Corporate Venture Capital (CVC) Investing Explained

Summary

Corporate Venture Capital (CVC) investing is a strategic investment approach by companies seeking both financial returns and synergistic benefits, which has seen significant growth since the early 2000s.

Abstract

Corporate Venture Capital (CVC) investing is a form of investment that, while similar to traditional Venture Capital (VC), is distinct in its objectives and participants. CVC involves established companies investing in startups or smaller firms, not solely for financial profit but also to gain strategic advantages such as access to new technologies, markets, and innovative ideas that can complement their existing operations. Unlike traditional VC firms that are primarily focused on financial returns, CVCs often aim to foster partnerships that can enhance their parent company's research and development, product offerings, and overall market position. The practice of CVC investing has been on the rise, with the amount invested by CVCs growing substantially from $3.5 billion in 2002 to over$ 73.1 billion in mega-rounds alone by 2020. This trend underscores the increasing importance of CVC as a tool for corporate growth and innovation.

Opinions

CVC investing is seen as a means to achieve symbiotic strategic advantages, beyond just financial gains, by investing in companies with complementary technologies and market positions.
The article suggests that entrepreneurs and businesspeople should understand CVC as a potential source of investment and strategic partnerships.
It is implied that the growth in CVC investments indicates a shift in corporate strategy towards more collaborative and forward-thinking investment approaches.
The author highlights that CVC firms are often part of larger companies that have their own product lines and market presence, which differentiates them from traditional VC firms.
The article conveys that CVC investments can provide startups with not just capital but also valuable industry connections and expertise.
It is noted that CVCs like Google, Intel, Johnson & Johnson, GlaxoSmithKline, Salesforce, and Mitsubishi are examples of companies actively engaging in strategic investments through their CVC arms.
The author cites Michelle Moon from LG to illustrate that CVC investment can be a strategic move to prepare for future technological impacts, emphasizing the long-term and strategic nature of these investments.

Investing not just for profit, but also for symbiotic strategic advantages

Corporate Venture Capital (CVC) investing is similar to, but not identical with, Venture Capital (VC) investing. Crucially, the amount invested by CVC firms has been increasing since the early 2000s. In 2002, for example, the amount invested by CVC firms stood at $3.5 billion. No measly sum, but compare that to the sum in 2020, when the amount invested in mega-rounds alone (investments of over $100 million) topped $73.1 billion.

Given the huge amounts of money currently being invested by corporate venture capital firms, CVC is definitely worth knowing about, especially if you’re a businessperson or entrepreneur looking to understand the investment and acquisition options young companies have.

How CVC is different from traditional VC

There are a small handful of differences between traditional venture capital investing and corporate venture capital investing strategies. But they are also similar in many ways too. I’ll start by explaining how VC and CVC are similar, and then I’ll explain the differences between them.

VC and CVC investing are similar insofar that both investment strategies involve investment firms:

Analysing the market to identify investment prospects;

Making investment decisions based on growth potential;

Making investment decisions incentivised by the pursuit of profit.

However, VC and CVC firms are different in several ways too.

Venture capital investors usually work for private equity firms, whose predominant activity involves identifying companies with high-growth potential to invest in for purely financial returns.

CVC firms are not necessarily only investment companies, funds, and banks. CVC firms are often investing arms of companies that manufacture, create, and market products in their own right, too. Google, Intel, Johnson & Johnson, GlaxoSmithKline, Salesforce, and Mitsubishi are all examples of companies with CVC interests and branches.

Venture capital investors are usually incentivised to invest only by the prospect of companies they invest in growing so much that the value of those companies increases. This means the value of the investor’s original investment grows with it, which they can turn over for profit.

Strategic corporate venture capital investors are incentivised by the prospect of companies they invest in increasing in value too. However, there are other incentives for strategic corporate venture capital firms to invest in young companies. Often, CVC firms invest in companies whose R&D programmes, products, personnel, and assets can complement their own operations, businesses, and portfolios. In return, invested businesses acquire both capital, and genuine industry connections.

Conclusion

CVC is straightforward to wrap your head around when you have understood what differentiates it from traditional VC, and what the key strategic reasons larger companies decide to invest in smaller companies are.

The most fundamental difference between VC and CVC investing is the fact that CVC investment often has a strategic motive, whereas traditional VC investors are usually incentivised only by future financial gain.

Plugandplay explains, for example, that “Michelle Moon at LG talks about [how] CVC investment provides an opportunity to invest in future technology (e.g. quantum computing) that may not be immediately relevant but will have a major impact […] in the future”. CVC investment is therefore all about symbiotic partnerships established for strategic advantages.

When CVC investors choose to invest, the investing and the invested companies usually work in overlapping industries. Decisions to invest are made from the belief that a partnership will provide strategic, symbiotic advantages that can help each company improve their research, services, operations, and products — ultimately giving them a competitive edge.

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