC deals. It is also worth noting that CVCs in this geography have made high-quality investments, with participation, on average, in 60 percent of the companies that have completed an IPO in the last five years.
As for Latin America, Corporate Venturing Latam 2020, a study of companies with consolidated annual revenues of at least US $4 billion, revealed that there are huge opportunities for growth in the region; one-fourth of this activity is recorded in Mexico. According to data by AMEXCAP, since 2011, various corporations have completed 132 transactions through their CVC units. Corporations that have already structured CVC mechanisms include Arca Continental, GBM, Proeza, Bimbo, Grupo Modelo, Cemex, ADO, Coppel, and Femsa, among others.
Although CVC investments are made in all industries, some have been more widely affected by technological innovations, creating a sense of urgency at the c-level to come up with strategies to combat these disrupting forces. It should be noted that trends and new technologies that are attractive for CVC units to invest in can be applied and be relevant to more than one industry. Therefore, it is quite common to see several CVCs representing non-competing corporates investing in the same deal. Among the startups getting more attention today we find companies dealing with solutions for climate change problems (decarbonization, driverless electric vehicles, circular economy), cutting-edge technologies (semiconductors, robotics, extended reality), Web3 (metaverse, digital twins), artificial intelligence and machine learning, Big Data and IoT, healthcare and biotechnology, fintechs, supply chains, cybersecurity, education and workplace technology, and consumer products.
While some CVC mechanisms are created with the sole goal of getting financial returns for the corporation, most of them also seek strategic benefits on their investments, such as the creation of strategic partnerships, access to the startup’s know-how or adoption of new technologies for the corporation. In some cases, an initial minority investment in a startup can evolve over time to an attractive full acquisition target. Getting to know a potential competitive threat or complementary business through a CVC investment can be a great way of validating key aspects that are crucial for the success of a bigger investment.
One of the key aspects in the development of a successful CVC program is the thoughtful creation of a well-defined investment thesis. This thesis may vary depending on the strategic and financial goals established. Among the advantages of CVC is that it is tailored to the vision and strategy of the corporation, so there is no single recipe for success, and investments can be made at any stage in the life of a startup. That being said, according to different worldwide studies, most CVC investments go to early stage (A and B) startups that are past the proof of concept stage and already offer products and/or services that have been tested on a smaller scale.
CVC investment is, undoubtedly, an increasingly common practice among the major corporations worldwide. The results and added value brought by these investments speak for themselves. In the last decade, CVC investments have grown steadily to achieve US $177.1 billion globally in 2021 alone, according to CB Insights, State of CVC Global Q3 2022 as well as Global Corporate Venturing.
As specialists in the management of corporate venture capital funds, we at Corporate VC by LIP Ventures Boutique strongly recommend the following practices for the execution of a successful CVC program:
Experience in venture capital. It is fundamental for a CVC program, whether it is managed externally (CVC as-a-service) or internally (self-managed CVC), to have people specialized in venture capital running it. This allows for optimization and speed every step of the way, from the selection process, due diligence and investment to the extraction of strategic value from the investment and the post-investment management of the deal.
Liaison with the company’s business development team. This provides an interlocutor to push the project from within the company and make exterior opportunities visible for startups that are part of the CVC portfolio, fostering strategic and financial value in the investments made.
A speedy investment governance process. Being able to make investment decisions soon after the due diligence is completed is crucial to avoid slowing down the usual pace of the venture capital world, where other funds taking part in the investment round will move fast.
Be transparent with the startup. If the company is genuinely interested in investing, it is really important to be clear with the startup from the get-go regarding the expectations related to the due diligence and decision-making processes.
Efficient and ad hoc due diligence process. The scope and time to complete due diligence are completely different for an early-stage startup than for major M&A transactions. A corporate with an effective CVC program should be able to adapt.
It is not enough for a company to have a clear leadership and innovation perspective in order to develop a successful CVC program. The corporate should also commit to more flexible decision-making processes and set aside financial resources so that it can move quickly on strategic investment opportunities.
Today, the US is the most relevant player in the CVC industry worldwide. Notably, various Eastern European countries have also gradually become benchmarks. Specifically, in Latin America, the countries with a bigger share in this market are Mexico, Brazil, Argentina and Colombia.
The practice of corporate venture capital will continue to dominate various geographies and industrial sectors; ensuring that expert advice is at hand will reduce risks and make positive results more likely.