In a rapidly evolving business landscape, innovation has become the driving force behind success. Corporations today are not just keeping pace with change; they're actively shaping the future. At the heart of this transformation lies corporate venture capital (CVC), a dynamic strategy that goes beyond traditional investment to forge new pathways and opportunities. How is Corporate VC redefining the business landscape, creating growth opportunities, and contributing to the development of innovative solutions?

Unlocking the hidden potential of Corporate Venture Capital

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Corporate Venture Capital represents the investment arm of large corporations, engaging in equity partnerships with external startups for both strategic and financial advantages.

The evaluation of CVC success typically revolves around two key dimensions:

• Financial metrics are often anchored in industry standards, such as IRR (Internal Rate of Return), TVPI (Total value to Paid-in), and DPI (Distributions to Paid-In capital).
• Strategic success of CVCs is assessed through several factors, encompassing pilot projects carried out with startups, the scope of implementations, cost savings, and the generation of additional revenue.

Investing in innovation during economic downturns yields exceptional returns, especially in the context of Corporate Venture Capital, where the benefits can be even more pronounced.

“Every dollar a corporation spends on innovation counts double during a recession. For a CVC, it counts triple."

The CVC sector has experienced significant growth, with nearly $100 billion invested in the past year alone. Looking ahead, the future appears promising for CVCs due to recent reductions in valuations over the last two years and decreased market competition. This has prompted CVCs to actively seek strategic partners capable of providing unique market insights and opportunities for pilot programs with their service units.

Advantages and misconceptions of Corporate VC

CVC funds offer several benefits to both established corporations and the startups they invest in. Some of the key benefits of CVC funds include:

• Market expansion: CVC investments can facilitate market expansion. For example, a corporation can use its startup investments to access new geographical markets, technologies, and business sectors.
• Collaboration opportunities: CVC investments often involve collaboration between the corporation and the startup. This collaboration can lead to new partnerships and joint ventures.
• Access to innovation: Corporate VC provides established corporations with access to cutting-edge technologies and innovative business models developed by startups. This can help corporations stay competitive and adapt to changing market conditions.
• Financial returns: While the primary goal of CVC may be strategic, it can also provide monetary returns. If the startup investments succeed, they can generate significant financial gains for the corporation.
• Diversification: CVC investments allow corporations to diversify their portfolios. This diversification can help spread risk and potentially generate higher returns, especially when traditional markets are experiencing challenges.

Despite their advantages, CVCs are surrounded by several common misconceptions, such as being slow, exclusively investing in late-stage startups, lacking performance-based incentives for investors, and solely making direct investments. However, according to The State of CVC Report 2021, for 47% of Corporate VC firms, the time from the initial meeting to an investment commitment ranges from just a few weeks to as short as two months. Furthermore, 74% of CVC entities focus on pre-seed and early-stage companies. Additionally, 25% currently provide equity upside, and 50% have disclosed active limited partner (LP) positions in other venture funds.

Why startups pursue CVC and what corporations look for in startups

The appeal of CVC to startups has surged in recent years. Startups are increasingly drawn to CVCs not only for the potential infusion of capital but also for the strategic advantages they offer:

• CVCs go beyond financial backing; they bring a wealth of industry-specific expertise and the promise of long-term partnerships.
• By aligning with CVCs, startups gain access to valuable resources and mentorship that can propel them through various stages of growth.
• Furthermore, collaborating with a corporate partner through CVC can open doors to a potentially vast and stable client base, turning the corporation into both a customer and a catalyst for long-term success.

This dynamic relationship holds the promise of profitability and sustainable growth for startups.

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Companies typically invest in startups through various methods, including equity incubators, LPs in VC funds, and CVC. When considering a CVC, several fundamental decisions come into play:

• Entity structure: Should the CVC be a separately registered entity, or should it operate within an existing or new profit and loss (PNL) structure?
• Investment goals: What are the primary objectives of the corporate venture capital — strategic, financial, or hybrid (both strategic and financial)?
• Resource allocation: What resources, budget, and timeline should be assigned to the CVC? Should the funding be a fixed amount within a defined timeframe, or should it operate with a rolling or evergreen model?
• Investment thesis: What specific areas should the CVC focus on? This could include industries, geographical regions, startup stages/technology readiness levels (TRLs), targeted technologies, and preferred business models.

These critical decisions will shape the nature and direction of the CVC, ultimately influencing its ability to achieve its strategic and financial objectives.

The power of CVCs and strategic partnerships

Investing in startups, CVCs are driven by the desire to acquire industry know-how and tap into a pool of talented individuals. What makes investing in startups especially valuable, beyond collaboration, is the opportunity to forge stronger relationships with the founders and potentially shape their long-term strategies, which may lead to a future acquisition.

An excellent illustration

Zone2boost is an open innovation program created by a consortium of companies: CaixaBank, Global Payments, and Ingenico. This partnership united three major corporations in their quest to invest in European fintech and retail tech startups. Their primary objective is to facilitate entrepreneurs in connecting with the market through mutually beneficial business prospects.

Zone2boost collaborated with Plug and Play to enhance their pursuit of promising startup investments. The process began with the establishment of an investment strategy and governance, followed by thorough scouting, assessment, and qualification of potential investments involving various business units. Upon receiving approval from the investment committee, Plug and Play took on the responsibilities of monitoring and supporting their investment portfolio. Throughout roughly three years, Plug and Play facilitated 26 investments for this consortium.

How Plug and Play can assist you with CVC services

• Educational workshops: Building a solid foundation through strategy workshops, venture development, investment, and startup-focused workshops.

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• Investment facilitation: Assisting in various stages of investment, including startup scouting, due diligence, negotiation, and finalizing investment agreements.
• Portfolio management: Providing comprehensive support, such as tailored training, access to a thriving ecosystem, dedicated portfolio managers, and performance reporting, for effective management of your CVC portfolio.

As we approach 2024, it is an opportune moment to consider CVC investments, as they have the potential to yield substantial financial and strategic returns, ultimately outperforming the market in the long term.

Ready to shape tomorrow through strategic investments?Contact us today to unlock the untapped potential of CVC investments and seize substantial returns.