Just a month ago, one of my clients in the sustainability and AI industry achieved a big success by partnering with a global industry leader through a merger or acquisition deal. What’s interesting about this story is that the startup originated as a Corporate Venture Capital (CVC) division within a global conglomerate. Looking back at their journey since the CVC investment, the CEO and I witnessed the startup's ups and downs, especially during the challenging times of the Covid-19 pandemic.
The conglomerate's involvement had a profound impact on driving the startup's product development, gaining more expertise, and expanding their market presence across different regions. However, it's important to note that CVCs are often known for being slower and more cautious compared to traditional venture capitalists (VCs). The process of working with CVCs can involve a lot of scrutiny, paperwork, and navigating internal company politics. These factors can be a concern for young startup CEOs seeking Series A or Series B funding.
In the current macroeconomic climate, funding dynamics have changed. Processes have become longer, valuations have dwindled, and VCs now prioritize existing portfolio companies, advising them to secure a minimum of 24 months of runway. As opposed to H1 2022, VCs approach new investment opportunities with greater caution.
Here are some important factors that may encourage startups to consider working with CVC firms:
Sales & Marketing:
- CVCs provide startups with access to corporate networks, customer base, and infrastructure, accelerating growth.
- Strategic alignment with a CVC grants startups access to expertise, resources, and market opportunities, including channels and ecosystem partners.
- Leveraging the corporate partner's branding can benefit startups, enhancing their visibility and reputation.
Product-Market-Fit
- CVCs specialize in specific industries aligned with their core business, offering startups tailored insights, guidance, and resources.
- Defining a clear, coherent, and business-oriented Use Case with relevant success metrics strengthens the startup's future funding prospects.
- Startups can leverage CVC expertise to apply more relevant value propositions within their product roadmap.
Strategic Finance
- CVCs offer industry stability, providing startups with a sense of security and higher chances of funding and ongoing support.
- CVCs have a longer investment horizon, fostering long-term partnerships and innovation within their corporate ecosystem.
- CVC investment can signal potential M&A opportunities if the startup meets its KPIs, as it aligns with the corporate's core business and collaboration potential.
When it comes to funding options, each has its own pros and cons. The choice depends on the startup's goals, industry, and growth strategy. While CVCs offer some advantages, it's important for startups to carefully consider the specific terms, control dynamics, and potential conflicts that may arise when partnering with a CVC.
In one of my upcoming articles, I will share tips on how startups can approach CVCs effectively.
