Here Come the CVC's

Corporations Dive In With CVC's by Terry Stidham

An increasing number of our corporate clients are setting up an in-house CVC team. The Corporate Venturing Capital (CVC) community recently had a US conference, where nearly half of the 450 represented organizations present had set up a corporate venturing arm during the previous five years. The remainder of the group is planning to set up a unit within the next 12 months. 
 

Corporate Venture Capital (CVC) - CVC as a subset a venture capital whereby a company is investing, without using a third party investment firm, in an external start-up or early stage venture that it does not own.
 

Corporate Venturing refers to when a company supports innovation and new projects internally. It is defined by the Business Dictionary as the "practice where a large firm takes an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise; the objective is to gain a specific competitive advantage.
 

The London-based, Global Corporate Venturing magazine ranks 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.

CVCs are on the way to becoming more important in providing venture capital than VCs. These figures omit business angels, who provide, worldwide, $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 has declined as exits are scarce and raising new funds is difficult. 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.

The big challenge for both VCs and CVCs with or without an internal business development team is sourcing quantity and quality opportunities that are aligned with their investment strategy, criteria, and focus.

Companies find it easier and less costly to buy innovation than to develop it in-house. This is due to a mixture of the agility of smaller organizations, the ability for a small company to motivate and reward high caliber people and the freedom from corporate structure and processes. 

There is a significant difference in the return calculation between the two funding classes. 

1. Private VCs - Measured by financial return (although a small minority also use social enterprise metrics). 
2. CVCs - Measured by an organization and even deal-specific mix of financial and strategic return.

This doesn't mean it is any easier for an investor to steer through the negotiation and due diligence process (and in fact it may be tougher, as some corporations 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.

Both VCs and CVCs need to see a minimum 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 their business.

Early stage or growth stage companies that are seeking $1 million plus in funding should put one or more CVCs on their list. It's important to understand the strategic aims of those CVCs before approaching them. If CVC money is available it needs to be determined if it would prevent other similar corporations from becoming customers and/or potential acquirers. 

Contact us today to discuss your needs or interests.
 

About the author Terry Stidham
Terry Stidham is the founder and principal of Target Search Group. He is a B2B Business Development Leader with extensive knowledge of the M&A process, combined with an in-depth understanding of the constantly changing global capital markets environment.  He has served as the head of entrepreneurial organizations as well as Fortune 500 companies.  He specializes with mid-market companies in a diverse array of industry sectors from service and manufacturing to technical and professional firms.

Mr. Stidham speaks the language of both the seller and the buyer having vast experience on both sides of the transaction. He has been directly involved in the execution and successful closing of hundreds of investment banking and corporate finance transactions.  Mr. Stidham has been instrumental in aiding thousands of business owners prepare their businesses for eventual sale by teaching them how to maximize efficiencies in operations leading to significant increased cash flow.

Target Search Group (TSG) is a business development firm that works with a select number of private equity investors and corporate clients to source and originate investment opportunities that fit their size, focus and strategy on both a generalist, opportunistic, and a specific search basis. 

TSG sources acquisition and investment opportunities throughout North America in companies that range from startups to businesses with revenues up to $500 million.