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The six types of Corporate Venture Capital — and how to pick the best one for your company
News | 23.08.2021

The six types of Corporate Venture Capital — and how to pick the best one for your company

From single balance sheet investments to an independent fund, here's how to choose the Corporate Venture Capital model that works for you.

In the last few years, corporate venture funds are becoming increasingly popular as an investment model, following the successes of RBVC and BMW iVentures, whose portfolios achieved a performance that was on a par with the top Venture Capital firms.

At Redstone, we spearheaded the Venture Capital as a Service model, offering a full range of services from setting up funds and managing them, and creating co-investing structures where corporates collaborate with an experienced Venture Capital team.

But Corporate Venture Capital is not a one-size-fits-all proposition. It can involve everything from sporadic investments from the corporate balance sheet to a fully autonomous Corporate Venture Capital fund that has been spun out from the parent company.

Companies need to decide which model with suit there needs best. Here is a checklist for evaluating the different models.

Evergreen structures

1. Single direct investments

This is often the first step corporates take into venture capital. It usually involves minority investments in the startups and is decided on in the same way a corporate would decide on an M&A investment. No specific Venture Capital experts are needed. This type of investing is often combined with a corporate incubator or accelerator.

Advantages

  • It is a first step into the world of corporate venture capital.
  • It creates awareness of startups inside the company and allows the corporate have some skin in the game.
  • It can foster exclusive cooperation with the startup.
  • It can be a first step towards taking a controlling stake in the startup.

Disadvantages

  • This is an opportunistic approach and not based on a clear investment thesis. It can lead to quite a random collection of holdings.
  • The investment is often at an early stage, which makes it more risky.
  • Limited Venture Capital experience at the corporate can also make it risky.
  • This is used as disguised M&A and leads corporations to pick the wrong investments. They tend to avoid disruptive technology and instead pick for incremental innovation still close to their core business for which they overpay.
  • Corporates have the tendency to do “control deals”. In principle they dislike minority deals, and inexperienced corporate investors will try to get preemptive rights and acquire a big stake (>25%). This makes the startup unattractive to professional Venture Capitals. Because they tend to avoid risks they avoid building a large portfolio (Venture Capital investment paradox) but instead acquire stakes in startups they believe to be “the silver bullet”. They acquire these at later stages and at higher valuations — but there is still a high risk of failure.

Who does this?

Claas, the agricultural equipment company famous for its harvesters and tractors, invested in E-Farm, a platform for trading pre-owned farm equipment. Redstone advised this deal in 2019 (read here what WirtschaftsWoche had to say about it). Claas had already long been involved in the trade of used machinery of its own brand, so investing in this digital marketplace meant access to better structures and new customer groups. The digital marketplace is cross-border and bigger than the region, and it offers a full range of services from testing to insurance to transportation. For farmers and dealers, it meant the consolidation of a fragmented and inefficient market, more transparency in buying and selling used equipment. Claas was keen to support the advancement of any and all aspects of the marketing, aware of the huge potential benefits of a professional trading platform for used farm equipment.

If you are thinking about this, ask yourself:

  • How would your organization be affected by a first, unsuccessful investment?
  • How much budget can you commit to investments?
  • What type of innovation is Corporate seeking? Incremental? Vertical? Radical?
  • What role do you want startups to play in your long term strategy?
  • Multiple direct investment
  • This is a very common practice among corporates that have decided to support internal R&D efforts by repeatedly but still opportunistically investing into start-ups. This is usually a more structured approach than single direct investments and there may be some dedicated internal or external resources dedicated to it. Investments are mostly driven by the R&D department and tend to foster incremental innovation.

 

2. Multiple direct investment 

This is a very common practice among corporates that have decided to support internal R&D efforts by repeatedly but still opportunistically investing into start-ups. This is usually a more structured approach than single direct investments and there may be some dedicated internal or external resources dedicated to it. Investments are mostly driven by the R&D department and tend to foster incremental innovation.

Advantages

  • Corporates learn a lot about Venture Capital dealmaking and collaboration through this method.

Disadvantages

  • It can be biased to focus on startups close to the core business of the corporate and ignore other opportunities. The corporation may miss the chance to diversify and to transform.
  • Deals are still mostly opportunistic deals and there is no clear investment thesis.
  • There is no long-term capital commitment.
  • It is hard to get high-quality deal flow when investments are ad-hoc.

Who does this?

In 2019, the real estate company Vonovia invested in Roobeo, a construction materials marketplace offering end-to-end services for streamlined procurement of tools and materials for renovations and decorations. The idea of a digital supply cloud with uniform standards was an innovation very relevant to the real estate giant, and it promised to improve efficiency. We encountered Vonovia on the occasion of advising Berliner Volksbank Ventures on joining this investment round.

If you are considering this corporate venture capital model, ask yourself:

  • Have you defined an investment thesis?
  • Are you seeking long-term capital commitment?
  • Which strategic business area justifies multiple direct investments?
  • Do you have the internal resources for managing multiple investments?
  • How will you get deal flow?

 

3. Portfolio

A portfolio of investments takes the multiple direct investments one stage further, combining it with a long term capital commitment to invest in 2-5 deals every year, based on a defined investment strategy. It can be closely attached to the corporate core business but sometimes is set up as a separate legal entity. Because of the ambitious goals and capital commitments, it needs a qualified internal team or external resources to manage.

Advantages

  • There is a long term capital commitment and clear strategic and financial objectives.
  • There is a dedicated internal/ external team.
  • The corporate can build its reputation and brand as a professional Corporate Venture Capital investor.
  • If needed, investments can be cut back.
  • There is a clearly defined governance structure and investment process.
  • Disadvantages
  • The evergreen structure can mean the fund managers aren’t offered the same attractive incentives they would get in a venture capital firm.
  • This can make it difficult to attract professional Venture Capital expertise.
  • The team may struggle to get high-quality deals.

Disadvantages 

  • The evergreen structure can mean the fund managers aren’t offered the same attractive incentives they would get in a venture capital firm.  
  • This can make it difficult to attract professional Venture Capital expertise. 
  • The team may struggle to get high-quality deals. 

Who does this?

  • Berliner Volksbank Ventures. With more than 18 Million customers, the Volksbanken group leads the market in SME-banking. In 2015, the bank set out to build a portfolio of investments themed on FinTech, PropTech, and other digital advances that would be relevant to SMEs. Choosing Redstone as a venture capital expert and trusted partner for success, the bank went on to invest alongside top global investors like Insight Partners, e.ventures and Partech in a portfolio of 12 startups.
  • Roche Venture Fund — has a large portfolio of early to late stage investments in healthcare startups. Some of these have gone on to be fully acquired by Roche.

If you are considering this corporate venture capital model, ask yourself:

  • How important is a financial return for your portfolio?
  • How will you hire an external Venture Capital expertise?
  • How will you generate global high-quality outbound deal flow?
  • Can you prepare 10-12 investment memos (internal documents outlining why you have or haven’t invested in a particular company) per year?
  • How will you structure and actively manage the portfolio?
  • Can the company make a long term commitment to the portfolio?

 

Closed fund structures

4. LP investment

Corporates can invest as LPs in independent Venture Capital funds. This gives them access to the digital ecosystem and access to startup deals.

Advantages

  • It is easy and fast access to the digital ecosystem and deal flow.
  • The Venture Capital does the hard work, limiting the cost and risk of building up your own team.
  • It is a chance to invest further away from the core business.

Disadvantages

  • No influence on the investment decision of the fund
  • Only access to recycled deal flow
  • There may be conflicts of interest between the corporate and the general partners of the fund
    Management fees for the venture fund can be high.
  • It means committing capital for up to 10 years
  • There are limited opportunities to learn about VC investing or the startup ecosystem.

Who does this?

Questions to ask

  • Will an LP investment meet your strategic goals?
  • How much do you want to be involved in decision-making?
  • Which topics, sectors or regions justify LP investments?
  • Are there trends you don’t want to miss but you are not sure about?

5. Corporate Venture Capital fund

A proprietary corporate Venture Capital fund has an independent, professional Venture Capital structure including an independent investment committee. Business units have no veto rights over the investment decisions.

Advantages

  • There is efficient allocation of capital and professional governance.
  • The team can invest more freely in new business models that could disrupt the core business. It can be a step towards the company reinventing itself.
  • The corporate can get additional return on investment by collaborating with the startups in the portfolio.
  • There is a strong focus on financial returns.

Disadvantages

  • Arms-length investments will have less ability to transform the corporate business.
  • There is limited ability for M&A. Portfolio companies are generally not acquired.
  • There could be conflicts of interest between the corporate and the independent fund manager.
  • It can take time to build the team, attract talent and connect with the digital ecosystem.
  • It will take time to build sufficient deal flow.
  • You will need to have a sustainable investment thesis.
  • There is a strong focus on financial returns and it will be easy to see if the strategy isn’t working.

Who does this?

  • MA Ventures, the venture capital fund of the Swiss Migros Aare supermarket cooperative. The fund’s themes are innovation for retail, last mile logistics, and technologies for the Proptech and Health sectors. Sourced, managed and advised by Redstone, the portfolio is designed actively to power the retailer’s digital transformation, to make it more sustainable, and improve processes at every level.
  • Swiss Health Ventures, the venture arm of Swiss health insurance company CSS, is a fund that was set up and is run in close cooperation with Redstone with the aim to accelerate digital health. The investment focus is on health, from prevention to recovery, specialist care and telemedicine, early detection diagnostics and digital tools to manage chronic illness.
  • M Ventures — Merck’s venture capital operation has invested in a broad range of startups from Akili, a video game-based medical therapy to Simulate, the creator or vegan chicken nugget alternatives.

Questions to ask

  • How important are financial returns?
  • Would you allow the Corporate Venture Capital unit to have independent branding?
  • Are you willing to commit resources for a long-term fund (at least 10 years)?

6. Co-GP fund

This is a structure where an external Venture Capital dealmaking partner works closely with the corporate, taking advantage of their in-house expertise.

Advantages

  • The Venture Capital investor brings a good track record and know-how to mitigate the risk of failure.
  • The Venture Capital investor as an independent professional investment manager provides necessary neutrality to manage interests of multiple corporate LP-investors.
  • The corporate, as a GP, has strong influence in the investment focus of the fund.
  • Corporate LPs strongly benefit from data and service offering of professional VC investment managers.
  • Both sides actively engage in decision-making through participation in the investment committee.
  • The corporate can contribute their industrial expertise.
  • You can define a clear investment thesis and have a data driven evidence-based decision-making process.
  • Potential to share management fees (with other/external LPs).
  • You can share risks and to write larger tickets.
  • The corporate can learn from the expertise of external partners.
  • Corporations can support startups to scale.

Disadvantages

  • You will need to collaborate with an external partner.

Who does this?

  • Future Industry Ventures — this is a co-GP fund between the Venture Capital expert Redstone and SBI Holdings, a Japanese financial conglomerate and world-leading investment group with unparalleled expertise, specialized in digital and innovative investment verticals. The fund’s mission is to provide capital for high-tech Industry 4.0 technology companies and to power the future of manufacturing.
  • R Ventures.

 

Questions to ask

Is the company prepared to collaborate with an experienced partner on a long term basis?

 

Finally…

We hope this article has helped you. If you are an innovation manager or have any interest in the field, do not hesitate to get in contact with us, we will be glad to hear from you!

An earlier version of this article, co-written by financial journalist Maija Palmer and Redstone Partner Marcus Schroeder, was first published in Sifted.

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