Are we seeing a wave of CVC spinouts?

Much has been made of Intel Capital’s about-face on its plans to spin out from its corporate parent Intel, but several others followed through on similar plans over the past year.   

Insurance company Axa’s venture unit spun out and subsequently rebranded, as did fellow insurance group Uniqa’s CVC, Uniqa Ventures, which is now called Shape Capital Partners. Elsewhere, JetBlue Venture was spun out and sold as its parent company dealt with financial turbulence.

A pattern is emerging where companies are rethinking their approach to open innovation, and redirect their efforts elsewhere.

In the case of Intel, a new CEO reversed the decision to spin out the 35-year-old unit but more often than not the opposite is true – management change hangs over CVCs like the sword of Damocles.

“There’s a certain cold feet effect, where managers decide that something is no longer strategic. Keep in mind that corporates are subject to cycles – not just the economic cycle, mostly the governance cycles, where a new CEO is in a way erasing what was done before,” says Alberto Onetti, chairman of innovation advisory firm Mind the Bridge.

It’s not necessarily that new management teams don’t see the value in CVC, they just see it other areas in greater need of funding.

“If we look through the eyes, through the eyes of CEOs of large enterprises, they have to invest heavily. They have to, for example, invest heavily in AI adoption and usage,” says Florian Noell, global head of the Centre for Excellence in Corporate Venture Capital at PwC

“If you then have to make a decision on where to put the money, sometimes it’s not a decision against venture investing, it’s a decision for other areas which are more urgent.”

Pivot to venture clienting

A number of corporate venture units have shifted to running venture clienting operations — where the corporation becomes an early buyer startup services without investing in the companies — alongside or even instead of their investment strategy.

It is increasingly perceived as a favourable, more cost-efficient alternative to venture investments in terms of their ability to bring in strategic returns, according to Noell. The lower level capital investment and the effective strategic onboarding of technology, combined with the relatively quick time to see results – perhaps within the year as opposed to over the better part of a decade – are making management teams favour clienting over investment, he says.

“What companies do at the moment, is they look for an increase in efficiency and cost reductions. For example, they may want to adopt AI solutions to make the processes of the business faster, better, or cheaper,” Noell says.

It is also easier to close down a venture clienting unit than CVC fund, according to Onetti.

“It’s easy, you can just it down or downsize it, or you can shut down an accelerator. When you add a portfolio of investments, it becomes more complicated.”

However, Noell argues that the move to venture clienting can come at the expense of opportunities for fundamental innovation.

“My strong belief is that you can’t reinvent traditional business models from within the corporate itself – you need external innovation, you need open innovation – and for this reason, you need corporate venture investing as one part of the tool set to do that,” he says.

“But what we see is trend in venture clienting while equity investments are maybe decreasing in some corporates.”

Proactive measures

Whether the decision to spin out a CVC comes from the corporate C-suite or the CVC unit itself can vary. “We’ve seen some examples in which the venture teams try to spin out and try to turn this threat into an opportunity,” says Noell.

When CVC leaders sense the management has become less favourable to corporate investing, they can often initiated a spinout as a pre-emptive step.

This was the case, for example, with what was then called Horizon X, the CVC unit of aerospace and defence giant Boeing. Unit chief Brian Schettler saw compounding problems within Boeing that he felt could end up affecting the survival of the unit. Two high-profile plane crashes between 2018 and 2019 and the fallout from them, combined with the onset of covid lockdowns in 2020, a large amount of new debt, and changes in management amidst that, made him think it was time to make a move.

The investment arm ended up spinning out under the umbrella of AE Industrial Partners and has since been rebranded to AE Ventures. It has been able to both enjoy the benefits of an independent structure, including changing its compensation structure to bring in more talent, while still retaining a team within Boeing to handle startup onboarding.

Risks of independence

The main risk of spinning out is potentially losing the value-add that differentiates CVCs from their institutional counterparts.

“If you’re becoming truly independent, at a certain point you are competing with the VC funds, but with a certain level of strategic constraints. It’s sort of like you’re losing your superpowers,” says Onetti.

“If I’m a startup and I got capital from a corporate, I take it because there is something attached to it. Without that, what’s the reason I should take money from them?”

Competing without the unique value proposition, in a new arena where you’re coming up against billion-dollar warchests with often stronger financial track records, can be a daunting prospect.

The challenge of finding new investors

A newly-independent VC also has to convince new investors to place money with them. Even if a new spinout fund gets some backing from its former parent, it must also find other LPs.

“This can only work if you have third-party investors,” says Noell. “In the end, it’s about [whether] you are able to convince external LPs to invest and other investors to join your fund. You have to be as professional as other venture capital funds – there’s a lot of competition and I think that’s the moment of truth for many CVCs,” says Noell.

The structure of the team might have to change. An independent VC does just need investment professionals, it must have fundraising specialists used to speaking to hundreds of potential LPs in the hopes of getting 10-20 on board.

“It’s a sales job in the end. Have your numbers ready – everybody will ask you for a track record,” says Noell. The current investment climate, which has seen a large number of VCs disappear, is a tricky moment for a newly spun-out fund, he says.

“From my talks with emerging fund managers, it’s not the best season to raise funds if you’re a first-time fund or a spun-out fund. For this reason, it’s a difficult play, I think, in the current environment.”