Corporate venture capital (CVC) is the practice of directly investing corporate funds into external startup companies. It is the investment of corporate funds directly in external startup companies. This is usually done by large companies who wish to invest small, but innovative, startup firms. 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.” These corporate venture arms either invest in ventures that have strategic synergies with their business or because of financial objectives. A CVC investment is defined by two characteristics: it’s objective and the degree to which the operations of the investing company and the start-up are linked.
The definition of CVC often becomes clearer by explaining what it is not. The investing company may also provide the startup with management and marketing expertise, strategic direction, and/or a line of credit. 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. The ultimate objective may be to acquire the startup and consolidate them with the company’s internal initiatives. Most importantly, CVC is not synonymous with venture capital (VC); rather, it is a specific subset of venture capital. The main goal of CVC is to gain a competitive advantage and/or access to new, innovative companies that may become potential competitors in the future. A startup firm can enjoy the large investing company’s industry expertise, prestigious name brand, stable financial standing, a network of connections, and an ecosystem of developed products.
In essence, Corporate Venturing is about setting up structural collaborations with external ventures or parties to drive mutual growth. CVC does not use third-party investment firms and does not own the startup companies it is investing in – as compared to pure Venture Capital investments. These external ventures are startups (early-stage companies) or scaleup companies (companies that have found product/market fit) that come from outside the organization. The complexity of managing simultaneous CVC and technology alliance portfolios can reduce technological performance. According to a report by BCG, the percentage of Corporate VC investments as a share of global VC investments grew 30% from 2012 to 2017.
Examples of CVCs include GV and Intel Capital. There are other industries where CVCs are popular as well, such as biotechnology and telecommunication companies.
