A guide to choosing the right corporate investment for entrepreneurs
CVCs offer funding, access to resources such as experienced business unit leaders, marketing and development support, and the halo-effect of an established brand. But interested start-ups should be aware of the potential drawbacks
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After a decade of easy money, start-ups are suddenly facing a strange new reality: funding is drying up. Global venture funding fell by 23 percent to US$108.5 billion in the second quarter of the year – the second-largest drop in a decade. Although the figure is still higher than levels seen before the pandemic, entrepreneurs could be forgiven for feeling more anxious about their venture being starved of financial backing.
The landscape has its bright spot though, and that is the rise of corporate venture capital (CVC). Between 2010 and 2020, the number of corporate investors grew more than six times to over 4,000. Collectively, they invested a record US$169.3 billion in 2021, up 142 percent compared to 2020. Even as investment appetite cooled in Q1 this year, there were a record 1,317 CVC-backed deals. However, funding fell 19 percent to US$37 billion.
CVCs offer funding, access to resources such as experienced business unit leaders, marketing and development support, and the halo-effect of an established brand. But interested start-ups should be aware of the potential drawbacks. We conducted an in-depth survey of the CVC landscape in collaboration with market intelligence company Global Corporate Venturing. Our findings show that more than half of the 4,062 CVCs that invested between January 2020 and June 2021 were doing so for the very first time, and only 48 percent had been in operation for at least two years at the time of investment.
These relative CVC newcomers may struggle with even a basic understanding of venture capital norms. In a separate survey of global CVC executives, 61 percent reported that they didn't feel like the senior executives of their corporate parent understood industry norms. Many CVCs may also be more impatient than traditional VCs for quick returns.
Finally, the existing investors of a startup may baulk at having a CVC on board. One founder we interviewed explained, “We had to turn down a CVC because our existing investors believed that taking them on would dilute exit returns and result in a negative perception on the eventual exit.”
[This article is republished courtesy of INSEAD Knowledge, the portal to the latest business insights and views of The Business School of the World. Copyright INSEAD 2024]