Definition
Corporate Venture Capital (CVC) is a form of equity investment that is directly made by established corporations in entrepreneurial ventures. This is usually done off the balance sheets of the primary organization. The goal is often to support business growth, gain access to new technologies, or leverage market shifts in a strategic manner.
Key Takeaways
- Corporate Venture Capital (CVC) is an investment made by an established corporation into start-up or small-sized companies which are innovative or have high growth potential. This approach allows larger companies to gain access to innovative technologies and business models.
- CVC is not only a financial investment but also includes sharing of resources, skills, and business networks from parent corporations to accelerate the growth of the companies they invest in, creating mutual benefits for all involved parties.
- The risks associated with CVC are substantially high due to the uncertainty and volatility associated with start-up companies. Therefore, a corporation must have a comprehensive risk management plan while investing in these ventures. Despite the risks, a successful CVC can provide substantial financial gains and strategic advantages.
Importance
Corporate Venture Capital (CVC) plays a significant role in the financial world as it is a strategy where a large firm invests in small but high-potential start-ups or innovative firms instead of creating new ventures themselves.
This approach is crucial for two primary reasons: first, it provides large corporations with an avenue to strategically innovate and stay competitive in rapidly evolving markets.
Through investing in start-ups, they can gain early access to groundbreaking technology, novel business models, and inventive ideas that can potentially disrupt their industry.
Second, it is beneficial for small companies or start-ups as it gives them access to necessary funding, business experience, and resources to grow their business.
Thus, CVC creates a synergistic relationship beneficial for both the investing company and the start-up, making it a vital instrument in the financial and business world.
Explanation
Corporate Venture Capital (CVC) typically refers to the investments made by established corporations in start-ups or small and medium sized companies. These investments, often made through a dedicated subsidiary or a segregated pool of funds, primarily serve to advance strategic goals of the parent corporation rather than purely seeking financial returns.
By investing in external firms with innovative products, new technologies or unique business practices, established firms can tap into the potential of ground-breaking developments that they may otherwise be unable to innovate or create within the bureaucracy of their own set-ups. The purpose of CVC is multi-faceted; ranging from gaining competitive advantages, driving long-term growth, speeding up introduction of new products, to improving existing operations.
For example, a company may invest as a means of gaining early access to an innovative technology, which could be integrated into its product offering to create a superior value proposition. Alternatively, it could be used to enter new business areas, explore disruptive technologies or hedge against uncertainties in a fast evolving environment.
In some cases, apart from financial investments, the parent corporations may also fosters the start-ups by providing them with operational support, technical expertise, market access, or other resources, thereby helping them grow while also benefiting themselves from the potential innovation and increased profitability.
Examples of Corporate Venture Capital
Google Ventures: Google has a separate branch dedicated to corporate venture capital known as GV or Google Ventures. The division invests in startups in any sector, ranging from life sciences and technology to consumer products and services. Notable investments have included Uber, Slack, and Buffer.
Intel Capital: Intel Capital is the corporate venture arm of Intel Corporation and invests in innovative startups focused on technology advancements. Companies they’ve invested in include AI-based companies, Cloud service providers, and software generated companies.
Citi Ventures: This is the venture capital subsidiary of Citigroup. It makes strategic investments in startups in sectors such as financial technology, cybersecurity, data analytics, and customer service. Some examples of companies they’ve invested in include Square, DocuSign, and Plaid.
Corporate Venture Capital FAQ
1. What is Corporate Venture Capital?
Corporate Venture Capital is a subset of venture capital where large corporations invest in startup companies, primarily for strategic purposes. The corporations not only provide financing but also contribute their expertise, resources, and network to help the startups grow.
2. How does Corporate Venture Capital work?
Companies under the Corporate Venture Capital scheme invest in external startup businesses. These investments are generally significantly smaller than the market capitalisation of the corporations making the investment. The aim is to gain a strategic advantage, often to supplement internal R&D activities.
3. What is the difference between Corporate Venture Capital and traditional Venture Capital?
While both Corporate Venture Capital and traditional Venture Capital focus on investing in startups, their motives are different. Traditional Venture Capital is primarily focused on financial returns. On the other hand, Corporate Venture Capital aims for strategic returns like gaining a competitive advantage, creating synergies, or getting early access to new technologies.
4. Are there any risks associated with Corporate Venture Capital?
Yes, there are several risks associated with Corporate Venture Capital. Corporate investors can overemphasize strategic fit at the expense of financial returns and they might get less attention from small startups than traditional venture capitalists. Additionally, there is also a risk of the startup failing to perform as expected or the strategic goals not being met.
5. What are the benefits of Corporate Venture Capital?
Corporate Venture Capital benefits both the corporation and the startup. The corporation gets access to new technologies, potential acquisitions, and a platform to learn the startup’s culture. For the startup, the benefits include capital, access to the corporation’s resources, customers, supply chains, and regulatory expertise.
Related Entrepreneurship Terms
- Portfolio Company: A company or entity in which a venture capital firm invests. All portfolio companies collectively make up the ‘portfolio’ of investments held by a venture capital firm.
- Exit Strategy: A planned approach to liquidating an investment in a business venture or investment portfolio, often with the aim of minimizing losses and maximizing returns.
- Risk Capital: Capital that can be lost without jeopardizing the financial security or life style of the investor. It is a component of the equity capital of high-growth startup companies.
- Internal Rate of Return (IRR): A metric used in capital budgeting to estimate the profitability of potential investments. It is a rate at which a project could break even in terms of Net Present Value.
- Dilution: A reduction in the ownership percentage of a share of stock due to the issuance of new stock in the company. Dilution often occurs following a fundraising round or the exercise of employee stock options.
Sources for More Information
- Investopedia: This website offers a comprehensive financial dictionary with over 13,000 terms and counting.
- Harvard Business Review: HBR is a reliable source for articles and data analysis about business management and operations including corporate venture capital.
- CB Insights: This platform offers detailed overviews on business funding, forecasting trends, and corporate venture capital.
- Entrepreneur: This website has a wealth of information about starting and running businesses, including information on funding like corporate venture capital.
