"Corporate Venture Capital"

*  Meaning :-

                      Corporate venture capital (CVC), distinct from corporate venturing, is the investment of corporate funds directly in external start-up companies. Corporate Venturing refers to when a company supports innovation and new projects internally. CVC is defined by the Business Dictionary as the "practice where a large firm takes an equity stake in a small but innovative or specialist firm,

to which it may also provide management and marketing expertise; the objective is to gain a specific competitive advantage.

                      The definition of CVC often becomes clearer by explaining what it is not. An investment made through an external fund managed by a third party, even when the investment vehicle is funded by a single investing company, is not considered CVC. Also, investments that are considered “corporate venturing”, whereby a company invests in a new internal venture that is distinct from its core business, but remains legally part of the company, is not CVC. Most importantly, CVC is not synonymous with venture capital (VC); rather, it is a specific subset of venture capital.

*  Objectives of Corporate Venture Capital :-

                          As Henry Chesbrough, professor at Haas School of Business at UC Berkeley, explains in his "Making Sense of Corporate Venture Capital" article, 

CVC has two hallmarks: 

1) its objective; and

2) the degree to which the operations of the start up and investing company are connected. 

                     CVC is unique from private VC in that it commonly strives to advance both strategic and financial objectives. A strategic objective is usually "externally focused and can be considered anything that benefits the firm outside of traditional investment returns". CVC investments are strategic when they are made primarily to increase the sales and profits of the corporation's own businesses. A company making a strategic investment seeks to identify commonalities between itself and a new venture. For example, a large pharmaceutical company's CVC division may invest in a biochemical start up that it believes will produce a key element that the pharmaceutical company will be able to utilize in its own products.

•                In addition to strategic objectives, CVC investments also have financial objectives. This should come as no surprise, seeing as the primary motivation for venture capital is to ensure as high of a return to its investors as possible. Specifically for CVC, the parent company seeks to do as well as if not better than private VC investors, hence the motivation to keep its VC efforts "in house". The CVC division often believes it has a competitive advantage over private VC firms due to what it considers to be superior knowledge of markets and technologies, its strong balance sheet, and its ability to be a patient investor. Chesbrough points out that a company's brand may signal the quality of the start-up to other investors and potential customers; this may eventually result in rewards to the initial investor. He gives the example of Dell Ventures, Dell Computer's in-house VC division, which made multiple Internet investments with the expectation of earning favorable returns. Although Dell hoped the seed money will help its own business grow, the primary motivation for the investments was the opportunity to earn high financial returns.

•                The second hallmark of corporate VC investments is the extent to which companies in the investment portfolio are linked to the investing company's current operational abilities. For example, a start-up with strong links to the investing company might make use of that company's manufacturing plants, distribution channels, technology, or brand. It might adopt the investing company's business practices to build, sell, or service its products. An external venture may offer the investing company an opportunity to build new and different capabilities—ones that could threaten the viability of current corporate capabilities. Housing these capabilities in a separate legal entity can insulate them from internal efforts to undermine them. If the venture and its processes fare well, the corporation can then evaluate whether and how to adapt its own processes to be more like those of the start-up. Although it happens far less than commonly thought, the CVC parent company may attempt to acquire the new venture.

*  Financing Process of  Corporate venture capital :-

                  The financing process outlines basic steps taken by CVCs from initial contact with potential start up companies through the first round of financing.

1) Start up companies looking for financing make initial contact with CVCs. CVCs can also seek out potential start ups looking for funding.

2) Start up management team presents a business plan to the CVC. If the reviewed business plan generates interest, the CVC will ask the start up for more information including a product demonstration. Investors will also conduct their own due diligence to investigate and better understand the product, technology, market, and any other related issues.

3) If the CVCs are interested in the proposed start ups product or service, they will look to determine the value of the start up. They communicate this valuation to the start up, often via a term sheet. If the startup is happy with the offer, a purchase price and investor equity is agree on. Negotiations can take place during this stage of investment valuation.

4) Legal counsels from both sides agree to a finalized term sheet where business terms for the investment are specified. A closed period, referred to as a lock-up time period, is also established during which the start up company cannot discuss investing opportunities with other investment groups. This indicates that a pending deal is in the process of completion. Once a term sheet is finalized, both sides look to negotiate and finalize financing terms.

5) Negotiations are conducted between the legal counsels from the CVC and the start up company. The start up legal team typically creates transaction documents that the CVC counsel reviews. Negotiations continue until all legal and business issues are addressed. During this time, the CVC conducts a more thorough investigation of the start up company, understanding the startup’s books and records, financial statements, projected performance, employees and suppliers, and even its customer base.

6) Closing of financing is the final step. This can take place immediately upon execution of the definitive agreements or after a few weeks. The additional time may be necessary if the CVC needs time to complete their due-diligence or based on the start up company’s financial needs.