Look at your phone, at the apps that you have downloaded and regularly use. The chances are that these apps all started thanks to venture capital (VC) investment. Somebody had an idea for a service, a business. But to make it happen what they needed is money.
Venture capitalists are the ones who get the headlines, who take the risk and in return for equity invest money that turn ideas into reality. VCs like Sequoia, Andreessen Horowitz, Kleiner Perkins, Accel and many others fuel innovation that help disruptive concepts become the likes of Facebook, Airbnb, Alibaba, Okta and Github and so many more.
But VCs are not the only source of money in the market, and for many start-ups a VC might not be the best partner either as there is a clear difference between what VCs want in return for equity and what corporate venture capital (CVC) want and can equally offer as part of the deal to make a business happen.
Searches for VCs vs. CVCs
What is Corporate Venture Capital?
CVCs are investment vehicles created and owned by enterprise organisations through which they can invest capital and knowledge directly into start-ups in return for equity.
Like VCs, CVCs invest if they see growth potential, i.e. generate a profitable return in the medium to long-term. For CVCs the return they are after might not just be financial, what they could be looking for is technology that add value to their parent company and the way in which they operates. Equally, having control of intellectual property that can help their business grow.
For corporates enterprises that invest, CVCs can play a very strategic part in safeguarding their future and growth opportunities.
In return for equity, investment from a corporate can include knowledge and expertise that can help a start-up scale and come online.
Just look at the health sector and how CVCs from firms like Pfizer, Johnson & Johnson and many others are investing in health and med-tech opportunities as we move from the COVID-19 pandemic to a state of endemic. The last two years has created an appetite for an improvement in healthcare that can be delivered through bio-tech, digital therapeutics, health IT, mental health and wellness, and telehealth.
A record year for CVC deals
What are the challenges facing CVC firms?
At a recent Global Corporate Venturing webinar a discussion took place not just about the deals that took place in 2021, but also about the challenges that surprisingly CVC still face.
CVCs have two primary challenges, which relate to:
How they are perceived within their parent companies, and
The awareness, or lack of, amongst start-ups regarding what they can also offer aside from capital.
Some great data was presented during the webinar, including a recent research paper by Ilya Strebulaev, a professor of finance at Stanford Graduate School of Business, and research fellow Amanda Wang, a key finding was ‘a general lack of knowledge about venture capital among corporate leadership.’
The research, which took place over nine months and interviewed senior investment professionals working in the VC units of 74 U.S. companies (representing almost 80% of all CVC units in the S&P 500) found that more than 60% of senior executives confided that their parent companies do not understand the norms of venture capital. Something that shocked me!
Enterprise CVC units were often kept at arms-length, with no two corporate venture capital units being alike, an issue not just for reporting and transparency, but one that slowed down the ability of CVCs to compete to get the deal done.
Some CVCs also stated anonymously that there was often not a clear sense of objectives set, with the investment numbers being presented just as an R&D expense. Against, value added and risk management were not often identified for parent companies.
Yes, like VCs, CVCs will have an exit strategy for their investments, but more often than not and with the right strategic aspirations and internal culture within their parent company, CVCs can also be more forward looking and help the parent company better manage competitive risk. Again, if the company thinks long-term and understands the value that their CVC can offer them.
Some outcomes for a parent company’s CVC strategy can include integration of new technology solutions into supply chain, ownership of IP, better positioning and market capture.
How can communications help CVCs?
Communications is an essential tool in order to better position the value that CVCs provide to both the parent company and the organisation that is seeking investment in order to grow and expand.
The GSB study shows that work is needed to map stakeholders and raise awareness amongst them of the work and value that CVCs provide to their parent companies.
Stakeholder mapping, engagement and management require insight and time in order to secure a better understanding of the value that they can add.
At the same time, a strong communications operation is needed in order to highlight the deals that CVCs are securing, because at the moment it is VCs that are getting the headlines, at least in the tech environment.
Each parent company will have their own objectives, set on the benefits and returns that they want from their CVC, and if they do not have these then work is needed to help establish these.
Messaging, storytelling and reputation management are critical areas of work that are needed. Equally, when an investment is made these are also essential knowledge areas that need to be leveraged within the organisations that they have invested in. The reputation of a start-up needs to be carefully developed and managed during the early stages of scaling. Reputation matters when you are looking to create trust. It really is about identifying risk and establishing confidence, not just in the company, but also in the founders.
The perception of innovation can increase teh reputation of many companies, which is why CVCs through their investments can also support the setting of this perception. This is something that is more of a long-term outcome of an effective strategic communciations policy, but one that over time will also help attract future investments as start-ups and founders decide who is better placed to help turn their disruptive ideas into a reality.
Look at the video conferencing app Zoom, which grew during the pandemic. In April last year, it launched a $100 million fund through which it plans to invest in businesses that are developing solutions that Zoom feel can add value to its own operations.
Zoom reported earnings of $2.65 billion, an increase of over 320% compared to the previous year. And with a focus on hybrid and remote working, the space is there to establish this business in the work ecosystem, making an investment vehicle a logical solution. By the end of 2021 Zoom had invested in more than 25 Apps.
Some of these Apps might be integrated into their environment, others might be sold.
There has been an increase in deals and investment in the past two years, with companies in the health, IT and media sectors receiving the largest investments from CVCs.
The time has come to establish communications as a key discipline in the CVC armoury to help it secure the recognition that it deserves, better manage the risk and reputation of its investments and better position it with its wide array of stakeholders.
This is not just about storytelling, it is about reputation management!
