Corporate Venture Capital Advantages and Disadvantages
Big-time corporations typically have a business model in place that has worked for them for a long time. Otherwise, they wouldn't be the corporate giants that they are. However, using the same tactics for so many years eventually loses its impact, and they begin searching for the “next big thing.”
Innovation drives the economy, and modern-day entrepreneurial frontiers (e.g., startups) have the innovation expertise that corporations are looking for. Corporate venture capital (CVC) can be considered the connection between corporations and startups. But what's the process?
There are five stages of CVC financing, all done in the early phases of development. Using this business model has proven time and again how advantageous it can be when corporations and startups join forces and build lasting relationships. Here's a basic overview of how it works:
- Early-stage financing: Capital is used for R&D of the startup’s initial concept or proof of concept.
- Seed capital funds: Funds used to build a working prototype and address legalities (patents).
- Expansion financing: Capital is used for expansion when the product or service is on the market.
- Initial public offering: Startup goes public, and shares can be bought and sold.
- Mergers and acquisition: The corporation buys another company to integrate, or the startup is sold to merge with a different company.
To some, this can seem easy. To others, not so much. But we’re here to give you all the insight you need for your considerations. But, before getting into corporate venture capital advantages and disadvantages, let’s take a closer look into CVC specifics.
What Is Corporate Venture Capital?
Corporate venture capital (CVC) is the investment of corporate funds from a large organization into an innovative startup with the intent of gaining a competitive advantage in a specific market.
Essentially, it’s the long-term strategic partnership between the big guy and the little guy.
But why would a corporation bother investing in the little guy?
It's simple. Established corporations can shake things up by working with the little guy. Startups have the innovative culture, new ideas, marketing abilities, and new technologies to give corporations a facelift. In return, corporations have the capital that startups need. It’s a win-win relationship.
There’s always the looming question about venture capital (VC) and whether it's the same thing as CVC. There can be similarities, yes, but they are certainly not interchangeable terms. So now we answer the next question…
What’s the Difference?
Venture capital (VC) and corporate venture capital can appear very similar in structure, but the exact details can vary from each other. Both may be inspired to partner with innovative startups to gain a competitive advantage, but corporate venture capital is often the most effective strategy.
Let’s take a closer look into the differences between the two.
- Limited partners (LP) provide the funds which can then be invested in startups.
- (Goal) Return on investment to satisfy all limited partners.
- (Exit) Must accomplish successful exits (ROI) such as a buyout from another fund or corporate.
Corporate Venture Capital:
- Independent investment with the objectives of financial success while having a strategic fit with the startup invested in.
- (Goals) Industry know-how, market knowledge, access to new ideas and technologies.
- (Exits) No intent to exit. Looking for a strategic, long-term relationship that benefits both parties.
If you're still unsure about CVC as an option, let's look at the following corporate venture capital advantages and disadvantages.
7 Corporate Venture Capital Advantages and Disadvantages
Corporations that successfully maintain corporate venture capital relationships can be incredibly successful. The blend of established businesses and young companies are switching up the market and knocking out the competition like Tyson in his prime. We may be partial, but we’ll be fair and provide more insight into the subject. Here are the advantages and disadvantages of choosing a CVC strategy.
VIP Access to Innovative Technology
If your company invests, you'll be able to leverage a startup's innovation and technology. One of the more significant reasons large businesses are interested in smaller ones is because these startups often pioneer the technologies of tomorrow—new or disruptive products—and become major players in the market.
Take a look at these corporate giants that began as startups as examples.
- Instagram (now owned by Facebook)
- LinkedIn (whatever you do, don’t click that link…)
Sometimes all a corporation needs is to give someone else a chance. The results can be incredible.
Value Proposition Growth
CVC can develop a more robust network of business leaders, greater credibility, and more profound domain expertise in your focus areas. With an expanded network, your company has the potential to reach a broader customer base and increase your value proposition as a company that delivers on your promises.
"Strategy is based on a differentiated customer value proposition. Satisfying customers is the source of sustainable value creation.” -Robert Kaplan.
You're grateful for the business model your company has been using for the last ten years, but it's time to make a change. However, convincing the original execs may be difficult. People can be uncomfortable with change, especially when they don’t see why change is necessary. (This is where we picture the 83-year-old CEO of your company sitting on a throne in a top-floor office covered in velvet.) Of course, executives have their reasons for being stand-offish to new ideas, but that's where you come in and explain how CVC can benefit everyone.
Your company should respond to the changes in technologies and business models of today. An innovative startup can bring that creativity and precisely give your company's business model what it needs to revamp. A CVC partnership can help you move faster, gain more flexibility, and offer the most direct path to strategic and financial rewards.
Sometimes it can even help stimulate demand for a company's products.
When done correctly, CVC can bring in a major cash flow. Investing in a startup can be risky, but the possible returns on your investment can grow into the millions. According to famed venture capitalist Fred Wilson, “corporate venture capital is exploding. Active CVC business units rose to 773 in 2018, up 35% versus the prior year. Corporate VCs were involved in 23% of all investment deals in external startups in 2018.”
The important thing to remember is that CVC is meant to be a long-term strategy with the expectations of long-term profits. Those that plan for a long-term strategy but expect immediate financial returns are more likely to fail.
Slow Initial Setup:
This is no insult, but corporations are notoriously slow-moving. From R&D to product launch, there are many doorways to get through. The layers of bureaucracy that we mentioned earlier will tie up the onset of your partnership. This could lead to the fast-paced startup getting snatched up by someone else that's ready to go and your company losing a potentially lucrative partnership.
Difficulties With Management Alignment
Large organizations tend to be decentralized, and that can be an excellent strategy for your company. However, decentralized management partnering with a startup can result in misaligned operational goals. If your management is too focused on internal operations rather than seeing the big picture, innovation can be stopped in its tracks, and the partnership can crumble.
This connects to the glacial speed of corporate executives and how they might be hesitant to dive into a radical strategy with a new partner. Your patience will be tested, but if you're able to persuade your executives sooner than later, you'll have a better chance of success.
As the investing company, you become a stakeholder in the smaller business. This can go one of two ways—result in profits or lose your investment and damage your company's portfolio. The corporate funds invested are meant to jumpstart the innovators to ramp up both organizations (the win-win effect). If the innovation fails, it drags part of your company down with it, especially if you have too large an equity stake.
The corporate venture capital advantages and disadvantages listed above can give you the insight needed to guide you and your company through the decision-making process. Some executives may be hesitant, but their outdated business models need to change and catch up with the rest of us—and you can be the one to ignite that flame.
rready for a Partnership?
At rready we help organizations make the innovative changes needed to keep their business growing. After learning about corporate venture capital advantages and disadvantages, it's true that entering a CVC partnership can be a very lucrative strategy when done correctly. But there is no need to hunt for startups outside your company. Instead, grow them from the inside with a bottom-up entrepreneurship approach using our innovation software and services. Our team of experts will give your company the best possible chance of success. We're here to help you unleash that ambition and grow your business. If you're ready to take action, contact us today.Get started today