Smaller corporate venture funds — those with less than $50m — can use their slim size as an advantage if they plan well and have a laser-like focus.
There’s not a fund manager or corporate venture investor head in the world who would turn their nose up at more money. When you’re in the business of investing capital, the more of it you have, the better. Limited capital means limited opportunity for return, limited deal flow, limited cheque size, and limited team.
Some investors say there isn’t much point in having a fund of much less than $30m. Yet there has been a recent trend for companies to set up smaller startup investment funds. According to our recently published GCV Keystone annual global survey of corporate venturing units, some 38% of CVC funds are smaller than $50m.
A smaller fund is often the way corporate begin experimenting with startup investment. For companies without unlimited coffers, a $150m commitment might be a non-starter, but $50m is easier to sell to the CEO and board. Sometimes, when a small fund has been successful, bigger fund allocations will follow.
There are ways to make the most out of even a small initial pot, says Gustavo Cavenaghi, head of investments of Kortex Ventures, which has a trio of health and insurance corporates as limited partners in the fund, which initially launched with $40m before growing to $50m.
Turn your small cheque size into an advantage
With small cheque sizes, you are unlikely to be leading funding rounds for startups, or commanding much of a startup founder’s attention.
“If you have 15% of a company, you have the attention of the founders. If you have 1% of the company, it’s a whole different game. So this is definitely a challenge,” says Cavenaghi.
To some extent you can target smaller rounds where your money will have more impact. A $1-2m ticket into a $50m round is negligible, but the same investment in a $15m round is much more meaningful in its own right.
Or you can turn your small size into a draw. While a founder might not pay as much attention to you, it also means that you’re far less likely to be seen as a threat. You don’t take up much room on the cap table, and you don’t represent the same burden in terms of governance rights, making it easier for you to get into big, competitive rounds without throwing up too many flags or inviting pushback from the startup or other investors.
For CVCs, the fact that you may take only a small bite out of the apple, but potentially bring a lot of value from the corporate connection, makes it that much more attractive. While many startups see traditional VCs as ideal round leaders– they’re deep-pocketed, tend not to be conflicted, and have no objective other than to sell as high as possible – they still want CVCs, with their connections and expertise, as part of the mix.
Cavenaghi described a large series A round they took part in alongside much larger Bay Area-based VCs, despite only pitching in a modest $1m. “What made us get into the deal was that we bring so much value to the table and we ask for so little in the cap table. So that made the co-investors look and say: ‘Okay, it’s a very small cheque for the benefit that you’re bringing, so we’re going to open that up for you,’” he says.
Focus on the startups you can help the most
Having a smaller pot of money means it’s harder to diversify your portfolio. One answer might be spreading your chips around by writing smaller cheques, but that’s not always possible. Kortex, for example, targets series A funding rounds because they are looking for companies that are mature enough to at least do a pilot or some other form of collaboration with its corporate LPs. That effectively puts a floor underneath the investment per startup.
Smaller tickets also don’t make the due diligence or investment committee sign-off processes any easier, either.
“It’s more expensive to be smaller than to be bigger,” says Cavenaghi. With size comes efficiency in terms of fund structure and fees – smaller funds aren’t paying much less in overheads than big funds. You still have to put money aside for follow-on rounds, and the money you’re left with to make first investments may not be sufficient to spread your chips around and manage risk.
“If you go below $30m, it just doesn’t make sense to have a fund at all. It’s just too expensive. The cost structure of having a fund is just too expensive,” he says.
What small funds can do is have a laser-like focus on startups where there your corporate connection brings some benefit.
“We ended up targeting companies that really, really needed us. These are all people who are trying to sell to automakers – our clients. It’s really hard to sell to automakers,” says Vito Giallorenzo, general manager of BlackBerry’s IVY business line – which integrates technology into automobiles, and head of the BlackBerry IVY Innovation Fund, which also began with a $50m allocation. “Everybody wants to sell to Ford, so the fact that we are a big supplier to these companies that they are really struggling to connect with gave us a high profile even if we didn’t have a big ticket.”
Set clear objectives
It is also crucial to set clear objectives with the corporate management team from the very beginning, especially when you have limited scope to bring in significant financial returns. Incorporate strategic targets that you can tangibly deliver on and demonstrate the value the unit creates – then deliver on them.
“My CEO never came back to me to say: ‘Hey, what’s the AUM on the investments and why did they only grow 5% or 20%?’” says Giallorenzo.
“He never chased me on that aspect of the plan because we agreed upfront that I’m most likely not going to invest in the next Open AI because the sector we traffic in doesn’t have those multiples. When I deliver those strategic things without losing money, and possibly doubling or tripling the money, that was enough for him.”
Setting those objectives up front and delivering on them sets you up well for follow-up discussions later in the year, especially if you can show some quick wins early on.
Above all, managers of small funds need to spend significant time in planning exactly how it will use its limited capital. That may mean time studying the strategies of other funds in the sector and understanding why they have made the capital allocation decisions they have made, and how much they will leave to come back for follow-on rounds. There is less “fat” available for miscalculations.