When we start dealing with fundraising, a question quickly arises: should we raise from a Venture Capital fund or a Corporate Venture fund?
This article explains the differences between Venture Capital and Corporate Venture Capital and how this impacts startups.
So, what is Corporate Venture Capital (CVC)?
Corporate Venture funds are funds that are whatsapp number list owned by a company willing to invest in startups for various reasons (we’ll tell you why). Like a classic VC fund, they have a dedicated investment team and operate in the same way.
Basically, Corporate Venture funds are like Venture Capital funds with only one Limited Partner (LP): the company itself. This way of organizing can have many consequences for the fund, as well as for the invested startups.
Value creation goals are different
Comparing these two types of funds leads us to ask what their respective objectives are. Corporate Venture Capital and Venture privacy protection as a premise of microsoft teams funds have the same objective: creating value for Limited Partners (or for the company itself in the case of CVC). They differ, however, in the way they create value:
- The main goal of VC funds is to have a good return on investment (ROI) to satisfy their investors (which are multiple external LPs). Thus, they will focus heavily on optimization or internal rate of return (IRR). To achieve this, they will try to achieve good exits such as IPOs or buyouts of other funds or a company. Often, VC funds will bring their expertise and support the startup in their portfolio to accelerate growth (and thus, hopefully, generate a higher IRR).
- While important, financial returns are not always the main objective of corporate venture funds. They are less focused on IRR because they have other ways of creating value. In fact, when investing in startups, corporate ventures will try to create synergies between portfolio companies by sharing technology, know-how or establishing business partnerships. These synergies should lead to the creation of value for both the startup and the company. Corporate venture funds usually invest in startups to generate strategic value first.
Different ways to involve startup governance
Venture capital funds play an active role in australia database directory corporate governance. They want to support the startup and have an impact on its strategic decisions. They will ask for control – proportional to the amount invested – to limit risk and have the ability to impact strategy.
On the other hand, in Corporate Venture Capital funds, companies tend to be less concerned with scalability. They are more focused on creating strategic value, providing advice and resources.
While a VC’s strategic control over a startup can be high, it is important that the startup is backed by people who can bring a deep understanding of the market they are targeting.
The investment horizon depends on the company’s strategy
Venture capital funds have time constraints on their limited partners. Generally speaking, VCs have an investment horizon that ranges from 7 to 10 years. After that, they need to find exit opportunities for their investments.
Corporate venture funds, however, can be evergreen, meaning they have no investment timeline and can follow a startup for the long term. This is a major benefit for a startup. But the downside is that the fund’s strategy is owned by the company and can change at any time based on its leadership.
Impacts of exit scenarios
The exit opportunities are the same for a startup backed by a CVC or a VC. However, in a CVC, if there is a lot of synergy between the startup and the company, this can lead to the startup being acquired by the company itself. In fact, building a pipeline for M&A can be part of the company’s strategy.
Being backed by a corporate entity can make other industry players wary of engaging in discussions about a potential acquisition. If a startup wants to avoid such a situation, it can negotiate with the CVC for a right of notification instead of a right of first refusal during term sheet negotiations.
In short: the challenge for a company is to rely on its own assets to create additional value.
Corporate Venture and Venture Capital funds act in very similar ways when it comes to making investment decisions and organizing them. However, their investment strategies may differ. While Venture Capital funds have primarily financial objectives, Corporate Venture will seek synergies to create value. Being backed by a Corporate Venture fund can generate many benefits for a startup: strategic partnerships, access to new market opportunities, access to expertise, etc. The startup will also benefit from the company’s brand reputation and gain customer consideration and a greater perspective.