Nine questions to ask a Corporate Venture Capital Investor

Below you will find 9 questions to ask the CVC investor you are talking to. The more ‘Yes’, the closer the CVC unit’s setup to a traditional, by financial return driven VC; the more ‘Nos’, the greater the (strategic) influence of the parent company on the CVC unit’s decisions.

What is most important is not getting a certain number of ‘Yes’ or ‘Nos’, but that the CVC setup fits your individual needs as a founder, entrepreneur, or (co-)investor - define these needs and ask your prospective CVC investor about his setup before closing the deal.

Most CVC units are a separate legal entity. This helps to establish the business model, processes, governance and incentivisation of the CVC unit. In addition, not having a separate entity can potentially have significant consequences for portfolio companies, e.g. startups will not be eligible to certain subsidy programmes in the EU any longer if a certain threshold of shareholding of a large corporate is reached.

Committed capital means that the investment team of the CVC can decide how and when to deploy capital based on their portfolio management strategy and portfolio company needs. Independence from the balance sheet and budget constraints of the parent company signals autonomy in investment and allocation decisions. However, if the committed capital is exhausted, getting a new sensible capital commitment is much more difficult than to ask for small additional capex in the annual budgeting process of the corporate.

Large organisations share information and gain advantage from their broad employee and knowledge base. However, transferring commercially relevant information from portfolio companies to the corporate can make an arms-length commercial cooperation difficult and lead to disadvantages for the start-up, e.g. weakening its negotiation position. The CVC unit should therefore commit to a Chinese wall concept: only information that has been approved by the start-up can be transferred to the corporate. Any other information received by the CVC in its investor role must be treated strictly confidential.

Venture capital decision processes differ in many ways from corporate M&A processes: regarding timelines, motives, and empowerment/hierarchy of the decision makers. At an early stage of the process the commercial relationship between the founders, the CVC and co-investors is established with a term sheet - the decision body of the CVC must comply with the typical, short VC timelines. Key discussion topic in the decision body/investment committee should be the individual transaction and the probability of success of the start-up – not the strategic goals the parent company seeks to accomplish. Bringing in external VC or entrepreneurial expertise into the decision body helps the CVC to act as a professional VC and open innovation tool.

The fundamental drivers of the CVC unit’s behaviour should be aligned with the entrepreneurial success of the portfolio company. Incentivising the CVC investment team on exit success based on cash-on-cash returns is a well-established VC principle that can also be transferred into a CVC structure.

What’s more, investment teams that are not working on traditional corporate benefit employment contracts can be more easily aligned to the portfolio company success as described above. Any newly invented CVC KPIs, e.g. number of start-ups presented to the corporate or contract value signed between start-up and corporate can lead to conflict of interests for the investment team.

Sweet spot for VCs is a 10 to 20% shareholding. Higher stakes might change the character of the cooperation from a VC to a joint venture logic, where the strategy of the JV partner prevail. Consortia have many advantages for future rounds and can support the start-up in different aspects. Accepting a balance in such a consortium, where there might be a lead investor, but all investors are treated in comparable way is an important logic in VC transactions.

Having multiple CVCs as investors even from the same sector can help establish the success of a platform business model. The ability to cooperate with other CVCs from competing corporates proves the open innovation approach of a CVC.

CVCs are often chosen by founders to enable commercial relationships with the parent company. This is one of the added values of a CVC unit. Opening the doors to the corporate, knowing the right decision makers, and moderating any misunderstandings is an important value add of a CVC. However, forcing cooperation contracts at the same time as the investment into the start-up or even worse negotiating commercial contracts between the corporate’s operating units and portfolio companies puts the CVC team into a minefield of conflicts of interest.

The Partners/Managing Directors of a CVC are often drawn from classic corporate roles such as strategy or M&A. This points to a strategic setup and decision making. On the contrary, if the Partners/MDs have a commercial/entrepreneurial background, (even better: outside the corporate), a more classic VC approach can be expected. CVC setups, where the MDs report to an internal innovation manager or are in addition to the CVC unit also responsible for the corporate’s internal innovation activities can, again, create conflicts of interest.

These questions are aimed at clarifying the business model and logic of CVC units for entrepreneurs/founders and co-investors to enable a successful cooperation – with success being defined by the founders’ needs.

If you have a different point of view, more questions to add, or are curious how many ‘yes’ you would get from EnBW New Ventures, please get in touch with me. 

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