What is CVC?
Corporate Venture Capital (CVC) is a subset of venture capital whereby a large corporation invests directly (i.e. not through a third party fund) in an external startup company, to which such corporation may also provide certain services. CVC is unique from private VC in that its objective is not only financial, but rather it is typically also strategic (i.e. aimed to increase the investing corporation's sales and profits).
The phenomena of CVC has come in waives, in general – per the changes in the economic environment. In the last few years, it seems that CVC investments have increased and stabilized and spread to additional industries and countries (see the link below to a report by BCG). Since May, several major corporations, such as Microsoft, GE and Bloomberg, have launched CVC firms.
It seems that the CVC phenomena in Israel is not as powerful as in the USA, for instance, but it is growing. Intel Capital Israel, Poalim Capital Markets Technology, the Challenge Fund (Coca Cola), RDC (Rafael) and Watech (Mekorot) are good examples for such growth; note that in some cases, Israeli corporations do CVC without having a formal framework therefor. Although Israel may be behind on the CVC "trend" in certain respects, many of the recently launched CVCs are Israeli involved.
CVC Pros and Cons
CVC advantages over private VC may be superior knowledge of the relevant industry, markets and technologies; stronger contacts in such industry; reputation that enables the corporation to signal the market; stronger economic position; ability to be more patient; platforms that can be used for the benefit of the invested company.
The main disadvantage of CVC over private VC (besides other difficulties related to large firms working with small ones) may be that the investing corporation is actually a competitor of the invested company and may be in conflict of interests therewith. Such disadvantage may be mitigated through separation of the CVC from the investing corporation and adoption of an investment policy targeting less linkage between the investing corporation\'s operations or existing strategy and the invested company's business.
Fred Wilson, partner at Union Square Ventures and one of the leading venture capitalists in the world, recently expressed his view that he would "never ever ever ever" do business with CVC funds. He was criticized (and he himself apologized). I do believe that, as reality proves, at least in certain sectors and under certain circumstances, CVC may constitute a good investment for a startup.
The legal structuring of a CVC is a complex multidisciplinary matter, which requires, among other things, the evaluation and discussion of the following issues:
- CVC Form – CVC may be structured as a "department" within the corporation or a separate entity (the scope of independence also requires special attention); as Corporate Venture Capital fund or as an accelerator or incubator.
- CVC Staff – the staffing and management of CVC and cooperation to be required from other parts of the corporation.
- Regulatory Limitations – there may be various regulatory limitations on investments by the corporation, such as antitrust limitations or limitations within the corporations' sector (such as banks).
- Investment Form – the investment may take form of direct investment in the invested company, loans, investment in the company's R&D or in-kind investments, such as provision of services or space, etc.
- Consideration for Investment – the consideration may be shares or other equity in the invested company; royalties; discounts; exit bonuses; developed technology licenses; control, audit and veto rights; board sits etc.
- Policies – policies, targets and procedures in the fields of investment, due diligence, confidentiality, security and safety, insurance, investment approvals, internal coordination etc.
The above issues are also the initial questions that any entrepreneur or startup considering engaging with any CVC in any form should inquire of and well understand.
What do you think of CVC? How should a CVC fund be structured? How will CVC develop in Israel?