Most of what is published about venture fundraising tends to focus on traditional, Institutional Venture Capital (VC). Little has been written that speaks specifically to how entrepreneurs can successfully raise capital from corporations.
Over the past 10 years, Corporate Venture Capital (CVC) has grown substantially. Today around a fifth of all U.S. venture deals involve corporations. Historically, CVC was seen as a poor option for entrepreneurs due to a reputation for demanding restrictive and economically lopsided deal terms from entrepreneurs. But CVC has matured and changed. Today it is far more competitive and entrepreneur-friendly. For the right kinds of ventures (particularly B2B ventures), CVC is not only a viable option, but may be more helpful than institutional venture capital.
Throughout my career, I have spent time on both sides of the table—both raising capital for, and funding, new ventures—often in corporate settings. CVC can be fruitful option for entrepreneurs, but securing it, and using it wisely, requires a different approach than raising traditional venture capital.
The CVC opportunity
Is Corporate Venture Capital worth pursuing? To answer that question, consider how CVC may be uniquely suited to help your venture grow and succeed. Successful corporations approach venture with a dual focus on not only financial returns, but also strategic returns. Strategic returns consider all the other ways a corporation may benefit by working with the ventures—from access to new technology to the chance to commercialize new product offerings. This focus on strategic returns means corporations may be better positioned than traditional VCs to help entrepreneurs develop their ventures. They can provide valuable engineering and product knowledge, offer quicker insight into commercial markets, assist with testing or piloting products, open up new channel relationships, and become a customer, or even an acquirer. For many companies, these powerful benefits can not only speed up development but can also mean the difference between competitive success or failure.
How to engage CVC…correctly
Too often, pitch decks sent to corporations look exactly like their institutional counterparts. Savvy entrepreneurs recognize they need to approach CVC funding differently —and they tailor their pitch decks and messages explicitly for this unique audience.
Entrepreneurs who engage CVC effectively do three things well:
- Select the right corporate partner(s)
- Articulate the strategic value of the venture to corporate partners
- Tailor the pitch deck to the corporate audience
Select the right corporate partner(s)
The first step is to select the right partner, or partners. It’s not just about industry alignment (i.e., a fintech venture targeting venturing groups at large financial institutions), but also about strategic fit. Differing strategic motivations and goals of corporations means that CVC groups approach investing from different perspectives. Without an understanding of these goals, you may approach the wrong corporations—with the wrong message.
We have analyzed the investment portfolios of scores of CVC functions and found CVC can be divided into different strategic groups based on their orientation along four dimensions: a) investment orientation: strategic vs. financial, b) development orientation: ecosystem vs. business, c) solution orientation: enabling technologies vs. portfolio solutions, and d) stage orientation: early vs. later stage (see inset).
The relative focus of any corporation across these dimensions is deliberate based on the corporation’s strategic objectives. Knowing where a corporation falls along these dimensions—and the role your venture plays vis-à-vis corporate strategic objectives—will define your messaging, inform deal terms and govern the overall relationship between you and the corporation.
Investment Orientation describes the degree to which a corporation is investing for strategic objectives, financial objectives or both. Greater emphasis on strategic objectives signals a desire to actively leverage ventures to drive concrete corporate business development. Greater emphasis on financial objectives indicates a desire to keep watch over new trends or, indeed, earn financial returns.
Development Orientation describes a corporation’s relative focus on building its business vs. developing an ecosystem around itself. A business development focus seeks to build or enhance its business via venture-driven solutions. By contrast, an ecosystem focus seeks to seed ventures and encourage them to work with a corporation’s technologies or business platforms where the more solutions that use the corporation’s platforms, the greater the value of that platform.
Solution Orientation describes the degree to which a corporation seeks to build or augment its core technologies and capabilities vs. developing market-facing solutions/applications for its product portfolio. Examples of enabling technologies might be blockchain technologies or foundational analytics capabilities. Acquihire investments (acquisitions) are another example. Other companies target ventures as a source to enhance, or fill gaps in, customer offerings.
Stage Orientation describes the relative focus of corporations on early vs. later-stage ventures. Few limit themselves to a single stage, but there is significant variation corporation-to-corporation around the focus. Some corporations invest in Seed or Series A rounds. Others have strict rules against investments prior to Series A. Still others target the bulk of their investments in Series B/C or beyond. Depending on the stage of your venture, some corporations will be better partners than others.
Several examples illustrate the varied focus of corporate venture capital funds. Citi Ventures (the CVC arm of Citigroup) focuses significantly on corporate growth, using ventures to “…augment and enhance Citi’s products and services.” It operates primarily in the upper right quadrant. Citi invested early in Square, a payments platform, and Chain, a digital currency startup, both of which are new platform technologies. But Citi also has investments in Betterment, Blue Vine and C2FO, all solutions-based companies. Citi’s investments in enabling technologies and solutions are all meant to enhance the core business.
At the other end of spectrum is Salesforce. Salesforce is a strategic fund focused on “creating the world’s largest ecosystem of enterprise cloud companies.” It operates primarily in the upper left quadrant. This is a valuable strategy for Salesforce because its platform is itself an enabling technology for enterprise cloud companies. More activity in that space drives more activity to its platform(s). Example investments include Adaptive Insights, Box, and Evernote—all companies that grow the enterprise software ecosystem.
Comcast and Verizon pursue more balanced agendas; they operate in all four quadrants. Verizon is focused on “solutions that are advancing the connected society of today and the network that powers it.” Comcast’s focus is also balanced, saying it brings: “...the best parts of a leading venture fund and the technical insight, scale and experience of a strategic investor.” Both companies target core-technologies in infrastructure (networking, switches, etc.). But they also invest in solutions. Verizon has invested in ventures like Urban Airship, a mobile engagement platform. Comcast has invested in ventures like Uptycs, an IT management solution. Both also have substantial investment activity designed to strengthen their ecosystems.
Finally, GV (formerly known as Google Ventures) takes a much more financial orientation. It operates primarily in the lower right quadrant and operates much like an institutional fund. It is focused on companies that “push the edge of what’s possible” in areas like life sciences, AI and robotics and has invested in everything from Nest and Uber to HubSpot and 23andMe.
By understanding the strategic orientation of corporate venturing groups, entrepreneurs set themselves up well to target the right potential partners–with the right messages.
Articulate the strategic value of the venture to corporate partners
The most important thing an entrepreneur can do when engaging CVC is to clearly position the venture as a way for a corporation to realize its strategic objectives. This is crucial for several reasons. First, recognizing–and valuing–the corporation’s potential for strategic returns enables you to position your venture as significant and demonstrate its potential impact. The greater value-at-stake tied to your venture, the more likely the corporation is to invest, and with better terms. The second reason relates to how investors perceive the risk/return profile of the venture. Remember investors — corporate, institutional and others — make investment decisions based on expected value relative to expected risk. Whenever a company demonstrates multiple value streams related to a single asset, value goes up and risk goes down. If the corporation recognizes additional value streams beyond the venture itself (i.e., strategic returns to the corporation), the perceived likelihood of investment’s success increases substantially. Third, institutional investors also stand to gain from strategic value created by corporate collaboration. Communicating this value makes it easier also to raise institutional capital.
Some entrepreneurs leave the valuation of strategic returns up to the corporation. But we’ve found more successful entrepreneurs do the work themselves. Connecting the dots for the corporation in the pitch deck (rather than hoping corporations will do it) reduces friction in and enables you to control the discussion. It’s not about being precise, but it is about articulating the potential.
Estimating the value of strategic returns is easier when you understand the kind of value you can bring. Strategic returns can be categorized by four main types of main types:
Accelerated Development Remember, often the reason corporations are engaging you in the first place is because you have the ability and agility to innovate faster than the corporation. Take advantage of this value stream by articulating reduced product development cycles and faster time to prove product-market fit. Estimate the impact by showing the potential for faster growth of the a corporations business.
Channel ExpansionCorporations can create new sales opportunities for a venture by making new sales channels available. With a good understanding of the corporation’s businesses, you can articulate potential revenue opportunities from collaboration and estimate the sales (and profit) to be generated by your product’s penetration into these new markets.
Product Enhancements Your venture may enable corporations to enhance their product offerings–or introduce new ones. Collaboration can make also make your venture’s products better. Demonstrate you understand how your solution enables corporations to build new revenue streams.
Technology Leverage Perhaps the most important source of strategic returns is successfully leveraging a new technology—as a foundation—across multiple lines of business. This is powerful—and often the greatest source of strategic value—because the impact of a technology is applicable far beyond a single use case, sometimes extending to the entirety of a corporation’s business. Estimate the impact of your technology by assuming x or y percent revenue growth and/or estimated new potential revenues from new markets made available by your technology.
By researching the corporation, you can develop a sense for which, and how many, of these sources of strategic returns your venture offers. Quantifying the impact is less about being precise (you’ll never be able to forecast the exact revenues or value-at-stake) but about guiding the corporation’s view of how you fit with its strategic objectives and how impactful you will be. But the more you are able to quantify strategic returns, the better able you will be to position yourself as a strong collaborator.
Tailor the pitch deck to the corporate audience
What brings this all together is the pitch deck. Insights into the strategic objectives of various CVC groups, your venture’s role versus those objectives and the potential for your venture to drive strategic returns for the corporation give you all the ammunition you need to build a compelling pitch to CVC groups.
There is general consensus around what “good” pitch decks need to communicate, and how (see inset). For CVC, two additional message slides should be added to the typical pitch deck and tailored for each corporation:
1) Fit with corporation and portfolio: Outline how your venture fits with the corporate portfolio. Here, you can show you understand the corporation, its strategic objectives and the role you will play in helping the corporation reach those objectives. It is also an opportunity to demonstrate your business may be both a) a better path for the corporation than pursuing the same technologies/solutions internally and b) a better fit than other (competing) ventures the corporation may be considering partnerships with.
2) Opportunity to drive corporate strategic returns: Delineate and quantify the strategic returns your venture may deliver. Ideally, this depicts value streams from both your stand-alone business and demonstrates the magnitude and timing of additional strategic value streams. In the corporate world, this is–literally and figuratively–the money slide. The clearer the path to multiple value streams and the higher the value attributable to the combination of them, the greater chance your venture will be funded—at a strong valuation—and sets you up for a fruitful collaboration.
CVC has indeed come of age—more strategic, competitive, and entrepreneur-friendly. And in today’s era, where emerging technologies are transforming enterprises an ever-increasing rate, CVC is becoming a better and better alternative for ventures. Entrepreneurs who engage CVC with a targeted, strategic perspective can find valuable new partners for their businesses.