VC and Corporate Venture Capital: Is There a Difference?
Venture capital and corporate venture capital operate very similarly, except that CVCs have only one LP and strive to create value in a manner that fits with their corporate strategy. Thus, it begs the question: Does this actually make a difference for startups?
In our latest DiffuseTap session, we took a deep dive into this curious VC-CVC dynamic with two investors from the corporate side: Serhat Cicekoglu, Founder of Sente Foundry, and Jay Bunte, M&A and VC manager at Ingredion.
DiffuseTap is a weekly virtual event hosted by Diffuse that is part networking (you’ll meet at least a half dozen high calibre startup players) and part purposeful (you’ll DiffuseTap new ideas). If you want to make new friends from our VC ecosystem, feel free to contact us.
What’s the difference?
When it comes to structural differences, the obvious distinction again is CVCs have only one LP. This means that their decision-making process caters to industry-specific objectives, with respect to their corporate strategy. Jay explains the mechanics behind this process from his side:
“From a structuring perspective, I don’t think there’s much of a difference between a VC and a CVC. I think the meaningful differences lie in the purpose of the fund. Obviously both VCs and CVCs aim to create value, however, the way in which value is created can differ. For instance, there’s likely not a VC out there with the same investment thesis that we at Ingredion maintain for our venturing efforts, which is much more focused on our corporate strategy. I think that’s a key difference.”
Another key difference is the time frame in which they operate with their startups. Jay shares that while VCs usually have an hourglass timer to their investments, deals with CVCs offer a little more flexibility:
“Another difference is the investment time horizon. Our investments have the ability to be evergreen, whereas some VCs are limited from their LPs seven to 10 years, or what have you.”
How to leverage a CVC relationship
Having CVC support can give a startup several benefits, one of which is wider sales reach, Serhat says. Corporate investors typically have a wider network compared to VCs, therefore startups in their portfolio have access to a wider range of potential customers. Serhat says this is the biggest advantage to working with a CVC:
“Being capital efficient in the sales process is obviously extremely important, especially during these times. One of the biggest advantages to having a CVC backing is that startups can be introduced to more potential customers because corporate investors typically have a wider network.”
Not only that, but there are other non-monetary ways CVCs can provide support to startups with their wider network, according to Serhat.
“In some cases, CVCs are also able to provide engineers or experts to solve some of their problems, like in logistics, marketing, etc. Sometimes these weigh much more than financial resources, so in my view, this is one of the most important ways that corporate venture funds can create value for their portfolio startups.”
“Dumb money” and why it happens
VCs and CVCs can collaborate to optimise the process of growing a startup. However, not having clear objectives in the decision-making process can lead to waste, which is a common narrative among corporates. They gave it the name “dumb money,” and Jay explains how it happens:
“You hear that term ‘dumb money’ in reference to corporate venturing. It does make me chuckle, but I also think it serves as a reminder of the importance of having a solid investment thesis and clear investment objectives, which I don’t think all CVCs have. When corporates are not aligned internally on their objectives, their structure, and on their governance, I think that term “dumb money” can be well earned.”
To avoid that from happening, VCs and CVCs should have a tight working relationship with their startups, Serhat argues:
“There’s possibly an enormous amount of inefficiency in creating a working environment between corporates, VCs, and startups. But I’m a firm believer that there’s an efficient way to create a process for all these parties to work together, the results would be more beneficial for everyone involved. What the corporates have as capabilities are well beyond financial resources that VCs don’t have, and I think that’s why figuring out a way to complement each other is really important.”
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Serhat Cicekoglu is Founder of the Sente Foundry, a Chicago-based startup investment platform that brings startups, investors, corporations, and public institutions together to scale innovative ideas from around the globe.
Jay Bunte leads the corporate venturing efforts at Ingredion, a Fortune 500 B2B company that provides ingredient solutions to the Nestles, Modeles, and Coca Colas of the world. Ingredion’s VC arm focuses on funding innovators within the alternative proteins and sugar reduction space.Find an event near you