Venture capital is seen as a financial profession because the core activity is money management, but practically speaking, there is very little finance in the day-to-day job. The function includes heavy doses of sales (convincing good entrepreneurs to take your capital and other investors to syndicate with you) and general management (helping startups grow quickly and avoid mistakes that could put them out of business). In many ways, those general management skills represent a specialized version of consulting for startups, and that’s what entrepreneurs are buying when they trade their startup equity for cash services.
Those consultative services include financial oversight, recruiting, networking, product advice and assistance with follow-on funding and, ultimately, with exits. We’ve seen firsthand how experienced and dedicated VCs can add value to their startups, whether from a role on the board of directors or simply as an active investor on the cap table.
While CVCs can, and should, emulate traditional VCs when it comes to these consultative services, they can also bring much more to the table. This is where the corporate parent and team behind the CVC can be an asset instead of a liability. CVCs can pursue commercial deals on behalf of their corporate parents, bringing revenue, distribution, marketing, supply chain relationships and product expertise. Whereas many traditional venture firms have tried to imitate Andreessen Horowitz’s “operating partner” model with one or two employees who help with business development introductions, corporations can be the business development partner. It’s a powerful option for the mutual benefit of a startup and a corporate investor.
As noted above in section 5, unlike traditional VC firms, CVCs are generally not exclusively concerned with driving financial returns. CVCs are also focused on strategic returns. Per the EY-Parthenon 2022 Digital Investment Index report, which surveyed over 1,500 executives, 44% of CVC respondents cite supporting new market expansion as their primary objective, further underscoring how corporate investors differentiate themselves from traditional VCs when closing deals with entrepreneurs.
In fact, CVC funds are the venturing tool of choice: 60% of organizations say that a dedicated CVC fund, as opposed to direct investing off the balance sheet (13%) or investing as a LP in a VC fund (27%), produced the best corporate venturing results.
Of course, operational involvement with portfolio companies can go too far. It’s the job of the management team to run the startup and for the VCs and board members to support that effort, not to meddle. But CVCs can leverage their deep industry expertise to give that support, providing a potential competitive edge for startups.
Our experience shows that each model has its strengths and weaknesses. While some traditional VCs still discredit CVCs, we’ve seen first-hand that entrepreneurs are hungry for any source of competitive advantage and are eager to harness the benefits that corporations can bring as investors. But these potential advantages are only as good as the corporation’s ability to follow industry best practices and work constructively with startup founders and traditional VCs.
Entrepreneurs, institutional VCs and corporate VCs should be keenly attuned to understanding the similarities and differences between these subclasses of venture if they are to work together successfully.
