Corporate venture capital (CVC) – corporations investing in startups – is supposed to create a win-win for both established corporations and startups.
Startups can tap into the corporate assets thereby uncovering faster and more efficient opportunities to scale.
Established corporations can generate awareness within the organisation about new technologies, market trends and potential industry disruptors and can capture value by being shareholders in successful startups or becoming the disruptors themselves.
In their article “Making Corporate Venture Capital Work”, Michael Wade, Nikolaus Obwegeser and Patrick Flesner described three basic rules that executives may observe when they want to pursue venturing activities successfully. Patrick Flesner shed more light on rule number two “create processes and incentives for employees” in his article “Making corporate venture capital work: give first”.
But many executives that want to initiate corporate venturing activities already struggle answering the question how to set-up a CVC organisation for success. The six guiding principles described in this series of articles therefore describe in more depth rule number one “Start with a traditional VC approach, then adapt” and are supposed to help answer the structuring question.
In this first article, we explain why many CVC organisations end up investing from a traditional venture capital fund structure. In the second article, we will elaborate on the CVC focus, while the third article deals with the importance of fast decision-making.
Guiding principle 1: create a traditional venture capital fund structure
Corporations often struggle deciding on the organisational setup for their venturing activities. They can choose among several options, all of which come with challenges and opportunities. They can set up internal structures by creating separate business units or incorporating their investing activities into existing business units, especially mergers and acquisitions departments, and invest from the balance sheet. Alternatively, corporations may decide to create traditional investment fund structures similar to institutional VC structures under which the corporation is the sole investor in separate investment fund vehicles pursuing investment activities.
Internal structures may – at first glance – have some advantages. In particular, one perceived benefit may be that the organisation can be created fast, because existing or newly established business units may only have to be supplemented by VC experts in order to set up shop. But they come with the major disadvantage that – as a general rule – these internal structures usually do not resonate with other players in the venture capital ecosystem, especially founders, investment professionals that need to be hired and traditional VCs. Internal and hence non-traditional structures signal to the investment industry that the CVC unit might act stereotypically under corporate processes that are sometimes considered slow waterfall decision-making processes that do not cater to the needs of the VC industry determined by fast high-risk decision-making on the basis of incomplete information. Another disadvantage is that internal structures signal to the VC industry a misalignment in goals and incentives in the sense that the CVC unit might put more emphasis on achieving strategic goals than on achieving typical venture capital financial returns pursued by founders and traditional VCs.
Although other structures can lead to successful outcomes too, establishing a CVC unit under a traditional VC fund structure is probably the most promising approach. This structure resonates best with other players in the VC ecosystem. It attracts VC professionals that are essential for the success of the investment activities as such VC professionals are well-connected in the VC industry and can create valuable dealflow. And it resonates best with founders and traditional VCs that know how these structures work and that these structures usually provide for aligned incentives (if the investment team has a carried interest). It does also allow for fast decision-making, a fact of paramount importance in the fast-paced VC environment .
DTCP (Deutsche Telekom Capital Partners), AV8 Ventures (Allianz), Sapphire (SAP) and Robert Bosch Venture Capital are but a few examples for successful internationally active CVC units employing a traditional VCl fund structure.