We are pleased to publish this blog post by guest author Trafton Kenney, in collaboration with NVCA Member, 500 Startups
What type of CVC are you? What’s the best way to stand out in an increasingly crowded corporate venture space?
Last week, 500 Startups and the NVCA welcomed a packed house of investors to address these questions and more as part of a fireside chat on the state of Corporate Venture Capital.
After opening remarks, 500 Startups’ Vijay Rajendran and Alba Zurriaga Carda walked through some of the key findings from the firm’s 2019 CVC Report, one of the largest data-driven studies in the field to date. The team outlined five guiding principles for effective CVC teams:
- Prioritize financial or strategic returns and design the CVC unit accordingly
- Time matters: Aim for quick wins and maximize your rate of learning
- Provide “Smart & Strategic Capital,” bringing capital, scaling capacity and portfolio support, to get into the top deals
- Measure your Return on Innovation not just the Return on Investment
- Integrate your investment activities into the wider corporate innovation framework
Building on some of these frameworks, 500’s Bedy Yang kicked off a panel discussion of local CVCs, featuring: Jay Reinemann of Propel Ventures; Olga Serhiyevich of Citi Ventures; Cynthia Kueppers of A3 Ventures; and Mark Klopp, Former Chair of CVC, NVCA.
The evolution of CVC
One thing all of the panelists quickly agreed on was the growing role CVC is playing in the venture ecosystem. In 2018 alone, corporates accounted for over 23% of all venture activity according to Pitchbook.
The panel represented a wide array of approaches, all investing in different verticals and at various stages of maturity.
Propel Ventures began as a venture arm of BBVA before the Spanish bank spun it off as a separate $250M fund and standalone LLC. Their first two funds used a single LP structure, but they’ve also been involved in other funds and investing off the balance sheet.
“We shifted Propel into a formal fund structure in order to be better aligned with the entrepreneurs,” said Jay Reinemann, a GP at the fund.
A3 Ventures, one of the newer venture firms on the panel, began their CVC journey with the primary focus on M&A and finding startups for AAA Northern California, Nevada and Utah. An innovation lab followed before they officially launched a fund. That’s a common approach, and one that tracks with 500’s report. 500 found that more than 50% of CVCs begin with balance sheet investments.
On the strategic side, Citi Ventures makes investments independently of any business at Citi. According to Olga Serhiyevich, SVP of the Venture Platform, Citi views CVC as a platform that can deliver value by incubating and investing in new ideas with internal partners as well as the bank’s clients.
“Citi Ventures primarily focuses on two areas: identifying the next generation of financial services providers for potential partnerships…[and] on the enterprise tech side, finding strategic value from the savings realized by bringing in innovative technology to make our business stronger,” said Serhiyevich.
Their internal team, Catalyst, is staffed from different business units, and increasingly focused on automation, with some geographic focuses as well. According to Serhiyevich, Citi Ventures has now invested in over 75 companies.
Design Principles around CVC Structure
500’s report highlights three foundation questions to ask when setting up a CVC:
- What returns matter to your organization?
- Are you more entrepreneurial or more corporate?
- What will be the relationship with your parent organization?
Once you’ve addressed those questions, what’s the best way to explore CVC when the executive team is hesitant to jump right in?
“When starting out, use the apprentice approach in partnering with a venture fund to learn the VC business and to reach a geography, stage or technology area that you are not investing in directly. Also becoming an LP in that fund will commit your company to a multiyear year agreement to participate,” said Mark Klopp, Former Chair of the Corporate Venture Group, NVCA. “This strategy is a test for the corporation on its seriousness toward longer-term investing.”
There’s no one-size-fits all approach. There are lots of different structures, from investing off the balance sheet, to setting up a dedicated internal fund, to creating a separate fund with multiple LPs.
“Shoot for a limited partner structure within a multi-year capital commitment. From a trend standpoint, it’s moving in that direction for a lot of corporations,” Klopp continued.
“In my experience, if [the CVC unit] starts only with internal people, it’s tough to get agreement within the corporation to move directly to a limited partnership (LP) structure on launch. However, if the corporation hires the CVC Head externally, they can say ‘If you want me to lead this effort, I need you to commit to an LP structure.’ To retain and recruit talent, you may need a carried interest or some type of profit share variable compensation for the CVC group,” said Klopp.
Defining Metrics for Success
500’s study found that mandates in the CVC sector can be as little as four years—much shorter than those in traditional venture which can be closer to a decade.
Given the time pressure many CVCs face, what’s the best way to define success?
“There are a lot of subtleties in measuring financial returns,” said Klopp. It’s about managing expectations. Generally, the bad news comes early (failures) and the good news comes late (winners with liquidity from M&A or IPO) with the classic J curve. If the organization expects quick realized returns, most of the time, they’re going to be very disappointed unless you’re very lucky. There has to be a commitment over time and a suspension of disbelief on financial returns for at least three to five years while strategic impact can be demonstrated earlier.”
“If you’re not able to demonstrate you’re feeding yourself, you have less opportunity for success.” said Cynthia Kueppers, Head of Venture Capital, A3 Ventures. “Strategic returns are critical—that’s really why you exist. We set our own goals, top of funnel, how many startups did you meet, how many qualified leads, and more.”
Several other panelists agreed on the importance of tracking sales funnels, but some metrics are more difficult to quantify.
“At Visa. we measured meetings and engagements, but ultimately, feedback from peers,” added Propel Ventures’ Reinemann. “Are these guys doing their job and bringing innovation into the organization? CVCs can’t survive tectonic changes without support from multiple senior executives”
Others highlighted the importance of navigating the needs of different stakeholders.
“Don’t claim full credit for things that other people in the organization believe is their domain, like revenue or savings,” said Klopp. “Because then you can find yourselves fighting against people that you’re trying to serve. That’s a subtle, political and diplomatic thing that you have to balance. But maybe you can say you were the catalyst or finder to allow that change to happen.”
One key to success?
According to Cynthia Kueppers of A3 Ventures, it’s about understanding the tools for innovation, how they work together and complement one another, and getting early buy in from executives.
“Today’s panel reinforced how crucial integration is for any firm’s CVC efforts to pay off in their innovation journey,” said 500’s Vijay Rajendran. “There plenty of different approaches, each with their own merit, and no prescriptive solution. We found that thinking intentionally about the parent company’s motivations, picking the right structure and investing in the right team early on will set you up for success down the line.”
Interested in learning more about the tools and tactics of corporate venture? Check out VC Unlocked: Paris, 500 Startups’ 2-day seminar on CVC, held in collaboration with INSEAD’s Global Private Equity Initiative at Station F.
The mission of NVCA is to advance the global competitiveness of the U.S. venture capital industry. The NVCA Corporate Venture Group (CVG) fulfills the information, education, and networking needs of corporations, enabling them to accelerate the progress of innovation and growth through successful strategic venturing. The CVG is designed to build better communication and practical cooperation across all parties in the venture process, including corporations, venture capitalists, start-up companies, and the research community. For more information on how to join, visit nvca.org.
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