Corporate venturing must not be mistaken for venture capitalism, says corporate expert Neil Foster.
“It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change,' Charles Darwin once said.
This saying is particularly apt in the world of business with evolution occurring in the business world of corporate development. In order to maintain a competitive edge many corporations are seeking to invest in innovative R&D companies by establishing a corporate venture capital team (“CVC”). This blog aims to give the reader a brief overview of the differences between a CVC and venture capital by funds (“VC”) and the effect on some of the terms and structuring of a CVC deal.
The following article stemmed from a recent webinar on "Structuring and Managing Corporate Venturing Deals," which was produced as part of Baker Botts’ continuing “London Calling” Webinar Series and was designed to help stakeholders differentiate between a CVC and venture capital by funds (“VC”) and how those labels can affect the terms and structuring of a CVC deal. .
CVC distinguishes itself from VC in that it strives to achieve both strategic and financial objectives. Strategic objectives include innovation of products by leveraging the intellectual property (“IP”) of entrepreneurial R&D companies. Having strategic objectives can more closely align the interests of a CVC with those of the management team in the target company and provide for a more innovative arena and collaborative growth strategy than is possible with VC investment.
CVCs also differ from VC due to the availability of investment of “in kind” resources such as use of secondments, access to distribution channels or production plants. With both parties able to share resources and IP many CVC deals involve an element of IP licensing. The CVC will want to ensure that its investment is protected, but also can gain competitive advantages by having early access to IP via an IP licence. In the initial stages of investment the CVC will usually structure the investment so that the smaller company is insulated from the stifling administrative burdens of the parent company thus encouraging innovation.
Establishing a separate, additional joint venture company can also act as a buffer for dealing with existing investors whose objectives may differ from those of the CVC.Typically a CVC will make a financial investment into a small firm in return for a minority interest. The ability to utilise and develop ideas is not linked to the size of the investment . This is therefore a capital-efficient way to access new innovation, R&D, IP and/or new markets.
CVCs also differ from VCs in relation to exit strategies. While a VC will seek to exit financially at the end of a predefined term, a CVC will have a number of exit options available to them - in fact, all three investment options (buy, sell or hold) are available. (VCs are always a seller). It is of course open to a CVC to co-invest with VCs and this proves mutually advantageous to both parties as it gives a CVC access to investment “deal flow” and also provides the private venture firm with technology expertise and strategic insight.