Startups

As traditional venture capital funding dries up, should your startup consider corporate VC?

  • 6 min Read
  • September 12, 2022

Author

Escalon

Table of Contents

Startups have long relied on three primary funding sources: venture capital, angel investors and the family office. But in recent times, corporate venture capital, whose roots can be traced to the early 20th century in the U.S., have taken hold as a popular fourth funding option.



Corporate venture capital-backed investments have swelled to represent over 20% of total venture capital value, a February 2022 Bain & Company analysis found. And as talk of a global recession grew louder in the second quarter, while the market dropped, CVCs were still investing at levels that were higher than any quarter before 2021, according to CB Insights



“The natural instinct when the economy becomes more challenging is to become more defensive, but investing in innovation can give corporations an advantage during a crisis,” BDO Corporate Finance Manager Matthew Gilmour told Pitchbook.



Making sense of CVC: the parent company’s side



Corporate venture capital, which is sometimes also referred to as corporate venturing, refers to the practice of larger, more established companies directly investing funds into external startups. Teaming up with small, innovative startups on a project allows the venturing company to create value through synergy.



For example, the CVC may aim to boost sales and profits for the larger company, or it may enable them to access new technologies, skills and resources, or to enter new markets. The venturing company may be in pursuit of a strategic advantage or early involvement in promising, cutting-edge businesses that may one day pose a threat to established market leaders.



As opposed to traditional VC investments, CVC deals directly with entrepreneurs and does not involve outside investment firms. Google Ventures, Qualcomm Ventures and Intel Capital are among the most prominent CVC funds today.



Making sense of CVC: the startup side



For startups, there are three primary benefits of receiving a CVC fund investment. First, they attain the potential for acquisition by the venturing company in the future. Second, their credibility with other investment sources is boosted for future capital raises. Third, they receive access to the parent company’s assets, such as advice and infrastructure.



Looking at it from the startup’s perspective, the company gets a chance to launch through a partnership with a larger company coupled with a funding infusion. The arrangement can also help the startup with expansion, to move into broader markets and to manufacture at scale. 



There is no doubt that CVC is a particularly reassuring proposition for startups at a time when the media is abuzz with speculation over a potential collapse of the economy. 



CVCs may focus on different startup phases



Rather than a one-size-fits-all approach, CVCs may invest on startups at varying stages of growth. 



Early-stage funding:

Refers to funding for new businesses that are ready to start up, but that are not yet ready to produce and sell on a large scale.


Seed funding:

Refers to the initial money used to cover the costs of starting up and to attract venture capitalists. Small amounts of financing are typically provided in exchange for a partial ownership position in the company.


Expansion financing:

Refers to capital offered to startups expanding via the introduction of new items, expansion of their physical facility, enhancement of products, or marketing.


IPO:

The coveted stage that most CVCs aspire to reach over time. The parent company stands to earn sizable returns by selling their investments when the startup’s stocks are open to the public. Earnings are then earmarked for new ventures.



Mergers and acquisitions:

Refers to financing a startup’s company’s acquisitions via an investment fund and aligning the startup and a complementary business to try and achieve synergy, where the new company is greater than the sum of the two previously separate entities.



Talk to us about how our back-office services can help your startup scale faster.


Types of CVC by investment goal



CVCs can also be segmented into four categories based on how they prioritize their investments. Startups should consider which type would best fit their needs.


• Strategic CVCs —

Prioritize investments that augment growth for the parent company; best suited for startups needing long-term strategy support.



• Financial CVCs —

Prioritize maximizing their return on investment; best suited for startups mostly in need of financial resources and with potentially little in common with the parent company.


• Hybrid CVCs —

Simultaneously prioritize return on investment and bringing strategic value to the startup; generally, the most desirable category of CVC to startups as they provide resources and support without the demand for a short-term return for the parent company.


• Transitional CVCs —

This category refers to CVCs shifting among the previous three categories; startups considering this category of investment must be mindful that the investor with whom they are communicating now could change quickly.


How startups can assess whether a CVC is the right fit



Most corporate venture capital arms rely on evergreen funds that receive a designated sum at regular intervals. Because their budgets have mostly been established before the economic downturn, CVCs still have ample unallocated capital on hand. 



However, not every CVC will be a good fit for every startup. So, how can entrepreneurs select the best match?


1. Analyze whether the CVC’s investment goal is congruent with your startup’s requirements.




Do you need long-term support, or are you looking primarily for financial support?



2. Assess the relationship between the CVC and its parent firm.




Will it offer the internal resources your startup needs, how will the parent company measure your success, and how well has the CVC communicated its vision throughout the parent?



3. Ascertain the CVC’s expectations and fit in the larger company.




Does the CVC make decisions independently from the parent; how are decisions made in terms of resource allocations for portfolio companies; how long does it hang onto portfolio companies; and what are expectations for exits and outcomes?



4. Talk to multiple people from the CVC and parent company.



Have you talked to key leaders from the CVC and parent company to understand their vision? Can you speak with CEOs from the CVC’s other portfolio firms to identify any hidden issues?


Takeaway



CVCs provide more than funds and advice to startups. They can offer resources beyond the domain of traditional VCs, such as industry expertise, access to potential customers, an ecosystem of products and a stable financial standing. These resources are effectively a type of non-dilutive capital that confers an important competitive advantage for entrepreneurs in an economic downturn.


Want more?

Since 2006, Escalon has helped thousands of startups get off the ground with our back-office solutions for accounting, HR, payroll, insurance, and recruiting and taxes — and we can help yours too.

Talk to an expert today.

Talk to our team today to learn how Escalon can help take your company to the next level.

  • Expertise you can trust

    Our team is made up of seasoned professionals who bring years of industry experience to the table. You gain a trusted advisor who understands your business inside out.

  • Quality and consistency

    Say goodbye to the hassles of hiring, training and managing in-house finance teams. You will never have to worry about unexpected leave of absence or retraining new employees.

  • Scalability and Flexibility

    Whether you’re a small business or a global powerhouse, our solutions scale with your needs. We eliminate inefficiencies, reduce costs and help you focus on growing your business.

Contact Us Today!

Tap into the latest insights from experts in your industry

Private Equity

The Key to Private Equity Success: Strong Financial Oversight and Compliance

Private equity deals are becoming larger and more complex, making financial preparation a critical part of the process. Take Novartis’s...

Read More
Accounting & Finance

Navigating Grant Management and Financial Reporting for Biotech Startups 

Biotech startups operate in a unique financial landscape, where securing grants, venture capital, and government funding is crucial for driving...

Read More
Accounting & Finance

Financial Compliance in the Decentralized Era: What Web3 Startups Need to Know 

As the world leans into the decentralized era, Web3 startups are at the forefront, exploring the possibilities of blockchain, cryptocurrencies,...

Read More
People Management & HR

Payroll Services: Streamlining Processes in High-Turnover Consumer Goods Settings 

  Managing payroll can be complicated in any industry, but it becomes especially challenging in the consumer goods sector, where...

Read More
Accounting & Finance

Navigating Payroll for Nonprofit Organizations: Staying Compliant with Grant Funding Rules 

Nonprofit organizations often rely on grant funding to carry out their missions, whether that involves community development, education, healthcare, or...

Read More
Media & Entertainment

Compliance in the Media World: Navigating Intellectual Property and Contracts 

In today’s hyper-connected media landscape, safeguarding intellectual property (IP) and expertly managing contracts are indispensable for success. Media companies—from traditional...

Read More
Accounting

Introducing C3: Your All-in-One Financial Management Platform

Managing your business’s finances can often feel like juggling too many tasks at once, especially when you’re trying to keep...

Read More
Startups

Sourcing Passive Candidates: Strategies for Expanding Your Talent Pool with Outsourcing 

  One of the most valuable sources of talent for startups is the pool of passive candidates—individuals who aren’t actively...

Read More
Startups

Managing Cash Flow in SaaS: Leveraging Outsourced Accounting to Scale Faster 

Cash flow is the lifeblood of any business, and this holds especially true for Software as a Service (SaaS) companies....

Read More