Clubbing together with other investors is a great way for corporates to finance startups. But check these three things are aligned first.
In the world of venture capital, 2022 has been a jarring year compared to the massive number of deals we saw in 2020 and 2021. Across the board, investors have been pulling back and slowing down. That is, however, not the case for corporate venture capital funds. So far, CVC organisations have participated in over a quarter of US VC deals, the highest rate of their participation in the last decade.
CVCs are able to continue investing even in tougher times because they’re more likely to invest in earlier stage companies, and they’re playing the long game. CVC has the potential to lead to future acquisitions and helps keep non-tech companies in touch with emerging tech.
The world of pets has not historically been associated with technology. That did not stop us at Mars Petcare, however, from working with partners Michelson Found Animals and R/GA Ventures to establish an accelerator for early stage startups entering the petcare industry. Because there has not been much technological development in this industry, we wanted to foster it.
If you’re a smaller organisation, you may not have the kind of capital or capacity to dive into CVC on your own. One solution is entering into a CVC partnership, working together with a number of other corporations or VC investors.
CVC partnerships can be advantageous not just because they mean less financial investment and therefore mitigated risk, but also because they create more holistic ecosystems of support for the startups on the receiving end. Not all CVC partnerships are created equal, however, and there are some best practices to keep in mind.
Ensuring your CVC partners share the same values and purpose, partnering with organizations whose strengths are different from your own, aligning on revenue expected returns, and creating a shared language of progress are three essential elements to optimize success.
1. Everything starts and ends with your values
The most important thing you can do when establishing a CVC partnership is taking the time to align on values and purpose. Obviously, financial incentive is important when investing in startups. The hope is they succeed and scale and your contributions return many times over.
Your partnership will be a lot healthier (and startup success more likely), however, if you dig deeper and decide what’s really important for all parties involved. What is the greater purpose or mission behind where you collectively put your money? What values will guide the decision making when things get tough?
For example, when we were forming Leap Venture Studio, our overall guiding vision was making the world a better place for pets, and therefore making the world a better place for pet parents. We want pet parenthood to be more accessible, so that anyone who wants to become a pet parent is able.
“Having clear values and purpose means the team can return to these for guidance [in case of disagreement].”
Under that umbrella vision, there are also some more pragmatic guiding principles. Diversity and inclusion were things we wanted to keep front and center. Last year, women founders received only 2% of VC-funding in the US, and those numbers are even more dire when broken down according to race. Proudly, in the four years we have been running, 70% of our founders have been women or people from underrepresented minority groups.
Having this clarity makes our investment thesis rock solid even when motivating business objectives may widely differ. When making high-stakes decisions, disagreements and varying points of view can get messy. Having clear values and purpose means the team can always return to these for guidance. These will make coming to an agreement much faster and more strategic because the best decision to make is the one that aligns most closely with the overall values and purpose.
2. Complementary superpowers make for a Marvel-ous partnership
Your values and purpose are going to act as an initial filter for choosing potential partners. Any establishment that does not align is not going to be a good fit.
But when you do find potential partners, the next best thing to look for is that they’re bringing something to the table that your organisation is missing. The goal here is to create the most holistic program you can with a complete ecosystem for your future startups.
In the case of our organisation, our superpowers include our long history of being in the industry, our global operations, and our heavy investments in science, technology, R&D, and veterinary medicine to understand the needs of pets and pet parents better. In short, our superpower is all things commercial. Our second partner is an animal welfare non-profit that champions pets at every point where they interact with society, and which is on the ground when it comes to the challenging sides of pet parenthood. This made a lot of sense. Finally, our third partner was able to bring to the table what we were missing regarding hands-on experience, and providing financial and creative capital to foster early stage startups.
Through our three very different organisations, we have been able to form a values-aligned accelerator where everyone has a specific role to play based on their strengths. In just four years we have seen two successful exits. This is the result of complimentary superpowers and a combined network that creates a diverse ecosystem for our fund to thrive.
“Talk to your customers and find out which other brands and service providers they love.”
There are a few things you can do in order to find partners with complementary superpowers. First, talk to your customers and find out which other brands and service providers they love. Including your community will likely expedite finding folks with a shared vision. If you are a commercial leader, you can look toward service providers to avoid too much crossover.
3. Setting metrics for success
Having a potential exit strategy for your portfolio companies is going to be top of mind for any investor. However, depending on how early you’re investing, that road can be long and tumultuous. To maintain level heads, it’s important to define smaller metrics along the way that satisfy all parties involved.
Remember when managing a CVC fund, your responsibility is supporting the businesses in your portfolio. Regularly checking-in with them regarding metrics like pure revenue growth, margin structures, employee numbers versus revenue scale, and customer satisfaction scores will not only give you an idea of how things are progressing, it will also help you better guide them when they’re struggling or in need of a critical push. Identifying core concerns and offering customized support through mentorship and access to appropriate resources are all ways you and your partners can guide startups beyond monetary investments.
“Look into the retention rate of the founding team – lots of turnover does not bode well for overall longevity.”
Other metrics to look into could include things like the retention rate of the founding team – lots of turnover does not bode well for overall longevity. Or your team could focus on unit economics and the path to profitability.
Whatever you decide to use as your indicators of success, create systems that play to each partner’s strengths, and don’t be surprised if things don’t always go as planned. This is the reality of managing a fund – there are risks, but the rewards are more than worth it.
Audrey Yoo is VP of business innovation at Mars Petcare and mentor for Leap Venture Studio – a partnership between Mars Petcare, Michelson Found Animals and R/GA Ventures.
