The corporate venture comeback: What startups considering CVC need to know

Corporate venture capital investments (CVCs) now represent more than a fifth of global venture. The bigger slice of the funding pie comes as founders have to navigate a more uncertain capital landscape. Amid the Ukrainian conflict and rising inflation — with many investors being more cautious with their dollars — startups are welcoming the longer-term stability that corporates can offer.

Corporate knowledge, R&D resources, M&A opportunities and networks are invaluable for early-stage companies. But many traditional investors have strong opinions about corporate venture capital projects, claiming that corporates’ role is to buy, not back, other companies. This approach, however, overlooks the benefits of corporate investment, especially in times of dwindling capital flows and more cautious investors.

I’ve worked in corporate venture capital for seven years and teach a master’s class about CVC at the Madrid Bar Association. This is why corporate investment is making a comeback — and what startups should look for in the return.

Corporate investment arms have gotten stronger

While few corporates used to offer startup investment (and the ones that did were primarily concerned with software, practically every corporate is involved in VC today and covers a range of niche sectors. That means there’s more corporate money and players for startups to explore.

Corporations have also come to realize the potential of a more open innovation strategy, where they invest in external startup ideas rather than only experimenting internally. This shift is why many corporates have investment funds specifically dedicated to startups — just look at Mondelez International (formerly Kraft), Nike, Microsoft, American Express and PepsiCo.

These branches not only assign funds and tools to startups’ growth — they supply startups with decades of investment experience. With the combination of capital and expertise, corporates can execute strong startup deals and deliver value to them faster.

And, despite their size, corporations can be surprisingly agile. In the past decade, the majority have reacted to and mirrored changes in the startup space, helping to raise the bar for CVC investments. At Wayra, we’ve adapted our strategy a number of times to ensure that we evolve as the startup ecosystem does. In 2018, we moved away from being an accelerator to a CVC to better help more mature startups with joint-venture opportunities and scaling. Later, we also launched a fund aimed at supporting startups’ transformation in Southern Europe and Latin America.

CVCs should have a foot in your startup field

Corporates generally aren’t hard to find because of their bigger presence, but founders have to take care to perform due diligence around which corporate best suits their needs. Start by networking as you would in any fundraising round, but explicitly say that you’re looking for corporate backing and specify why and what you anticipate from working with corporates.

At the same time, dive into the big players in your industry – corporates that are active and have successfully completed exits — and what investment trends they’re following. If there’s an investor that aligns with your mission, it’s safe to say that you’ll already be on their radar.

Be cautious of corporate investors that haven’t worked with startups before or that can’t articulate how their investments are tailored toward startups. Corporates may have attractive deep pockets, but without knowing how to communicate with a small team, provide mentorship and grow internal culture, the deal won’t supply the value you need.

Corporates have to be transparent and play by VC rules

Corporates should be upfront about their investment motives. CVC generally takes two forms. The first is purely financial, wherein the deal has no strategic relationship with the core business — it’s just a way to manage the corporate’s assets. The second approach has a strategic purpose, where the corporate hopes to achieve returns and impact its core business via the deal. Clarify the investor’s approach to know what to expect from them, especially because a corporate with a financial approach will be a more hands-off investor.

Your relationship with a corporate investor should be no different to that of a traditional investor. The corporate world can certainly be cutthroat, but that doesn’t mean corporates get a pass when it comes to VC rules — such as practices set out by the NVCA.

They need to fall in line with standard processes, documentation and general etiquette. For instance, corporates sometimes try to include commercial conditions like exclusivity in their investment agreements. Or they may try to have an influence on startups’ pricing or road map to prioritize their preferred feature development. Investors that behave this way are only serving themselves first and destroying the startup innovation they’re trying to foster.

Corporates can’t “copy-paste” success

It’s great if corporates can demonstrate that they’ve successfully worked with startups before, but they can’t assume replicating their previous steps will help your startup. There’s no set formula for corporate-startup investment, and corporates that take a “copy-paste” attitude to their startup portfolio can’t be seen as a tier-one investor.

Ask corporate investors how their network and knowledge pertain to you, and what they are exclusively offering you compared to their other startups. Get them to show you a road map for your investment journey with them, including how their resources contribute to your set vision. Don’t be shy to ask what events, talent and fellow investors they can showcase you to, either.

For example, Telefónica is a technology corporation with millions of customers all over the world. When we work with startups, we present their products to segments of those customers, focusing on their target audiences. We also pre-install their apps in different devices we sell, paying attention to the type of platform they specialize in, and the type of user feedback they want to garner. We also invite our startups to different conferences that we participate in, such as a roundtable about payments in the metaverse for our fintechs.

Corporates are always going to be mighty investors. Their size, longevity and influence make them desirable to founders, especially in an unpredictable VC space — which is why we’re seeing the recent CVC revival. But founders still need to put corporates through their paces to fully leverage their potential.