Designating a CVC Fund: Key Considerations – Part I

In my previous notes I have commented on the importance of  being committed to growth companies by relating to startups, creating an ecosystem of innovation and, in the best case, structuring an investment fund (corporate venture capital or CVC) to deploy money in startups. This allows for faster adaptation to the speed of change generated by innovative technologies.

In the same way, I have also commented on the benefits of adopting corporate venturing models in terms of growth, innovation and development of new businesses and products. And likewise, I have argued about the importance of integrating a strategic and financial vision when considering the creation of a corporate venture capital fund and the differences that this means compared to a traditional venture capital fund.

In this article, I will discuss the key considerations that the management team and the main shareholders of the company should consider when designing a corporate investment fund for startups.

Key Considerations to Set Up a Corporate Venture Capital Fund

There are three key considerations that organizations should consider:

1. Commitment and execution – It is necessary to question the commitment of the management team and the role of the CEO in incorporating and executing new growth models. In principle, because it should be considered that, like other vehicles for growth, such as M&A, R&D or joint ventures, CVC is not the ultimate solution, but it has great qualities to identify and attract innovation and disruption to the organization. In good times for organizations, these are often allowed to make large expenses that are not entirely justified or that do not represent a strategic outlay for the company. This sometimes means creating investment funds simply for the sake of jumping into the hype of innovation and startup investments, rather than developing a clear vision and commitment to how the organization can benefit from making those investments. Consequently, when good times change, the investment intention also changes and is no longer a priority.

2. Vision – For this reason, it is mandatory to clearly establish the fund's vision and how it creates value for the organization. That's why I always try to understand the reasoning to create the fund and what is the main purpose. Some of the best reasons for setting up a fund can be summarized as follows:

3. Create a portfolio of acquisitions or minority investments that facilitate the creation of new businesses and products, identify talent, identify new uses of technology and new business models.
4. Support and renew existing business models and products in the market.
5. Understand a market or segment and its dynamics.
6. Provide the organization with a constant source of new visions, structures, thinking and management models.

1. Willingness to assume risks – Although it is true that a venture capital fund implies uncertainty and associated risk, many organizations do not understand the nature of the risks and uncertainties that startups are subject to, and executives within organizations are far removed from being entrepreneurs and understanding the implications of starting a technology-based company with potential for accelerated growth. Therefore, assuming intelligent risks when investing is of great importance and for this it is important to understand in depth the fundamentals that define the growth of startups.

The Main Pillars for Setting up the CVC Fund

When considering the creation of an investment fund, it is necessary to use the following six pillars for its formation:

1. Strategy

2. People

3. Incentives

4. Deal flow

5. Governance

6. Ecosystems

Strategy – The company must establish a long-term strategy for the investment fund. The components of the strategy should include:

• The objectives – These must be consistent with the growth 

• strategy of the organization, such as establishing that the purpose of the investments will be to conquer one or more of the following targets: complement the company's R&D capabilities, acquire business at an early stage to incorporate them as new business units to the organization, contribute to the growth of the organization in a certain amount of income derived from innovation, among others.

• Investment thesis – Specify the sectors, industries and market segments to invest in.

• Investment Stage – Determine if the fund will focus on early, growth or late stage investments.

• The life of the fund – Most traditional venture capital funds have a five-year investment period and another five years to reap the returns. In the case of corporate funds, the period to harvest can be very different and can also be quantified in various ways that are not only financial but also strategic at the time the invested startup is incorporated into a new product or business unit, or speeds up an R&D or transformation process. As a result, the payback period of both – the invested amount and the time to produce results –  may be shorter.

• The invested amount – Establish the tickets to invest, but at the same time consider a vision on each investment, considering the path that each investment can develop due to market conditions, technology, market segment, and users, among others.

• Investment governance – Define if CVC members will take seats on the board of invested companies or only be observers. When the design of the fund has a strategic component for the organization, members not only take seats in the invested organizations, but the entrepreneurs are also more immersed in the processes, businesses or products of the company that invests in them, since the investment becomes an asset that generates value when incorporated into the organization.

In the next post, I will continue to describe the remaining  pillars by discussing people, incentives, deal flow, governance and ecosystems. 

Luis Hernández Alburquerque is an expert leader in Corporate Venturing and Corporate Venture Capital (CVC) focused on transforming mindsets to build growing organizations based on innovation, technology and venture investments.