Entrepreneurs in the highly dynamic world of startup funding usually face tons of different options. Two of its biggest operators are VC firms and corporate venture arms. While both open up and provide essential funding for new companies, they are constituted with different models and different objectives in the first instance. The following article discusses the most important differences between traditional VCs and corporate VCs so that this significant characteristic can be understood by entrepreneurs and investors alike.
Defining VC and Corporate VC
First of all, let us define what a VC and a corporate VC are.
What is Venture Capital?
Venture Capital refers to private equity funding given to startups or early-stage companies that have high growth potential by VC firms or funds. VC firms generally raise money from LPs like pension funds, endowments, and high-net-worth individuals, and further deploy the money into various fast-growing startups’ ideas against equity.
What is Corporate Venture Capital?
The other way around, corporate venture capital is when large corporations make some strategic investments in external startup companies. In general, such strategic investment will flow from an independent corporate VC arm or innovation fund within the larger corporate structure. Instead of money contributed by outside parties for investment, funding for the investments made by corporate VCs is provided by the parent company’s balance sheet.
- Organizational Structure
This thus creates very different organizational structures between VCs and corporate VCs, further impacting decision-making processes and investment strategies.
VC Structure:
- Not affiliated with any parent corporation as separate entities
- Primarily closed-ended partnerships
- Distinct fund size and investment period
- GPs hold control over investment decisions
Corporate VC Structure:
- A subsidiary of a larger parent corporation
- Primarily an internal department of the parent, but structured as a subsidiary
- The fund size is often not as rigid and may be derived from corporate profits
- Investment decisions can originate from VC professionals and/and corporate executives
- Investment Objectives
Perhaps the most fundamental difference between VCs and corporate VCs is their primary investment objectives.
VC Objectives:
Financial returns: Produce high returns to its limited partners
Portfolio Diversification: Invest in a large number of startups to diversify their risk
Look for companies with high growth potential and well-defined exit plans
Corporate VC Objectives:
- Strategic alignment: Invest in those startups that serve the strategic interests of the parent company
- Innovation access: Early access to new technologies or new business models
- Potential acquisition targets: Interrogate prospective future acquisition candidates
- Financial returns: While important, they may be second in priority to strategic benefits
- Investment Focus and Criteria
The investment focus and various criteria for VCs and corporate VCs are very different in many ways. For example :
VC Investment Focus:
- Sector focus with scope for specialization in industries like technology and healthcare
- Scalability and size of the market
- Disruptive technologies or business models
- Prospective high-growth companies with potential attractive exits
The focus of investment of Corporate VC:
- Sectors adjacent to the parent company’s industry
- Interest in technologies or services related to the core business
- Will invest in companies that have the potential to become suppliers or partners
- Sometimes in the most novel markets, any hope of diversification alone
- Value Beyond Capital
Both VC and corporate VCs bring value beyond the capital invested, but the flavor of delivering value itself stands differentiated.
VC Value Addition:
- Scaling expertise, as a startup, will evolve and transit different phases
- Huge Networks for Hiring and Partnerships, subsequent rounds
- Financial Management and Corporate Governance
- Preparation for Exits: IPO / Acquisition
- Tap into corporate resources for R&D and market channels
- Commercial collaboration opportunities with the parent
- Industry-specific experience and know-how from the market
- Additional credibility through affiliation with a prestigious corporate brand
- Investment Horizon and Exit Strategies
Investment horizon and perfect exit routes could differ between VCs and corporate VCs.
VC Investment Horizon:
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Typically 5-10 years, coinciding with the fund life cycle
Razor-sharp focus on exit strategies from the outset—IPO or Acquisition
- High multiples on invested capital
Investment Horizon of Corporate VC:
- Can be more patient, at times longer-term
- Quick exits are not always a priority
- Will potentially acquire successful portfolio companies
- Decision-Making Process
The investment decision-making processes of VCs and corporate VCs can differ dramatically.
VC Decision-Making:
- A relatively straightforward process involving partners and the investment committee
- Decisions are primarily based on financial potential and market opportunity
- Investment decisions have fast turnaround times
Corporate VC Decision-Making:
- Can include several stakeholders at the parent company
- Non-financial return considerations, strategic fit, etc.
- Lengthier decision process as a result of corporate bureaucracy
- Risk Appetite and Investment Stage
Risk appetite and investment stage are areas where VCs and corporate VCs differ quite frequently.
VC Risk Appetite:
- Generally high-risk tolerance
- Willing to invest in the early stages of a startup with unproven business models
- Risks are diversified within a portfolio
Corporate VC Risk Appetite:
- Often more conservative due to corporate oversight
- Maybe like later-stage startups with proven traction
- Sometimes focus on de-risked opportunities that align with corporate strategy
- Networking and Ecosystem Building
The role played by VCs and corporate VCs is crucial in developing startup ecosystems but approaches widely differ.
VC Ecosystem Building
- Connect portfolio companies
- Run events and programs to enable startup growth
- Network with other VCs to get co-investment deals
Differences in Corporate VC Ecosystem Building
Atum startups and corporate business units
Enable pilot programs and proof-of-concepts within the corporation
Introduce startups to corporate clients and partners
- Funding Stability and Follow-on Investments
The funding stability and follow-on investments can be quite different from VCs and corporate VCs.
VC Funding Stability:
Dependent on raising new funds periodically
Pressure to show returns to raise subsequent funds
- Follow-up investments are often contingent on startup performance and the availability of funds.
Corporate VC Funding Stability:
- Generally more stable because it is based on corporate profits.
- Less pressure to get money back quickly – can support longer-term investments.
- More lenient on follow-on investments, giving leeway to the strategic nature of the investment.
- Reporting and Governance
The kinds of reporting and governance VCs and CVCs expect are often different as well.
VC Reporting and Governance:
- Regular reporting to limited partners
- Board seats often required as part of investment
- Focus on financial metrics and growth indicators
Corporate VC Reporting and Governance:
- Internal reporting to corporate stakeholders
- May or may not require board seats
- Interest in both financial and strategic metrics
- Potential Conflicts of Interest
Both VCs and corporate VCs can face potential conflicts of interest, but the nature of these conflicts differs.
VC Potential Conflicts:
- Balancing interests of different portfolio companies
- Relations management with limited partners
Corporate VC Potential Conflicts: - Reconciling startup interests with corporate priorities
- Portfolio companies versus business units in the corporation
- Effect on the Culture and Operations of a Startup
The degree to which a VC or corporate VC affects the culture and operations of a startup:
Impact of a VC:
- Growth pressure and scaling
- Building for exit
- Innovative and disruptive culture
Impact of a Corporate VC: - The potential effect of the corporate culture
- Synergies with the parent
- Startup-like agility vs. corporate processes
Conclusion:
Both traditional VCs and corporate VCs are relevant players in the startup ecosystem, albeit working with very different models and ideals. Traditional VCs are focused on financial returns mostly. They bring specific experience in scaling startups and dealing with growth issues. The investment focus is often generic with a clear exit strategy based on the lifecycle of the fund.
While corporate VCs do share strategic alignment with the goals of their parent company, they can offer unique value to the startups in which they invest through access to corporate resources and industry-specific expertise. The investment criteria of a CVC, however, are bound more strongly to corporate strategies, and the decision processes are often more complicated than usual.
For entrepreneurs looking for funding, grasping these differences will enable them to decide which of these kinds of investors best aligns with the goals and needs of their startup. A few startups may benefit from the fast scaling and exit-focused approach traditional VCs provide, while some others might value more strategic support and industry connections that a corporate VC brings.
Ultimately, both VCs and CVCs contribute greatly to the growth and development of the startup ecosystem. Their differences in approaches offer diversity to entrepreneurs, making the funding landscape rich and dynamic. As the startup ecosystem continues to evolve, it feels like the roles that traditional VCs and corporate VCs play are areas of dynamism for opportunities. Most importantly, these are areas through which the startup can lock in funding, strategic support, and partnerships that are dearly needed in the quest for competitiveness in the global marketplace.
