Corporate venture capital investments (CVCs) represent more than a fifth of the global ventures. In addition, many investors are more cautious with their dollars amid the Ukrainian conflict and rising inflation. With that in mind, startups welcome the longer-term stability that corporates can offer.
Corporate knowledge, R&D resources, M&A opportunities and networks are valuable for early-stage companies. That said, established companies and corporations have understood the dangers of not keeping up with the fast-moving world we live in and the opportunities they can unlock by supporting innovative young start-ups. So, how do corporate investments work?
Corporates provide capital and assist with business and product development. Companies can also offer most of their resources and market expertise so that the start-ups can accelerate their growth. According to CBInsights, CVC-backed deals reached a new record in the first half of 2021, with a 133% year-over-year growth. The rise was likely caused by how fast the tech landscape evolved and the start-ups starting to understand the value that a CVC can provide to their business.
What should startups keep in mind when considering Corporate venture capital investments?
Similar to venture capital firms, CVCs tend to invest internationally. However, CVC and venture capital firms have different commercial perspectives. Corporate investors may invest for strategic, synergistic, and financial reasons. Corporate investors could ask for consent rights over the investee company entering into contracts with competitors. These include limits on disclosure of information, the provision of goods or services, or transfers of equity to competitors.
Furthermore, corporate venture capital investments have a longer-term horizon than venture capital investments. As a result, corporates often require additional rights over an exit.
Many corporate venture capital investors require rights over future M&A deal activity. For example, corporates regularly request a right of first refusal, offer and negotiation. A more friendly option is the right of the first offer, as it provides an investor with the right to be offered the shares before any external solicitation takes place. Nevertheless, corporates regularly request a right of first refusal (or ROFR). ROFR provides the investor with a right to be offered any shares being sold by other shareholders in the investee company after the selling shareholder has solicited an offer for their shares from a third party.
In some cases, corporate investors may want a call option to acquire the company. In other cases, corporate investors may require the flexibility to sell their shares in the investee company back to the company or other existing shareholders.
CVCs often require disclosure of a broader range of metrics or key performance indicators (or KPIs). The precise KPIs are generally tailored to the business of the investee company.
Lastly, corporate investors increasingly subject their investee companies to rigorous environmental, social and governance (ESG) standards. These include compliance with anti-money laundering regulations, anti-bribery and corruption, anti-modern slavery and other relevant policies.
We expect CVC activity to continue growing in the long term. Annual CVC volume has grown at about 7% between 2017 and 2020, with value increasing more than tenfold over the past decade. Companies invest in innovations and new business models that will lead them into the future. However, CVCs should also know how to work with startups. If you are looking for a CVC investment, consider all of the factors we mentioned in this article, and if you need a professional financial advisor to help guide you, our team is here to help.