With global corporate-venture-capital-backed (CVC) funding reaching $79 billion across 2,099 deals in the first half of 2021, according to CB Insights, the chances are high that startups will find great opportunities with this growing investor set.
Entrepreneurs, however, are likely to discover that the investment process can be different for CVCs compared to private venture capital firms. While both types of investment firms tend to make decisions via an investment committee (IC), private VCs (inclusive of VCs with corporate backers that have an independent LPA structure) make up their ICs with firm partners and/or other venture-minded people.
As CVCs become more active, entrepreneurs often don’t understand that the decision to invest, or not, doesn’t rest solely within a subgroup of the direct investment team or with venture-minded people.
But for CVCs investing off a corporate balance sheet, the IC can include corporate-minded people, such as the CEO or business unit leaders, who generally tend to be detached from the venture mindset and the requirements for operating in the VC world. As such, entrepreneurs will realize that a successful CVC investment decision tends to have different requirements compared to a private VC firm’s decision.
So what do entrepreneurs seeking investment need to know about this relatively new but powerful participant in the funding process? I’ll do my best to demystify the role of the CVC IC and shine a light on how entrepreneurs can navigate some of the hidden pitfalls while taking advantage of the opportunities.
The arbiters of investment
While private VCs immerse themselves into the venture ecosystem, CVCs live in the middle of two very different worlds and mindsets: corporate and venture. The CVC must engage the venture ecosystem to attract deal flow while also driving opportunities that can be of strategic interest to the corporation.
To do this well, a CVC ideally should have a well-defined mandate and IC purpose statement — to deem investment opportunities as strategic, for example. A business unit leader or CEO who spends about an hour on a monthly IC session is nearly completely immersed within the corporate mindset while making a decision related to the venture world.
It is therefore important to make sure that everyone involved in making the investment decision has all the information necessary at the start of every meeting, even if doing so risks being redundant. If the CVC’s purpose and the IC’s role are ill-defined, every IC meeting may well be a shot in the dark.
A CVC is also well advised to “socialize” opportunities with individual IC members before the formal IC decision. Within the private VC world, this tends to happen organically as firm members, including those who sit on the IC, meet frequently to discuss new opportunities and progress through diligence.
What entrepreneurs can do to help the CVC team convince the IC
There are several best practices and tenets every entrepreneur should know to work successfully with a CVC. Here are my recommendations:
Gain clarity
Conduct a careful analysis of how the CVC’s IC works. Ask the investor what their “hit rate” has been with the IC for the past year. Why spend significant time with a CVC that has a recent hit rate of under 60%?
Understand the mandate
The IC governs mandates and will decline an investment opportunity if it does not align well. Reasons for declining can range from too early or not strategic enough to not compelling enough considering the risk/reward proposition. Ask the investor why any previous recommendations were not approved to better understand the IC’s collective state of mind.
Be proactive
Understand that the CVC brokers between the corporate and venture mindsets. Help the investor by offering to meet with internal groups or even IC members so that a deeper level of understanding and “buy-in” can be achieved. It’s always easier to say “yes” when there is direct familiarity.
Be patient
If you want to leverage some of the benefits that CVCs offer for scaling or market expansion, be mindful that there can be elements that require more time than a private VC firm. For example, two legal reviews are common: One by the CVC using outside advisers and a second by the corporation’s internal legal team.
Sometimes, the CVC unit itself is not the signatory, so coordinating signatures can take longer. Further, wiring from a corporate’s balance sheet can require more time to set up versus a private VC firm investing from its own accounts.
A final word
As CVCs become more active, entrepreneurs often don’t understand that the decision to invest, or not, doesn’t rest solely within a subgroup of the direct investment team or with venture-minded people. By understanding the roles, processes and how to help get their deal through a CVC IC, all parties stand to benefit.