CVCs must show how they differ from VCs

This year might be remembered as the one when corporate venture investors stopped trying to copy VCs
and began to develop their own definition of success.

At least that would be the most positive outcome from a challenging year which has seen VC investment
activity globally decline 30%, and many startup darlings of the past decade’s boom have gone bust or been sold for nominal sums. UK digital healthcare company Babylon Health, once valued at $2bn, filed for bankruptcy in August. US electric scooter company Bird, once valued at more than $2.5bn, fi led for bankruptcy protection in December.

The severe market correction led the Financial Times to comment that VC had failed as an institutional asset class and could not escape its role as a cottage industry.

Corporate venture capital teams have not been immune to this difficult market. We have seen CVC-backed startup funding rounds fall 27% in 2023, with 3,894 such transactions last year compared with 5,339 a year ago. CVC leaders tell us that they have not stopped investing, but they focused efforts last year on supporting their existing portfolio companies, rather than in making new investments. Even where they are making new investments, timescales for finalising those deals have become much longer.

There has also been a slowdown in the creation of new CVC units by corporations. Whereas in 2022 we
saw a record 122 new units created, this year we have seen just 65 emerge.

But new CVC units are still being created, so it would seem that corporate leaders have not lost faith with
this tool for harnessing innovative ideas. Corporations such as Chilean paper company CPMP, US ride-hailing company Indrive and Korean steel company Posco, for example, launched new CVC arms last year. A fear of missing out on the wave of generative AI investments was a strong driver for setting up funds. IBM, Visa and Salesforce were among the companies creating large new AI-focused funds.

In some markets such as Japan and Brazil, we are seeing a strong rise of new CVC units, often with relatively small fund sizes – less than $50m in many cases – and with a mainly domestic focus. These CVC teams may well do startup investments in a different way to the norms set in the past decade, mostly in the US.

New focus on value

Even among the more established CVC teams, we are observing a shift of focus, with more emphasis being put on what Liz Arrington at the GCV Institute likes to call “landing the value” corporate venturing. In other words, making sure the investor relationship creates some value for both the startup and the corporate backer. This might be simply some market insight or a full-blown commercial collaboration.

This means that a different type of corporate investor skillset is seen as valuable. At the height of the 2021 investment boom, investors focused mainly on who could bring in the most deals. The speed at which investment decisions could be made, and the number of high-profi le deals that investors could bring in were, to a certain extent, the measures of success, regardless of the strategic logic of those investments. Aggressive dealmakers were king.

Now, however, so-called “platform” roles are becoming the hottest ticket in corporate investing. Platform refers, broadly, to all the activities in a CVC unit that are not directly to do with direct investment
and board participation. These are all those activities. from sourcing and due diligence to marketing,
communications, talent recruitment and business development for a portfolio startup.

In the annual Keystone survey of corporate venturing trends, we found that 40% of corporate venturing teams now have a business development function. A decade ago there was barely a name for this, now it has become one of the essential ways investors try to stand out from the crowd.

The shift is showing up in pay schemes too, where we are increasingly hearing about units that are shifting their fi nancial upside structures so that they can include more of the platform specialists than might have been the case in the past.

It is not just corporate investors that are emphasising platform. One in eight people working in venture capital is now in a platform role, up from one in 16 in 2000, according to VC Platform’s The Power of Platform report, which analysed metrics from 850 venture capital firms. VC fi rms with platform-focused team members tend to outperform peers in internal rates of return and return multiples.

But platform is where corporate venture investors might just have the advantage over VCs. They were never likely to outdo VCs on speed of deals, but with a deep bench of internal R&D experts, manufacturing experience and logistics networks, corporate investors can arguably offer startups a more effective “platform” experience than VCs.

Some of the features that were typically perceived as shortcomings of CVC – such as the fact that 67%
still invest from the corporate balance sheet rather than from a separate, defined fund – can actually be strengths in this new era. Funding that does not come from a time-limited fund can be more patient, which is useful when backing deeptech startups with long trajectories to commercialisation. Investments in deeptech startups with sustainability solutions for industry was one of the dominant features of investment in 2023, alongside generative AI investments.

A full toolkit

Another trend in corporate venturing is the use of a number of tools to tap into innovation. It is not just
equity investing in startups, but increasingly companies will also have venture clienting operations in which they become early customers for startups.

Some 40% of respondents in our annual Keystone survey said their company also had venture clienting
operations. Venture clienting can be a good tool when a company needs to expand its capabilities quickly, for example, in a market undergoing rapid transformation.

Some 37% of respondents also had venture building operations, creating their own startup companies from scratch – either in the company or with the help of an external venture studio. How you do it does not matter, one corporate venture builder told us, it is the principle of wanting to build something new, rather than investing in a pre-existing startup that is the important distinction.

The ideal is for venture clienting and venture building to sit alongside equity investing, with each used
according to what is most appropriate for the situation. This is another way that corporate venturing can be distinct from VC.

The CVCs surveyed were cautiously optimistic about prospects for next year, with nearly half convinced
there will be large improvement in market conditions in 2024.

A return to less challenging market conditions would definitely be welcome, but even better would be
to see CVC investment teams come through the crisis with a much more defi ned operating model and sense of purpose. CVCs have often been concerned with proving that they are just as good as VCs and not the “dumb money” that they are accused of being. It is time to leave that angst behind and acknowledge that yes, CVC money is different to VC money. And that is no bad thing.