All Posts

Model Ways For CVCs to Invest in Startup Companies

 

Corporate Venture Capital (CVC) may seem like a distant perspective for startup companies, especially compared to private VC funds or Business Angels. There are, however, a few paths of carrying out successful startup-corporation cooperation, without much damage to any of these parties.

The giants

First thought that probably comes to mind, when talking about corporations, is that they’re slow. Their fixed working culture, long processes, and the resistance to take risks, may be repulsive for young tech companies seeking new business partners and investors. Corporations earned it. They’re viewed as entities operating at a slow pace, putting financial revenue way over risk taking, and being hesitant to change. And even though they might seem to be some significant drawbacks in today’s world, it’s the large corporations that shaped it, after all. There is no state in the US without a Wal-mart and no country without a Toyota car. Corporations are a part of our lives for a reason. They do provide stable conditions, hire professionals, whose once acquired knowledge, can be easily transferred to another corporation. Thus it creates a comfort for individuals, who know their skills are not limited to a certain company and its processes. The fixed standards corporations adapted, ensure that tourists staying in any of AccorHotels resort, can expect the same conditions, whether it be a Mercure, Ibis, or Sofitel. Similar thing goes with McDonald’s, KFC, and other fast-food brands. It is true there are somewhat significant differences between the beverages’ sizes, for example, but overall you can order a Big Mac at any chain’s restaurant, and still get a large burger.

The dwarves

On the other side there are startups. These young tech companies work at an extremely fast pace to deliver innovative solutions and become the next disruptor. One giant drawback that comes along, is the high risk of failure. With 90% of startups failing, it could effectively discourage to even think about launching another company. It’s worth remembering, however, that out the 90% failed businesses, only a few founders try to launch a second startup. And most of them succeed. Hence the culture of failure, so well-recognized in the Silicon Valley. The lessons taken from the fatal mistakes prevent startup founders from making them again, and in turn they perform much better afterwards, with the right market research, product validation, and timing. Despite the higher risk factor, startups provide solutions that improve our lives, and often reveal what the society was missing out on so far. This can be seen particularly in digital world. Professionals cannot imagine their work without finding specific answers on Quora, support their social media channels with Hootsuite, improve their team communication on Slack. They’re all startups that found the niche and discovered a problem customers have. The amount of information on the internet creates a danger of fake news (which was officially named Word of the Year by Collins Dictionary in 2017). Thus the desire to create value delivered by professionals for professionals. Hootsuite allowed social media managers use their work time more efficiently thanks to scheduling or managing many social media channels in one place. It quickly became a blueprint for other companies. Finally, the popularity of Slack comes from the urge to communicate among team members. Internal email communication becomes a distant memory. The option to create topic-related channels and bring together teams around the world quickly turned into a standard in many entities.

4 ways to cooperate

In 2002 Henry Chesbrough released a staple article in Harvard Business Review on how to make sense of Corporate Venture Capital and on most common reasons for them to invest in startups. He distinguished two characteristics to describe VC investments in startups. These characteristics also split into two objectives each. The first one, corporate investment objective, can be strategic or financial. Corporations seek young companies that will increase the profits, even if it means introducing a long-term strategy and creating revenue after a few years. The second investment objective seeks financial returns. A startup becomes a part of corporation’s financial strategy, helping it grow faster.

The other characteristic is the link to operational capability, where it could be either loose or tight. In other words, large companies seek links between them (their portfolio) and startups. The latter will make use of the corporation’s plants, technology, or distribution channels. This complementary structure favours long-term strategies and mutual growth using the resources both parties have.

  Corporate investment objective
strategic financial
Link to operational capability tight Driving
advances strategy of current business
Emergent
allows exploration of potential new businesses
loose Enabling
complements strategy of current business
Passive
provides financial returns only

Mapping Your Corporate VC  Investments (source: Henry Chesbrough, Making Sense of Corporate Venture Capital, Harvard Business Review, March 2002)

Driving Investments

This particular type of investment links startups with operations of the investing company. As a result, a strategic rationale is created. One of the most popular examples is the cooperation of Microsoft. It invests in young companies that use Microsoft’s .NET technology as part of the strategy extension. It corresponds mainly to the current strategy, so there is the risk of failure, however if carried out correctly, it can be profitable. Microsoft has been consistent in developing .NET, hence the framework’s high recognition. The company’s been supporting startups that create products compatible with Windows and other Microsoft products. Interestingly, Microsoft Ventures admit, that 40% of Azure revenue comes from startups and independent vendors.

Driving investments is a strategic objective with tight link to the startup. It advances strategy of current business. In effect it may cause poor response to disruptive strategies and difficulty to identify new opportunities. The corporation’s focus on the present environment doesn’t really allow transcending the current strategy or processes. Unless, of course, it wants to shift to other types of investing and decreases the reliance on driving investments.

Enabling investments

This leads to the second type, which is enabling investments. In this case, ventures are still making strategic investments, but unlike the previous type, they’re not tightly linked with the startup companies. The strong link isn’t necessary to realize the benefit. A startup uses the corporation’s resources to develop a product, that is linked to corporate strategy to create a complementary product. Put simply, having one product leads to wanting another and another.

Intel Capital carried out many investments of this type. In the early 1990s the corporation spotted an opportunity in emerging startups. It realized startups have the innovative thinking, very much desired in Intel. Thus it invested in hundreds of young companies. They developed products that required the use of Intel’s processors. It ranged from audio, video to software and hardware products. Consequently they created demand for Intel’s chips and stimulated significant financial returns. The bad thing is, competition doesn’t sleep and as Intel keeps growing, others can observe the market’s direction to create their own strategies and technologies to take over at least part of the demand.

Emergent investments

Such kind allows exploration of potential new businesses. It has the financial objective and is tightly linked to operational capability. As the name suggests, corporations make a decision to invest based on the startup’s potential and a view of new emerging markets to explore. If the business environment shifts, there’s a fair chance the startup may become strategically valuable. This gives the advantage of better financial returns once the shift becomes reality.

Emergent investments are also a good way to extend the first type, driving investments. Companies like aforementioned Microsoft, could benefit from cooperating both with startups that answer the current needs and with those that announce significant financial returns on different segments of the market in the future.

What corporate ventures need to keep in mind, though, is that emergent investments do require a good balance between financial discipline and strategic potential. Many make mistakes of putting money in the wrong places at a wrong time. Some investments will never create the desired revenue and this must be embedded in the company’s activity.

Passive investments

These investments are also common among CVCs. The objective is strictly financial and the link to operational capability is very loose. Companies look for financial returns only. They do not expect startups to complement their strategies. They are rather seen as just another investors in the young firms. Startups will certainly use the money invested and create revenue also based on the right mentoring and guidance from the corporation. They won’t, however, take advantage on joining forces with the CVC. Other way round, corporations will be waiting for the return of investment, but do not look to benefit from the new technology itself. It is argued whether it’s a good model of investing and creates controversy when it comes to using shareholders’ funds. As long as the development conditions are favourable, it’s accepted. If there are some visible turmoils, though, corporations might drop the investment without considering any pivots or changing the cooperation model.

Deciding on the model of investment requires time, experience, and other team members ready to take risks. On the other hand a well-thought investment might develop yet another unicorn startup.

 


If you are looking for innovative projects, we have launched WolvesMatch  Platform, where you can find companies tailored to your needs. Visit wolvesmatch.com, set up a corporate profile, browse projects according to tags and filters and get access to a startup database.


LIST OF INNOVATIVE STARTUPS

Get to over 330 top tech startups - download for FREE a complete list
of innovative startups that attended 8th edition of Wolves Summit
 

book (2) 

DOWNLOAD FOR FREE

 
All Posts

Model Ways For CVCs to Invest in Startup Companies

 

Corporate Venture Capital (CVC) may seem like a distant perspective for startup companies, especially compared to private VC funds or Business Angels. There are, however, a few paths of carrying out successful startup-corporation cooperation, without much damage to any of these parties.

The giants

First thought that probably comes to mind, when talking about corporations, is that they’re slow. Their fixed working culture, long processes, and the resistance to take risks, may be repulsive for young tech companies seeking new business partners and investors. Corporations earned it. They’re viewed as entities operating at a slow pace, putting financial revenue way over risk taking, and being hesitant to change. And even though they might seem to be some significant drawbacks in today’s world, it’s the large corporations that shaped it, after all. There is no state in the US without a Wal-mart and no country without a Toyota car. Corporations are a part of our lives for a reason. They do provide stable conditions, hire professionals, whose once acquired knowledge, can be easily transferred to another corporation. Thus it creates a comfort for individuals, who know their skills are not limited to a certain company and its processes. The fixed standards corporations adapted, ensure that tourists staying in any of AccorHotels resort, can expect the same conditions, whether it be a Mercure, Ibis, or Sofitel. Similar thing goes with McDonald’s, KFC, and other fast-food brands. It is true there are somewhat significant differences between the beverages’ sizes, for example, but overall you can order a Big Mac at any chain’s restaurant, and still get a large burger.

The dwarves

On the other side there are startups. These young tech companies work at an extremely fast pace to deliver innovative solutions and become the next disruptor. One giant drawback that comes along, is the high risk of failure. With 90% of startups failing, it could effectively discourage to even think about launching another company. It’s worth remembering, however, that out the 90% failed businesses, only a few founders try to launch a second startup. And most of them succeed. Hence the culture of failure, so well-recognized in the Silicon Valley. The lessons taken from the fatal mistakes prevent startup founders from making them again, and in turn they perform much better afterwards, with the right market research, product validation, and timing. Despite the higher risk factor, startups provide solutions that improve our lives, and often reveal what the society was missing out on so far. This can be seen particularly in digital world. Professionals cannot imagine their work without finding specific answers on Quora, support their social media channels with Hootsuite, improve their team communication on Slack. They’re all startups that found the niche and discovered a problem customers have. The amount of information on the internet creates a danger of fake news (which was officially named Word of the Year by Collins Dictionary in 2017). Thus the desire to create value delivered by professionals for professionals. Hootsuite allowed social media managers use their work time more efficiently thanks to scheduling or managing many social media channels in one place. It quickly became a blueprint for other companies. Finally, the popularity of Slack comes from the urge to communicate among team members. Internal email communication becomes a distant memory. The option to create topic-related channels and bring together teams around the world quickly turned into a standard in many entities.

4 ways to cooperate

In 2002 Henry Chesbrough released a staple article in Harvard Business Review on how to make sense of Corporate Venture Capital and on most common reasons for them to invest in startups. He distinguished two characteristics to describe VC investments in startups. These characteristics also split into two objectives each. The first one, corporate investment objective, can be strategic or financial. Corporations seek young companies that will increase the profits, even if it means introducing a long-term strategy and creating revenue after a few years. The second investment objective seeks financial returns. A startup becomes a part of corporation’s financial strategy, helping it grow faster.

The other characteristic is the link to operational capability, where it could be either loose or tight. In other words, large companies seek links between them (their portfolio) and startups. The latter will make use of the corporation’s plants, technology, or distribution channels. This complementary structure favours long-term strategies and mutual growth using the resources both parties have.

  Corporate investment objective
strategic financial
Link to operational capability tight Driving
advances strategy of current business
Emergent
allows exploration of potential new businesses
loose Enabling
complements strategy of current business
Passive
provides financial returns only

Mapping Your Corporate VC  Investments (source: Henry Chesbrough, Making Sense of Corporate Venture Capital, Harvard Business Review, March 2002)

Driving Investments

This particular type of investment links startups with operations of the investing company. As a result, a strategic rationale is created. One of the most popular examples is the cooperation of Microsoft. It invests in young companies that use Microsoft’s .NET technology as part of the strategy extension. It corresponds mainly to the current strategy, so there is the risk of failure, however if carried out correctly, it can be profitable. Microsoft has been consistent in developing .NET, hence the framework’s high recognition. The company’s been supporting startups that create products compatible with Windows and other Microsoft products. Interestingly, Microsoft Ventures admit, that 40% of Azure revenue comes from startups and independent vendors.

Driving investments is a strategic objective with tight link to the startup. It advances strategy of current business. In effect it may cause poor response to disruptive strategies and difficulty to identify new opportunities. The corporation’s focus on the present environment doesn’t really allow transcending the current strategy or processes. Unless, of course, it wants to shift to other types of investing and decreases the reliance on driving investments.

Enabling investments

This leads to the second type, which is enabling investments. In this case, ventures are still making strategic investments, but unlike the previous type, they’re not tightly linked with the startup companies. The strong link isn’t necessary to realize the benefit. A startup uses the corporation’s resources to develop a product, that is linked to corporate strategy to create a complementary product. Put simply, having one product leads to wanting another and another.

Intel Capital carried out many investments of this type. In the early 1990s the corporation spotted an opportunity in emerging startups. It realized startups have the innovative thinking, very much desired in Intel. Thus it invested in hundreds of young companies. They developed products that required the use of Intel’s processors. It ranged from audio, video to software and hardware products. Consequently they created demand for Intel’s chips and stimulated significant financial returns. The bad thing is, competition doesn’t sleep and as Intel keeps growing, others can observe the market’s direction to create their own strategies and technologies to take over at least part of the demand.

Emergent investments

Such kind allows exploration of potential new businesses. It has the financial objective and is tightly linked to operational capability. As the name suggests, corporations make a decision to invest based on the startup’s potential and a view of new emerging markets to explore. If the business environment shifts, there’s a fair chance the startup may become strategically valuable. This gives the advantage of better financial returns once the shift becomes reality.

Emergent investments are also a good way to extend the first type, driving investments. Companies like aforementioned Microsoft, could benefit from cooperating both with startups that answer the current needs and with those that announce significant financial returns on different segments of the market in the future.

What corporate ventures need to keep in mind, though, is that emergent investments do require a good balance between financial discipline and strategic potential. Many make mistakes of putting money in the wrong places at a wrong time. Some investments will never create the desired revenue and this must be embedded in the company’s activity.

Passive investments

These investments are also common among CVCs. The objective is strictly financial and the link to operational capability is very loose. Companies look for financial returns only. They do not expect startups to complement their strategies. They are rather seen as just another investors in the young firms. Startups will certainly use the money invested and create revenue also based on the right mentoring and guidance from the corporation. They won’t, however, take advantage on joining forces with the CVC. Other way round, corporations will be waiting for the return of investment, but do not look to benefit from the new technology itself. It is argued whether it’s a good model of investing and creates controversy when it comes to using shareholders’ funds. As long as the development conditions are favourable, it’s accepted. If there are some visible turmoils, though, corporations might drop the investment without considering any pivots or changing the cooperation model.

Deciding on the model of investment requires time, experience, and other team members ready to take risks. On the other hand a well-thought investment might develop yet another unicorn startup.

 


If you are looking for innovative projects, we have launched WolvesMatch  Platform, where you can find companies tailored to your needs. Visit wolvesmatch.com, set up a corporate profile, browse projects according to tags and filters and get access to a startup database.


LIST OF INNOVATIVE STARTUPS

Get to over 330 top tech startups - download for FREE a complete list
of innovative startups that attended 8th edition of Wolves Summit
 

book (2) 

DOWNLOAD FOR FREE

 

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