Why more corporate venturing units are choosing a more independent legal footing for their funds.
“I have a lot of friends in corporate venture, and so many of them ask how they can get some independence,” says Jay Reinemann, general partner of venture capital fund Propel Venture Partners. “People who end up being good investors as part of a CVC will at some point ask, ‘why am I here?’”.
Reinemann has worked for corporate venture units as well as for the independent venture fund that he currently runs. He ran Visa’s CVC arm and corporate venturing at Spanish banking group BBVA before he helped spin it off into an independent fund, which was renamed Propel Venture Partners, in 2016. His verdict: independent VC structures work best for startups as well as for the people running the funds.
As the number of corporate venturing units has increased over the past few years, so has the number that have chosen a more independent legal structure for their funds – whether this is full independence through a spin-off, or a hybrid approach where the fund still sits under the corporate umbrella but has some independence. We asked industry practitioners about the pros (and the cons) of granting more independence.
1. Better alignment with portfolio companies
One reason that Reinemann isn’t a fan of working at a corporate venturing unit is that you have “zero skin in the game”. You could be doing a great job at investing, but the next day the CFO may turn around and cut off funding because of budget cuts. Or the corporate may hire a new CEO who isn’t keen on venturing and shuts down the unit. “Any good work you have done is gone,” says Reinemann.
A traditional VC fund is set up with a 10-year lifespan, which means startup founders can rely on funding for longer. And, as an investor, you can align yourself more with the interests of your portfolio companies. “The most important customer you have is the founder. You don’t have that alignment as an employee of a corporation,” says Reinemann.
2. It is easier for a fund to grow
When you are investing off the balance sheet of the corporate parent, it can stifle growth opportunities. Munich Re Ventures, for example, used to invest off the balance sheet of an insurance subsidiary under the German reinsurance company’s corporate umbrella. Over time, the venture fund added internal limited partners and quickly increased its assets under management. “It was clear we needed to develop a structure that would be adaptable to Munich Re’s increasingly direct VC appetite across the company,” says Jacqueline LeSage, managing general partner of Munich Re Ventures.
So, in 2018, the CVC created a separate legal entity under the Munich Re umbrella. This legal structure has a traditional general partner (GP) and limited partner (LP) structure. And, at the beginning of this year, it moved its management company into its own legal entity. Creating this fund structure means the team can apply traditional venture capital benchmarks, such as measuring performance in a standard way and having expenses that are more like management fees.
“When you have conversations with your corporate parent about target performance or what your operating costs should be, you can say: here is the benchmark,” says LeSage. “It allows you to discuss with your corporate the trade-offs between different goals and expectations that they might have of you, and what it means in terms of expenses and returns.”
3. You can compensate your team better
Corporate CVCs mostly do not compensate employees as well as traditional venture capital firms. This is because they are often not set up to pay carried interest – a share of profits from venture capital that is paid as incentive compensation to the fund’s general partner.
“The more independent your management company is from existing corporate structure, the greater chance you have of corporate VC-level compensation and carry,” says LeSage.
The issue of compensation was a big reason that the CVC team of Spanish bank Santander chose to spin off the corporate venture arm into an independent fund, which was renamed Mouro Capital, in 2020. European directives make it particularly hard to create compensation schemes that resemble those at venture capital firms because carried interest is capped under retail banking rules, says Manuel Silva Martinez, who led the spin off. “That means that the best talent never joins the CVC,” he says.
4. The CVC will more than likely last longer
Granting more independence to your fund will help you keep track of financial returns better. “If you want to have longevity, you need to have returns that at least cover your capital and the best way to be in a situation where you are able to monitor and measure those returns is through a traditional GP, LP fund structure,” says LeSage.
Having an independent fund is riskier because you don’t have the parent corporation to back you up or help you switch to a different role if it doesn’t work out. But it also means the investment team has to work harder at making the best investments. Martinez says Mouro Capital has superior returns as a spinout, which has resulted in better returns for Santander.
5. It might make the corporate-CVC relationship closer
Corporates often worry if they grant more independence to their CVC they will lose touch with the fund and lose that strategic alliance that they sought in the first place. But the opposite often happens.
For Propel Venture Partners, its former parent is an “important customer” says Reinemann. BBVA is a limited partner in the venture fund and represents its largest source of capital. The fund shares information with BBVA about where the banking industry is heading. “We are kind of high-level consultants to them,” says Reinemann. “We learn a lot from being in the middle of exciting portfolio companies that we can give them advice. There is an edge that venture gives you in understanding the early direction of an industry.”
Martinez says he keeps in close contact with his former employer, even more so than when he was part of the corporate umbrella. Mouro Capital is 100% funded by Santander, which means the fund still has to follow the bank’s approval processes for transactions in a way that doesn’t compromise competitiveness. Martinez says he spent time building trust with the bank so it would have confidence the fund would follow through with compliance.
In return, the bank benefits by gaining guidance on the strategic direction of the industry. “They use us to get opinions: they will ask us what is working, what is not working. Because they fund you, there is a higher degree of trust and transparency in that conversation,” says Martinez.
The downside of independence
Industry practitioners emphasise that going independent isn’t the be-all and end-all. For some it will work better than for others.
Setting up a completely independent fund is not for the faint hearted. Many processes have to be started from scratch, such HR and finding an office. Mouro Capital dropped its parent’s brand name and started with a blank canvas. It did this during the covid pandemic when there was a lot of competition in fintech. “Finding our uniqueness, independent of the corporate brand, was a challenge we needed to overcome,” says Martinez.
Ultimately, the decision for independence depends on the goals of the corporate. Some may choose to create more independence under the corporate umbrella, such as Munich Re Ventures has, while others may consider a complete spinout.
“You can create levels of autonomy for a CVC arm. It is not all or nothing. It is informed by the experience of those who are operating the CVC arm on behalf of the corporation,” says Neel Lilani, global head of tech clients at law firm Orrick.
Too often there is a conversation in the corporate CVC world that there is a trade-off between being strategic and having financial returns. The right answer is that you have to do both, says LeSage, of Munich Re Ventures. “The way you set up your legal entity structure creates the most flexibility over how you do that,” she says.
