In June 2014 I joined the Kauffman Fellows program. It has been a great experience, which I recommend to any venture capitalist who wants to build an amazing investor network globally and learn from the most successful VCs and entrepreneurs in the Valley.
As part of the Kauffman Fellows program I have been looking at the recent trend of corporate venturing (CVC) – i.e. corporates engaging directly with startups through equity investments and collaboration projects. Since 2011 CVC organizations have been popping out like mushrooms and they are now close to 1500 such organizations globally. 25 of the 30 Dow Jones companies have one and in 2014 corporate investors accounted for close to 20% of total venture capital investments in the USA!
Given the significance of this trend, I wanted to understand the entreprneurs’ perspective on the CVC investments and their motivations for acquiring corporate investors. This information would help corporates become even better investors and to build some of the greatest companies in the market. Between May and July I conducted a survey involving 88 entrepreneurs aimed to investigate the following three questions:
- Why do entrepreneurs reach out to corporates for investment?
- How happy are they with their CVC investors?
- How does their experience compare to the experience with VC investors?
The results have painted a more positive picture of corporate investing than expected. I am very happy about the contributions that CVCs have made to entrepreneurs, but at the same time I recognize that these results are probably biased. I distributed the survey through a channel that was most readily available for me – i.e. through my CVC colleagues. This means I have likely sampled the best performing ventures in the industry. Because why would a CVC manager send such a survey to their worst performing ventures?! To correct this bias I reached out to some entreprneurs on Linkedin, but their response rate was relatively low.
A detailed summary of the study results including commentary can be found here. These are the top 10 take aways:
- 80% of startups are happy or neutral about their corporate investors. If they were to choose again, they would either go with the same investor consortium or even a higher participation from strategic investors.
- CVCs seem to give slightly better financial terms than VCs and they fill a capitalization gap in some sectors not served well enough by VCs (esp. Chemicals & Materials as well as Hardware products).
- The future of CVC looks bright. 2/3 of startups believe that CVC investments will increase slightly or significantly over the new few years and most of them are happy with today´s widely practiced model of doing CVC in-house (e.g. 3M New Ventures, BASF Ventures).
- Most startups (80%) wish to find a customer (50%) or a distribution partner (30%) in their corporate investor. Commercialization experience and market access are the two most popular motives for an investment (from startups´ perspective). Brand and capital access are almost as important. Access to the corporate`s technical know-how is significant, but secondary.
- When it comes to the actual value contributions by corporates, all startups – except for those in the enterprise software space – think more could have been done in providing market access. Especially Chemicals & Materials corporates have helped little in the commercialization efforts and mostly contributed with technical support.
- 90% of corporates do not put limitations on exit any more, which is great news for startups!
- 75% of startups deem it unlikely to exit to their corporate partner.
- If you are a startup aiming to acquire funding from a corporate investor, plan at least 6 months (better 9) for the due diligence process. Also be prepared to give up some exclusivities, especially if you are a materials or hardware supplier, albeit not in your core areas.
- Startups in areas completely new to the corporate are least likely to initiate any collaboration with their partner. Most successful collaborations are in areas core or adjacent to corporate and have already started prior to an investment or the collaboration agreement was signed at investment closing.
- CVCs are good at many things, but not at board representation and investor acquisition for future rounds. Fortunately, VCs fill these gaps well.
Hope you enjoy the report! Happy to discuss the results. Please contact me on twitter @ewencja if you have any questions or comments.
“Entrepreneurs say “The future of Corporate Venturing looks bright”!” was originaly posted on Ewa’s blog.