Moving from having just one corporate backer to having several can give a corporate venturing unit a lot more freedom. The venture unit can act more like a financial VC, moving faster on deals and less at the mercy of the changeable strategic aims of a corporate parent.
But this isn’t an easy road. CVC managers considering the multiple-LP -route need to be prepared for the challenges of managing multiple conflicting demands. We’ve put together these best practice tips for anyone considering the move.
Increasing reach and credibility
Often CVCs move to the multiple LP structure because they want to increase their reach beyond what a single corporate can fund.
“[The single-LP evergreen structure] works well but it has limited scope. We have tripled or quadrupled our reach by getting money from external sources,” Dominique Mégret, head of Swisscom Ventures, told Global Corporate Venturing.
Swisscom Ventures, started as the venturing unit of Switzerland-based telecommunications firm Swisscom with a fairly limited budget, but now pulls in an additional 75% of funding from outside Swisscom.
Moving to this model was not simple, says Mégret.
“It is extremely difficult [to raise money externally] because it goes against the standard dogma of the industry, which says that you have to be independent or you have got to be dedicated to a corporate.”
“Being entirely dependent on the corporate has limits and creating your own fund is super difficult. Choosing a model in between is as hard as the sum of those two other models.”
It is not just about dry powder. In an environment where startups can afford to be pickier about who they let into their rounds, having backing from institutions can put CVCs in a better position.
“I think the simple reason [CVCs are raising outside money] is for validation purposes. In order to be relevant in your market, you need validation. Startups are raising from new VCs and new investors. I think as a fund you need to raise funds not just from your existing investors like your parent,” says Joshua Agusta, formerly director of venture funds at Mandiri Capital, the strategic investment arm of financial services firm Bank Mandiri, and currently executive director at venture capital firm Vertex Ventures.
Unlike traditional VCs, which may find it progressively easier to bring in investors once they get a few vintages under their belt, getting investors to trust you as a CVC, even raising your third fund, will still be a tough road if it is your first one engaging outside investors.
Balancing strategic and financial
One of the biggest shifts of taking on external money, is that it tips CVCs more towards a financial orientation in its investments. The financial success of the portfolio becomes the primary imperative, though not necessarily at the absolute expense of a strategic outlook.
Mégret says: “We continue to be strategically focused, but at the same time 75% of our money comes from other people, and that is why we have to be financially oriented as well.”
The good news is that you can provide strategic value in many ways, not just through investing in startups that have potential synergies with a parent company. The process itself and the information you learn will also benefit the corporate, even if IRR is the main benchmark.
“Strategic value is not just about owning a share in a company, it is about being active in the ecosystem, looking at the deal flow and expanding relationships,” says Mégret.
“All those things are better if you have got four times more money with strong LPs so, in a way, we have added strategic value in many ways through these add-on funds.”
Strategic investments with little or no financial dimension are still done, of course, but not predominantly through LP-backed vehicles. The corporate does them directly or through a multi-fund strategy where the balance sheet money is invested through some kind of purpose-built vehicle.
This raises a separate question – to what extent can a corporate-linked vehicle justify deploying capital without a strong strategic alignment, especially if the fund in question is sector-agnostic, as was the case in the Mandiri Capital-managed Indonesia Impact Fund?
Turns out the link doesn’t have to be that strong. In the case of the Indonesia Impact Fund, says Agusta, the heavy ESG focus is enough to connect its investment strategy to Bank Mandiri by way of the latter’s ESG goals, even if it was more sector-agnostic. Bank Mandiri now had another feather in its ESG cap.
Managing LP expectations
While not involved in the day-to-day decision-making, LPs will want an idea of what the fund will be investing in and how the impact of their money will be assessed.
“They were asking about our ESG footprint so far – from our existing portfolio and balance sheet investments – on top of the business performance,” says Agusta.
The grilling did not stop there — they also asked about the types of companies the fund would be investing in, what kind of ESG focus would they be trying to implement and the nature of the framework through which they would assess the ESG performance of investees. At the fund level, they also wanted to know how Mandiri Capital would report it.
In the case of Swisscom Ventures, LPs still have customary conditions, but having a strong financial track record means they tend to be more receptive to the corporate connection and afford the CVC more flexibility to keep the strategy they want.
Mégret explained: “That is what the LPs have to accept. On one hand, they get the advantage of the brand, access to the corporate, network and so on, but at the same time they have to accept the fact that we are linked to a corporate.”
“It is more or less take it or leave it, in a way. I would say we did not change our model fundamentally, but because we had a good track record, financial investors were interested in benefitting from it.”
It is not a trade-off that has harmed Swisscom’s ability to fundraise. Despite the typical difficulties in raising money, particularly at the beginning, both funds have been oversubscribed. This is true even though certain investors, generally speaking, seem fundamentally opposed as a matter of principle to investing in anything that touches a corporate.
Best practice:
- You have a great track record.
An external LP model, according to Mégret, will only really work if you have a demonstrable track record of financial success. You probably want to be on your second or third fund – or have been operating an evergreen fund for a while – before you consider bringing in external capital, otherwise, the big institutionals like pension funds will likely find it too risky a proposition. You want to diminish as much of the risk as possible before trying to get the big fish on board. - The corporate parent needs to commit to the fund.
LPs also need to know that the parent has skin in the game. This is especially true if it is your first time raising from outside parties.“The first question that a lot of external LPs will ask is ‘What’s the commitment from the parent company for this fund’, and I think that in many ways, the fund manager should be able to convince all the potential LPs that their parent companies are backing this up,” says Agusta.“Usually a GP commitment is up to 10%. I think for corporate venturers, they always expect them to be more than that. It will give LPs much comfort, especially if it is the first fund.” - Have a unique angle.
“Try to figure out what sort of investment strategy cannot be done by other institutional investors in the region, because the LPs usually ask what sort of things you can do that cannot be done by the usual suspects – the ones that are more experienced at managing LP money than the CVCs. Finding that angle and selling that differentiation will be important.”To this end, being able to tell LPs that you can leverage the resources of the parent company is effective only to the extent that there is alignment between the fund’s investment strategy and the corporate’s core business – if there is not much alignment, other differentiation avenues need to be explored, said Agusta. - Be clear on levels of independence from the corporate parent.
Even with track record and willing investors, sticky issues will remain – particularly with regards to governance and compensation – which are not easy to solve. These will typically include questions around the level of independence the unit has from the parent – the corporate will naturally still have a legitimate say over a unit’s direction, even when having external backers means the financial angle is elevated. - Don’t raise too little.
Raising from LPs with too small ticket size can also be a pitfall to be wary of, says Agusta, as they tend to request quick liquidity, which as a CVC you need to avoid. Finding the LPs that can bring in bigger tickets would be far more beneficial.
