How do VC funds relate to CVC for Portfolio Growth?
“ It is not a competitive relationship, is more of a collaboration”- Jonny Saacks, Managing Partner at F2
Antonio Peña, Jonny Saacks, Felipe Valencia
In the world of entrepreneurship, startups develop their business idea trying to solve a problem and adding value to the customer. To do so, they raise capital from VC funds that will allow them to continue building the technology, the product, the team, and the access to the customer to grow exponentially. In this process, entrepreneurs and VC funds may need to collaborate with corporates to scale. Corporations are interested in engaging with startups and VC funds to relate to this ecosystem, follow innovation trends and gain access to technology-based business models that allow them to strengthen their strategy or capabilities.
Let’s review the case of Forté Ventures, an independent VC fund whose focus is on collaborating and co-investing with corporate VC funds (CVC). Forté believes that having the right corporate investor allows it to have a force multiplier for startups. For example, Car IQ a company dedicated to providing payment solutions for fleets was founded in 2016 in San Francisco. Throughout these years it has raised USD$22.3mm in capital from 16 investors. In Series A Citi Ventures entered and later in Series B Forté Ventures co-invested with Citi Ventures and Blackberry. Forté Ventures has co-invested in other investments such as Stella Connect with Comcast and Zendesk, Intelli-vision with Zebra Technologies and Remedy Informatics with Merck.
Forté Ventures is a clear example of the collaborative power that exists between independent VC funds and CVCs. Both players are important not only to provide capital to the startup but also to drive its development. As long as there is collaboration between VC funds and CVCs, the ecosystem will grow, and startups will become stronger.
Also, keep in mind that corporations tend to invest in startups that already have a product market fit, typically around Series A. Therefore, the investment of funds will allow the development of the startup and give visibility to corporations to invest in subsequent stages, as Jonathan Saacks, managing partner of F2, pointed out at the INC Monterrey event. In addition, it is dangerous for the CVC company to become the startup’s only client; having VC funds on the cap table will allow the startup to have additional clients and continue its growth.
When a startup has the capacity to generate value for a corporation, the latter can develop a proof of concept (PoC), a pilot or invest directly in the startup. Whether to generate a PoC or pilot before the investment will depend a lot on the investment process and objectives of the corporation. If the investment is made, the corporate may be more motivated to conduct a PoC or pilot. Also, if the startup is based in another geography, it might make more sense for the corporate to invest and align incentives before doing a PoC or pilot. However, in VC it is not essential for a corporation to invest, it can obtain value from the startup by other means.
At the time of a PoC or pilot between the startup and the corporate, it is essential that there is independence between the two and that the investment decision is not conditioned. The corporate may take a direction that could probably be contrary to the interests of the startup and vice versa, therefore, it is essential that each party can make its decisions without limitations. Even if the corporate is inclined to acquire the startup, the startup should have the opportunity to go through a competitive process and decide who is the best bidder not only for economic decisions, but for control rights.
Just as VC funds seek a relationship with corporates, the reverse also applies. A company may invest in VC funds. The objective could be financial or strategic to gain access to pipeline, market insights and business networks in the innovation and VC ecosystem. However, one of the learnings and practices of the CVC world is not to invest in independent VC funds.
A CVC should be a professional team of VC investors with capabilities, skills and networks equal to or better than any other independent VC fund. If the CVC is new, it should hire an outside team in order to meet investment objectives.
When a CVC invests directly in startups in addition to injecting capital, it is opening the doors to generate a mutually beneficial business relationship. Indirectly it is benefiting the VC fund as it sends a signal to the market of the potential benefit and value generation by the startup in the portfolio.
The CVC’s investment in the startup should be conducted on the technical and legal terms used in the ecosystem, and at market prices. That is to say, the CVC should not have preferential conditions to the market, otherwise it could complicate future capital raising by the startup and perhaps jeopardize its growth potential.
Entrepreneurs are the ones who make the decision on who they want to partner with. They must choose the right partner and the right time. Failure to do so can be a cause of delay or failure for a startup, as it could consume a lot of time and effort trying to close a relationship with a corporate that may not generate value.
Finally, when a CVC seeks to invest in a startup, the entrepreneur needs to consider whether it is a professional team that has the financial capacity to support the company through the cycles and understand what the potential business relationship could be. Their approach and experience could help the entrepreneurs in their portfolio navigate the complexities of corporate investment and be a link to the success of the project.
Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.
Ricardo Latournerie. VC Investor at ACV.
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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