Corporate Venture Capital – A Student Perspective

What CVC reputations are to novices, and why they’re important

By Justin Gage, NYU Stern Class of 2018

As a student and intern at a seed stage venture fund this summer, part of my job has been running around to events in New York and meeting people who might be good syndicate partners for the firm, specifically other VCs. I was definitely expecting to meet all different kinds of firms, but I was surprised to find an entire ecosystem of corporate venture capital (CVC) firms that I had never heard of before. Amazingly, as the summer winds down, I might have met more partners at CVC firms than at institutional ones.

From panels at conferences to dedicated CB Insights reports, CVC groups are finally getting serious coverage. I’ll explain the three major differences that I perceive, and I hope that it lends some insight into how people going into the industry view CVC groups and what they’re doing. Keep in mind – these are general differences, and there are bound to be many exceptions, so don’t hold me accountable of your CVC firm breaks these boundaries.

The first key differentiator between institutional VCs and CVC arms is investment scope. While there are certainly exceptions (Comcast and others) and it isn’t binary, CVC arms will generally invest in sectors that are strategically relevant to their core businesses. Institutional VCs may or may not be thesis driven, but they will typically invest over a broad range of verticals that may be unrelated. For example, a friend of mine who worked at Samsung Ventures mentioned to me that for a while, Samsung would only take a serious look at opportunities that were directly relevant to their businesses.

The second major difference I see is the value proposition. As Rita Waite, senior analyst in growth strategy and investments at Juniper Networks, notes in CB Insights, CVCs will often position themselves as doorways to industry expertise and connections, while institutional VCs talk about helping you build your business, together. This also translates into how active the partnership is post-investment – CVC arms will typically be more passive investors, while institutional VCs will try to push the company in what they see as the right direction more aggressively. While CVCs may also be active investors as well (see the framework in the HBR), institutional VCs will almost never be passive. I have no evidence for this assertion, but it’s certainly the general perception I’ve sensed in the industry.

The third and final key disparity is fund structure, and what that means for the life cycle of the investment. CVCs will often invest off of the parent company’s balance sheet instead of raising their own fund (Bloomberg Beta and Slack are some notable exceptions). The area where this comes into play is follow-on investments – if your CVC arm funded a company at seed and now they’re raising a $100M Series C, participating pro-rata may be easier with a whole balance sheet (theoretically) to invest from. At the same time, it’s also more dangerous – a corporate can decide to stop investing at any time, while an institutional VC will generally need to invest most of their fund.

Investment scope, value proposition, and fund structure – these are the three major points that I’ve found differentiate the CVC arms I’ve met this summer from the institutional ones. This is an industry where differentiation matters – deal volume has decreased significantly in 2016, and there are a limited number of startups to go around. Yet, at the same time as deal volume has been decreasing for VC as an asset class, CVC deal volume has been increasing year after year since at least 2011. Decreased deal volume generally means less quality investment opportunities to go around – but CVCs continue to push for more investments. Reputation, and thus access to better deals even when they’re scarcer, has never been more important as a VC.

At the NY Venture Summit last month, there was an impressive CVC panel with directors at Motorola Solutions, Citi, and Intel, among others; and one of the topics was exactly that, reputation. Entrepreneurs and institutional VCs will often view CVC arms with suspicion – if they’re investing, why aren’t they acquiring? Are their incentives aligned with the entrepreneur’s? These are questions that may have good answers but need to be answered by CVCs clearly. With reputation still up in the air, CVC arms should continue to consider how they can communicate their unique value add and get access to top startups.