Corporate Venturers outmuscling VCs
Through the Martlet Corporate Angel fund, I have become part of the Corporate Venturing Capital (CVC) community and recently attended a US conference (450 people), where it is was clear that nearly half the represented organisations had set up a corporate venturing arm in the previous five years. This shows how rapidly corporates are setting up CVCs.
First some statistics: the London-based, Global Corporate Venturingmagazine has ranked CVCs and sees funds with $billions available, some (such as Google) investing $300+ million per year. Deal volumes vary from just one to over 80 per year.
In the last two years, more than 200 corporate venturing units have been launched. In 2011, over 500 corporate venturing units globally invested more than $26 billion, which is similar to private VCs at about $28 billion.
So it looks like CVCs will (or already have) become more important in providing venture capital than VCs. These figures, of course, omit business angels, who provide, worldwide, perhaps $20 billion or so.
Some will argue that this trend is cyclical, but Corporate Venturing is definitely on the ascendancy in this decade and for good reasons. Venture Capitalist funding is declining as exits are scarce and raising new funds is difficult. And, of course, despite the global problems of the last half decade, businesses in whatever stage of their lives still need funding, which may come from various sources such as customers, loans, grants and equity.
Corporates (especially pharmaceuticals) are finding it easier to ‘buy in’ innovation than develop it in-house. This is due to a mixture of the agility of smaller organisations, the ability for a small company to motivate and reward high calibre people and the freedom from corporate structure and processes.
But also, there is a significant difference in the return calculation between the two funding classes. Private VCs are measured by financial return (although a small minority also use social enterprise metrics). CVCs are measured by an organisation- and even deal-specific mix of financial and strategic return.
This doesn’t mean it is any easier for an investee to steer through the negotiation and due diligence process (and in fact it may be tougher, as some corporates impose internal investment processes on external opportunities), but it does mean that, if the strategic fit works, CVC money may be available where VC money is not. In addition, many VCs have time-limited funds – commonly five years to invest followed by five years to divest. Most CVCs do not have these pressures.
One of my portfolio companies (a B2B SaaS fintech model) has been raising finance recently and has talked to both VCs and a CVC. We have now proved that a further angel round is the more sensible option. From our conversations, we learnt that both VCs and CVCs needed to see a minimum MRR (monthly recurring revenue) before taking it further. However the VCs then would dig deeper into the financial numbers, whereas the CVC would first look at how their own product and channel infrastructure could help with scaling our business.
For this business it also proved easier to identify and approach a CVC than to choose which VCs to contact, when management time is very scarce in a company growing its revenue by 20 per cent a month.
So what conclusions can we draw?
a) When seeking upwards of perhaps £500K/£1M in funding, do put one or more CVCs on your target listb) Work out how to satisfy the strategic aims of those CVCs, before approaching themc) Although the corporate parent of a CVC may be a potential trade exit for you, this is uncommond) On a slight downside, if CVC money is on offer, do analyse whether this may exclude other similar corporates as future customers and/or potential acquirers.