3 Types of CVC Investors and How to Engage With Them
by Andrii M. on Sep 19, 2022
CVC is booming, which means it’s a great time to be an entrepreneur. According to a report by CB Insights, there are hundreds of active corporate VCs with more than $50 billion of CVC capital deployed in 2018.
There are many reasons why the CVC activity is becoming increasingly high. The tech landscape is moving very fast today and corporations are hungry for innovative ideas, solid strategies, and good deals. While some try to build new revenue streams with new technologies, others may simply be looking for ways to disrupt the business of their competitors.
That is why at the same time grows the number of startups seeking corporate over traditional venture capital. Founders are well-aware of the numerous opportunities a CVC can offer a startup from an unimagined wealth of capital to long-term corporate partnerships.
To help entrepreneurs navigate the waters of corporate venture capital, in this post, we want to tell you about the three types of corporate VCs, the key things each has to offer, and the best ways to approach them.
What you need to know before approaching an Institutional CVC
Normally institutional venture capital comes from professionally managed funds ready to invest in emerging growth companies. Such VCs look for high-growth companies capable of reaching at least $25 million in sales in five years. The only difference between an institutional VC and its corporate version is that an institutional CVC has a big company behind them, capable of opening up real channel revenue. Be that as it may, their goal is still the same—leverage their parent corporation’s strategic assets, scale their portfolio, and drive real revenue.
This type of CVC is typically as fast as traditional VC. They may be interested in both financial and product due diligence and, as in their traditional form, corporate VCs are also often led by a team of full-time investment professionals, even though they might not be as experienced as people working for a pure financial VC.
Even though this type of CVC may be used for pretty much anything from ensuring the development of a new product to growing your financially proven MVPs, it is very expensive. An institutional CVC investor will most definitely demand significant equity in your business. And the earlier the investment stage you’re in, the more equity you should be ready to give up in order to secure such an investment.
Institutional CVC is a tricky one to engage with as their supply of funds is pretty limited and a significant bit of their balance sheet is already dedicated to supporting the club you’re trying to join—their portfolio companies. Even though institutional CVCs may be choosy, it’s always possible to find a perfect match. You just need to know what you’re looking for.
Always do your research before you approach a CVC. Well…any VC for the matter. Never try spamming any and every one VC you’ve found on the Internet or met at some conference. It will help neither your business goals nor your reputation if you do not match an institutional CVC’s investment criteria, be it the size of the investment you’re looking for, your stage of development, industry, or even geographic location. Your business plan will simply end up in their assistant’s bin, never even making it to their table.
Therefore you should always learn about the CVC you’re dealing with and the people who run it. What are the company’s past investment patterns? Who is the individual you’re trying to meet with? What’s their background and business focus? Are they looking for companies like yours? Limit your reach to a small number of well-researched targets and consider these key criteria in your search:
- Line of business. Whether it’s a particular technology, industry, or kind of business, make sure your offer hits the spot.
- Preference in geographic location. Distance is a pretty serious factor for an institutional CVC. Most stick to particular regions, not looking for deals overseas.
- Stage of development. Same as with line of business or location, some prefer early-stage startups while others invest only in mature, proven companies.
- Investment size. Pay attention to the upper and lower limits. CVCs looking to invest $3 million in a thousand startups will not be interested in giving all of that money to you alone.
- Leaders and followers. Lead CVCs conduct extensive due diligence and are significantly harder to get than passive ones. However, their presence alone can prove truly helpful for your second, third, or fourth round.
What you need to know before approaching a Strategic CVC
When it comes to strategic CVCs, good ROI only comes as a sweet bonus to them. What they are really after is innovation and strategic advantage. With little financial diligence, this type of CVC is strictly product focused. They are looking for startups that can help their parent corporation stay on the leading edge by discovering new technologies and pioneering new business opportunities and directions.
Sometimes slower than traditional VCs, strategic CVCs are ready to provide you with a serious cash commitment straight out of their corporate balance sheet or a dedicated fund if you have something novel to offer. They will make an investment in your company if you have some interesting technology, business approach, or anything else they can integrate into their parent corporation to complement its growth.
This type of CVC is not looking to bite off a big chunk of your equity, so they’re normally less aggressive on valuation and less intrusive when it comes to control over decision making. What they are primarily looking for is securing an exclusive license arrangement, a collaborative development/marketing/distribution agreement, or something like an option to buy your company in the future.
If you only need the money, it’s better to pursue institutional CVC. Don’t be tempted by better chances at valuation if you’re not ready for commitments other than financial. Consider a strategic CVC if you’re looking for a long-term relationship with an industry giant. Here’s what you should do if you seek a strategic CVC:
- Determine the kind of corporation you want to be affiliated with.
- Narrow down a pool of VCs that represent the corporations you like.
- Evaluate where your startup needs help and anticipate what the strategic CVC will want from you in return.
- Negotiate the terms carefully and consider the impact this will have on the future of your company.
- Don’t be pushed into a corner—prepare a mutually beneficial plan for future growth and exit strategies.
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Tourist CVCs are a very tricky bunch. These are young venture arms of big corporations that are primarily made up of C-levels pulled from finance, accounting, or product development who have little to no experience in venture capital. The lack of experience means weak processes (investment structures, active portfolio management, etc.), which makes them considerably slower than traditional VCs. It’s also usually hard to understand what a particular tourist CVC is after. Some may be hot-headed ready to invest in anything trendy without giving it enough thought (remember the peak of cryptocurrencies and ICOs?). Some may be strategic, product-focused, looking for long-term benefits while others will be less willing to allocate funds to innovative (or risky, as they see it) startups and therefore take valuation a lot more seriously.
What you need to know before approaching a Tourist CVC
Corporations start such VC firms when they seek more profitable climates abroad, see big opportunities in emerging economies/markets, or simply follow some tech trends/rumors. Chances are, you won’t be looking for them, they will be the ones knocking on your door with that “tourist money” if you’re good at networking, marketing, or have something mind-blowing to offer.
All this, however, makes tourist CVCs pretty flighty compared to the experienced institutional and strategic ones. Remember, you should never allow a tourist CVC to lead the round. They become increasingly more difficult to work with as you move through the phases and they usually don’t re-up. Even though it depends on the experience and skills of the individuals leading the investment, tourist CVCs are usually the first to get anxious and abandon the ship once it gets too complicated or the market weather turns nasty. So never assume that this type of capital is permanent.
Whether pushed by economic conditions and political situations or pulled by rumors of big opportunities, this fickle type of CVC is still a good catch if you play your cards right. After all, who knows where companies like Uber and Dropbox would be today if it wasn’t for these “tourists.”
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