More and more large companies are creating internal venture groups to invest in startups

When we think of venture capital, what comes to mind are traditional venture capital firms like a16z or Sequoia.

We don’t usually think of large corporations like Verizon, Pfizer, or Salesforce as venture capitalists. But they are.

In fact, GV (Google Ventures) is an $8 billion fund that’s made 472 investments in startups. Salesforce has allocated $5 billion and made 459 investments to date.[1]

The venture arms of large companies are known as Corporate Venture Capital or CVCs. More than 4,000 companies have set up CVCs, a number that’s multiplying rapidly.[2]

Of course, few are nearly as big as the Google or Salesforce monsters. Half of CVC funds are under $100M, with most of the rest between $100M and $1B. But that’s still a huge source of investment dollars.

Together, CVCs invested $170B in startups in 2021, making them quietly responsible for a third of all venture investment.[3] CVCs participated in 8,254 deals in 2022, writing checks that averaged $10M.[4]

CVCs can be an important source of funding that offers unique advantages to startups. Think of them as friends with benefits. But those benefits also come with complications.

What is a CVC?

A traditional VC is an investment company. They collect funds from a variety of sources including insurance companies, university endowments, and rich individuals and invest the money in startups. Like any other investment firm, their goal is to provide financial returns to their investors.

Until recently, corporations with extra cash (or large employee retirement funds) might hand some of that to VCs to invest for them. Many still do. But 4,000 companies so far have made the decision to invest in startups directly by setting up their own dedicated venture funds.

By investing themselves, the company can allocate funding based not only for financial gain but to meet other corporate strategic goals.

CVC Goals and Focus

Unlike VCs that are focused strictly on financial returns, CVCs can consider the wider benefits of an investment in a startup.

They can use small investments to monitor promising new technologies that might disrupt their industry or solve internal problems. They can get an inside look at companies they might want to acquire in the future.

Their investments can help bring products to market that compliment their own, such as telecoms providers investing in startups developing telemedicine, AR/VR, and gaming apps that consume their 5G bandwidth.

For a CVC, even a failure can be a win. Investing $2M in a promising startup whose technology didn’t work can save the company $100M by not acquiring the startup outright.

Financial vs Strategic Goals

However, balancing the goal of making money against broader strategic benefits can be a tricky balancing act. In my experience, most CVCs strongly favor one or the other.

Some CVCs act like traditional VCs, primarily tasked with generating a financial return for the company. These CVCs typically have wide latitude in what they can invest in.

At the other extreme, some CVCs are focused almost exclusively on corporate strategic goals. Just breaking even on their portfolio is sufficient if the investments provide other benefits like advancing sustainability goals or promoting their own products. These CVCs typically only invest in startups that provide a specific benefit to one of the company’s product groups.

Most CVCs claim to fall in the middle, needing to provide financial returns while also meeting strategic goals. However, either financial or strategic goals have to be the higher priority as this affects how the CVC is structured and how it makes investment decisions.

It’s important for founders know which type of CVC they’re dealing with since that will affect how to pitch them and what to expect for the relationship after the investment.

A financial-focused CVC will act a lot like a VC — they’ll want regular updates of the startup’s finances and progress, but typically won’t be actively involved with the startup beyond an occasional meeting.

Strategic-focused CVCs are different. To meet strategic goals requires partnership and collaboration between the company and the startups. The pitch will be more about joint opportunities than long-term financial projections. The decision makers may be the managers of the product businesses rather than the CVC staff.

The best way to tell whether the CVC is financial or strategic focused is to analyze the team. Are they PhDs in physics or MBAs in finance? Did they rise through the company’s product groups or did they start as associates at Sequoia? Adjust your pitch accordingly. And don’t be afraid to ask the CVC staff about their processes:

  • Do they have a dedicated fund or does the investment come from the product group’s budget?
  • Who will be on the diligence committee, who will be negotiating the investment terms, and who will be making the decision whether to invest or not?
  • How long does it take them to make an investment decision?

Investor with Benefits

As an industry leader, CVCs can provide benefits to startups that are impossible for financial investors.

The CVC knows the industry. They own the customers. They can offer guidance and input on all aspects of the startup’s business from development to marketing to distribution. They can provide introductions to potential customers, partners, and the press.

For hardtech companies, access to the company’s test and production facilities can be more important than the investment itself.

An investment from an industry leader can open doors to other investors and customers. If Google makes an investment, the rest of the round will be filled within minutes. If you’re developing sustainable fabrics, landing an investment from Tin Shed Ventures, Patagonia’s CVC, is a huge stamp of approval.

When it comes times for an exit, the CVC is the most likely acquirer. Building that relationship early and proving the startup’s value can lead to an ideal outcome for both the startup and the acquirer.

CVC Complications

However, while there are major benefits of taking investment from the industry giant, there can also be complications.

The most obvious drawback is that the company is a potential competitor. With thousands of engineers and a strong brand name, how much information do we want to share with them?

Even if the company isn’t a direct competitor to us, it is likely to be competing with our other customers. Will that scare away other business?

CVCs also tend to be slow and bureaucratic. Unlike a VC that has only a handful of employees and can go from pitch to investment in weeks, a CVC is a small group inside a big corporation that needs to get buy-in from decision makers across that company. That can go painfully slow.

Used to dictating terms to small suppliers, large companies can be inflexible with unreasonable demands. The company may demand exclusivity as a customer or reseller. They may require a board seat. They’ll almost certainly ask for a right of first refusal (ROFR) over any acquisition.

Ideally, the founders can simply say no. But if they’re desperate for investment, it can be tempting to accept the cash now and worry about the implications later.

All these demands can have serious downsides for running the business, signing up customers, and maximizing the value of the exit. They can scare off other customers and investors. No matter how tempting, founders should say no.

To avoid complications, the CVC should always be a follow-on investor rather than the deal lead, and should be accept the same terms as other investors without exception.

To preserve the ability to work with any and all customers without restrain, or pivot business strategy as needed, the CVC should not be given a board seat nor board observer rights. However, they should get monthly or quarterly updates, including financial reports, the same as other investors. A role as a technical advisor or business mentor can be highly beneficial.

Any special considerations such as pilot testing, development partner, or resale rights should be negotiated separately from the investment, treating them the same as any other key customer.

Final Thoughts

CVCs are like VCs with benefits. As you look for investors for your startup, reach out to the CVCs in your industry.

But the CVC exists to meet their corporate strategic and financial goals, which aren’t always aligned with yours.

So absolutely look for investment from CVCs, but be firm about investment terms that maintain the flexibility you need to build the startup.

If you’re lucky enough to land an investment from a CVC, the money is just the beginning. Be sure to advantage of their resources, expertise, and connections to help with your success.

In my novel, To Kill a Unicorn, the Silicon Valley startup, SüprDüpr, lands a billion dollar investment from BiteCoin Ventures. But the reclusive Satoshi Nakamoto on their board sends them in a sinister direction.

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