More and more corporates are turning to external specialists to run their venturing units. Here's what you need to know before you take this option.
So you want in the CVC game, but don’t know where to start?
There is a growing set of services on offer for corporates that may have the appetite — but not the infrastructure or the know-how — to deploy venture capital. Even if your corporate’s got the right mindset, getting a CVC unit off the ground is not easy. You need the capital and operational expenditures and to hire the right people.
CVC-as-a-Service (CVCaaS) firms let corporates hit the ground running while minimising — in theory — the steep and painful learning curve, as well as taking advantage of the scale, network, experience and established best practices of a professional firm.
It is also quite different from simply investing as an LP in a venture capital fund.
“In a lot of ways, our relationship with a corporation looks more like a JV or a partnership rather than a pure play fund. We collaborate very closely on managing all aspects of the fund and driving towards the strategic and financial goals that the corporation has,” says Rich Grant, cofounder of CVC-as-a-service company Touchdown Ventures, which boasts clients such as Bentley, Kellogg’s and 20th Century Fox.
“We really try to handle a lot of the day-to-day blocking and tackling — that’s sourcing deals, evaluating those deals, getting to those entrepreneurs, all the way through providing guidance on investment decisions. But we try to bring our core partners into the conversation and into the decision-making process at the appropriate times.”
This often means speaking to tens of executives at a company, with different perspectives, priorities and pain points. Juggling these and cutting through to the main priorities is part of the job.
More than ever, corporations are turning to VC service providers. Touchdown Ventures, for example, is potentially looking at a record year, having launched six new funds with companies including Erie Insurance, as well as a successor fund over the past 12 months. The calendar year 2022, according to Grant, is set to be one of, if not the largest growth years in the firm’s history.
There’s been a rapid rise in the perception of CVC as complementary to other functions like M&A, new business development and R&D, while the ever-present threats posed by innovation mean more corporates fear getting left behind.
CVCaaS has been able to piggyback on that trajectory, given the difficulty or inability of many corporates to establish a unit themselves. Awareness of the segment is also growing, meaning there is more opportunity for CVCaaS firms to get in the room and pitch.
“To large corporations, depending on the sector, CVC is being considered an obligatory key strategy,” says Peter Seiffert, chief executive of Brazil-based CVCaaS firm Valetec Capital, whose corporate partners include ArcelorMittal, Eurofarma, Dexco and Algar.
Solving the CVC investor shortage
For corporates in younger markets such as Latin America, where CVC is also growing rapidly, finding good enough talent to build out your own investment team is not easy, making outsourcing even more attractive, according to Seiffert.
“The key problem is finding professionals in the market. There is a huge lack of professionals in the market,” he says.
Getting access to a network
Another element that CVC-as-a-service companies bring is access to a network. The majority of Touchdown’s investments have been sourced through its thousand-strong VC network, for example, while it has also been able to take advantage of relationships it has in place with existing corporate clients and past co-investors.
Not just for newbies
It’s not just companies completely new to CVC that come knocking, either. Those that already have their own units but need some support, or maybe have had difficulty getting some wins, also avail themselves of professional firms.
“The ones that are brand new, they want to learn, they want to understand. They tend to be the most shy because they tend not to know what they don’t know yet. The ones that have been doing it for a few years, they’ve been whacked in the face. They know what they don’t know and so they see us not as a replacement for what they’re doing, but as an extension of what they want to do,” says Pegasus Tech Ventures partner Bill Reichert on a recent episode of the Global Venturing Review Podcast, adding that the two principal issues that corporations look for help with are the generic issue of how best to grow, as well as the threats posed to its business units by innovation.
Is there a CVC-as-a-service playbook?
Yes and no.
The first overarching lesson Grant has taken over the years is that while each client is unique, that doesn’t mean you start at zero each time. There are plenty of overlaps with regards to assessment, decision-making and process.
“There are best practices or processes that can make us more efficient, and we don’t have to reinvent the wheel every time,” says Grant.
“There are similarities in just about anything you can think of, whether it’s deal sourcing, due diligence, knowledge transfer, how you make follow-on or investment decisions. There’s a lot of frameworks and best processes and practices that we can implement.”
These are some of the things CVC-as-a-service companies told corporations should consider before they jump into this.
1. Prepare to have a conversation about strategy
Getting to understand clients’ motivations is one of the most important early steps that a service provider has to take.
“Are they looking to partner with startups to help inform their strategy? Are they looking to partner with startups to launch new business lines or accelerate their current ones? Some of the companies we talk to, they’re thinking about building out an ecosystem on top of their platform and they want to have all these startups that are building or using their platform because it makes their platform more valuable, more sticky,” says Grant
“In general, the common thread is that these companies recognise that startups are playing a role in their space and they’re looking for ways to partner with, align and reinforce relationships with them.”
The importance of getting on the same page strategically from the get-go can’t be overstated.
“Once you start talking to VCs and entrepreneurs, they’re going to have a bunch of questions around strategy. I really can’t stress enough how important it is upfront to make sure that you’re building out the strategic goals and overall strategy,” says Grant. “Our process is to sit down with the senior leadership team and try to understand what their overarching strategic goals are, and we use those goals to then build out a bunch of KPIs so that we can measure success against those goals. And then we’ll build a strategy.”
Seiffert shares the sense of urgency in getting the strategy sorted right out of the gate. “The key challenge to us is to be on board and interact with the client at the right time, and the right time is at the beginning when they are starting to think about the design of their CVC strategy,” he explains.
“This is the perfect time to be at the table because after that it’s always more difficult. Instead of a blank slate to design the best approach from the beginning, we receive plans that already have several constraints, difficulties and misunderstandings we need to fix.”
Happily, many corporations are already doing this work before they engage with a CVCaaS partner, says Seiffert.
In the past, Valetec’s advisory service often use to take companies through a six-week process to create a business plan complete with a thesis, pipeline, governance, process, OPEX and CAPEX. Seiffert says more and more corporates approach them now with much of that already set out — their thesis and key directives in place — allowing them to get off the mark quicker by only having to worry about agreeing on final details such as management fees, OPEX and CAPEX and the overall GP proposal.
“Something that has surprised me is the number of corporations that have arrived at Valetec already saying: We have our investment thesis, we want to do a fund and we’d like a quote for GP services. They are much better prepared than in the past,” Seiffert says.
Unlike a regular CVC that only has to worry about one strategy, CVC service providers have to make a new one for each client, each of which is unique.
“Every corporation is different. I wish there was just a simple recipe, but cultures are different, organisational structures are different, business sectors are different,” says Reichert. “Generally, we encourage starting with sort of a limited scope and not trying to fix the entire corporation.”
“Some of our corporate partners, they’ve got 11 different business units – it’s somewhat challenging for everyone to cope with 11 different mandates. Generally, what we want to do is start in an area where hopefully there’s some low-hanging fruit where there’s the highest receptivity and the highest need,” he says.
2. Get ready to spend serious money
It needs to be clearly understood that this is a long-term commitment and not a cheap one — you’ll likely be forking out tens of millions of dollars. If you are not ready to spend the capital, or if you won’t be able to focus on the project, don’t take the plunge.
3. Get comfortable with not having control
Companies that have not done much startup investment, or are more used to M&A and venture-building activities, where subsidiaries are wholly-owned, need to get used to the idea of not having full control over portfolio companies.
“As a corporation, you’re taking minority positions. That enables you to share the risk and share the capital requirements with others. But it also means that as an organisation, you’re not going to have control over these companies on a day-to-day basis. So the comfort or the recognition that you’re going to be relying on others outside the company to run these businesses on a day-to-day basis is something you should have going in,” says Grant.
4. Have a dedicated internal team for CVC
Yes, you are getting CVC-as-a-service professionals in to manage much of the heavy lifting. But you also need to have people in the company dedicated to managing the CVC relationships. This is something that Global Brain, always asks of the corporates that it works with, says Naoki Kamimaeda, partner at Global Brain and head of its Europe division.
“The one thing we ask the CVC partners is that they form a dedicated internal team for the CVC. When we involve the corporate development side we’ve found that their mindset is more like that in M&A. They might ask the startups to have audited financial accounts at an early stage — that’s impossible. Or they keep pointing out that the startups are losing money and wondering if it is a good investment,” he says.
“We need to talk to people who understand that startup investing is not short-term work. If they keep switching people every three years, that won’t work.”
5. Don’t overdo the preparation
There is such a thing as too much groundwork, however, which can cost you time and — in the case of failure — lead to you potentially delaying innovation activities for years, according to Seiffert
“From a strategic perspective, I don’t agree with this belief that we need to have an innovation culture where we need to learn first, where we need to try doing some sort of investment in startups for several years to learn how to do it,” he says.
“If corporates have a strategic mindset and look towards the future at what’s going on with their markets, they will understand that the transformation is going so fast, there is not enough time to learn anymore. We have to understand there’s no time to understand.”
Investing in startups without a professional team as a precursor to formal venturing activities can turn out badly, he says, and if it does, it will take a while to regain the appetite to take another crack at it.
“It’s a terrible way to start because it’ll probably end up in a failure in three or four years. The strategic scenario, the competitive scenario, does not allow learning-by-doing approaches because it raises the risk of, as we say in Brazil, burning the option — once you fail, it can take three to four years to start to discuss it again,” Seiffert says.
“The chances of trauma are higher than those of gaining self-confidence.”
6. Be prepared to move faster
Unlike a regular VC firm, where the fund managers have complete autonomy, investing on behalf of corporates means that there are additional layers of approval.
“We are always pushing the corporate side to move faster,” says Naoki Kamimaeda, partner and head of Global Brain’s Europe division. Global Brain currently operates CVC funds for corporates including Sony Financial, KDDI, Epson and Mitsubishi Electric .
“Corporate newcomers are sometimes a bit obnoxious, and they think startups are all willing to work with them. But once they miss an opportunity they begin to understand how they should modify their behaviour.”
Ultimately, says Seiffert, the market waits for noone: “The key lesson is that the market is changing very fast every year. If a corporation has any sense of urgency in terms of their strategic thinking around CVC, they should put their initiative in place as soon as possible.”
7. Be clear in how to measure success
Measuring financial success is relatively easy, but another one of the main issues for any CVC is determining how best to measure strategic success – a challenge that is compounded when you’re in the business of bespoke strategies across diverse sectors. Nevertheless, several common performance indicators (KPIs) tend to keep popping up, such as number of investments, capital deployed against a certain strategy, partnerships with X number of companies, or percentage of portfolio that have partnerships addressing specific themes or objectives.
On top of being bespoke, no strategy remains static over time. Objectives change, new things emerge and corporates refocus their eye elsewhere – the CVC service provider needs to keep up and make sure that shifting priorities are reflected in the day-to-day, usually through regular strategy meetings with the corporate.