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The State of Corporate Venture Capital

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CB Insights’ Growth Collective demystifies the growth strategies of the world’s largest organizations. We surveyed 365 corporate venture capital arms to understand how CVCs govern, set objectives, compose their teams, embed processes, and use technology. This research is the most comprehensive look at how CVCs operate and drive growth in their organizations. Growth Collective members also have access to best practices and tools to better deliver on their corporate venture capital goals.

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The State of Corporate Venture Capital

  1. 1. 1 The State of CVC A Six-Part Series Demystifying Corporate Venture Capital
  2. 2. 2 SELECT PARTICIPATING COMPANIES Meet other leaders. Get ahead. Stay ahead. What is Growth Collective? Growth Collective is an exclusive network that offers access to peers, tools, and insights to overcome corporate growth challenges. Membership is optimized for senior strategy and innovation executives who need proven solutions to accelerate organizational growth. CONTACT Sara Lindholm Director, Growth Collective Office 212 292 3148 x 1095 slindholm@cbinsights.com growth.cbinsights.com
  3. 3. 3 Introduction CB Insights’ Growth Collective demystifies the growth strategies of the world’s largest organizations. We surveyed 365 corporate venture capital arms to understand how CVCs govern, set objectives, compose their teams, embed processes, and use technology. This research is the most comprehensive look at how CVCs operate and drive growth in their organizations. Growth Collective members also have access to best practices and tools to better deliver on their corporate venture capital goals.
  4. 4. 4 Governance: Is there a downside to reporting to the CEO? Objectives: Measuring value, financial vs. strategic returns Deal-making: It’s about who you know Team Composition: Emphasis on “corporate” Process: Oversight and independence, a balancing act Tools and Technology: CVC in the age of digital 5 10 16 22 26 31 Table of Contents
  5. 5. 5 The State of CVC, Part 1: Is there a downside to reporting to the CEO? In the first part of our series, we look at organizational structure, perception, and performance.
  6. 6. 6 In the first part of our series, we look at organizational structure, perception, and performance. Our analysis shows that while most CVCs report directly to the CEO, this reporting line and its influence may not necessarily drive performance. CVCs typically report into the highest ranks of the organization and align with central functions as opposed to business units. While almost a third of CVCs surveyed report directly into the CEO, another 27% report into an Investment Committee, which more often than not includes the CEO. Access to top executives in the organization ensures the resources, credibility, and support crucial for deal-making. N= 254 CEO 31% Invest Comm 27% Corp Strat 11% Corp Dev 7% CFO 7% BU 3% CTO 8% CEOs sit on 60% of committees
  7. 7. 7 Understandably, CVCs reporting into the CEO perceive a higher degree of effectiveness compared to their non-CEO reporting peers. This is due to a streamlined oversight process that allows CVCs to get deals done — a competitive advantage in a business that rewards speed and decisiveness. CEO IS THE HOT TICKET REPORT TO CEO = BETTER OVERSIGHT Satisfaction with current reporting line is highest among those reporting into the CEO, while CVCs reporting into the CTO, CFO, or Corporate Development group often seek a new reporting structure. Those looking for a change are most likely to cite the CEO as their preferred report line. Satisfaction with reporting structure Current Reporting Line N= 254 N= 253 10% The percentage of unsatisfied CVCs not reporting to the CEO interested in switching their reporting line to the CEO Oversight effectiveness 45% to 31% Portion of CEO vs. non-CEO reports selecting "very effective"
  8. 8. 8 BUT HERE’S THE CATCH DON’T FORGET THE BUSINESS UNITS While most CVCs clamor to report to the CEO and build relationships at the center of power, the ability to win deals is often based on the value proposition provided by the business units. When asked for the two main reasons startups choose to work with a CVC, respondents overwhelmingly cite reasons such as domain expertise, business unit relationships, and defined partnership paths with the business. While CVCs reporting to the CEO perceive greater effectiveness, this does not result in a high win rate (i.e., investment in the round for which you provide a term sheet). CVCs reporting into the CEO are more likely to lose at least half the deals they enter. Win rate greater than 50% Reasons startups work with a CVC N= 219 N= 225 Access to resources/ expertise Intros to BUs Defined partnerships Market entry Distribution channels Capital Clean terms Potential for acquisition
  9. 9. 9 THE BOTTOM LINE Reporting directly to the CEO is viewed by most CVCs as necessary and the most effective option to get deals approved. But when we look at win rates, this isn’t necessarily the case. The question that arises is how those at the top enable effective collaboration with the business units to deliver the value startups expect.
  10. 10. 10 The State of CVC, Part 2: Measuring value, financial vs. strategic returns In the second part of our series, we look at CVCs’ objectives.
  11. 11. 11 Annual global CVC financing trends (2000-2018) In the second part of our series, we look at CVCs’ objectives. Our analysis shows that while most CVCs serve a dual purpose — strategic and financial — the difficulty of effectively articulating strategic value means that financial viability becomes increasingly important. A look into past trends shows that the number of CVCs as well as their deal activity largely follows the business cycle, growing in good times and shrinking in bad times. The median lifespan of a CVC over the past 5 decades rarely extended beyond 5 years, and during financial downturns, investment by CVCs can drop by as much as 84% — as occurred during the boom and bust of the technology sector in the early 2000s.
  12. 12. 12 CHASING STRATEGIC AND FINANCIAL RETURNS In 2018, CVC deal volume and investment reached new heights. Many of the CVCs contributing to this activity are young, having been created within the past 5 years. N= 255 CVC maturity More than three-quarters of CVCs have a dual mandate to deliver both strategic value and financial returns. CVCs focused on a single goal are more likely to focus on strategic value than financial returns. N= 255 Both strategic and financial Financial only Strategic only CVC objectives
  13. 13. 13 BITING OFF MORE THAN THEY CAN CHEW In their pursuit to deliver strategic value, CVCs tend to focus on bringing new products to market, accessing innovation, and integrating new startups into the organization. Major questions here include: what outcomes will result from engaging startups, and who should drive these engagements? N= 235 Strategic goals of CVCs 3 Average number of strategic goals: CVCs are typically tasked with focusing on 3 strategic objectives. This is in addition to their mandate to yield financial returns.
  14. 14. 14 “IS THIS ABOUT RIGHT?” Strategic impact is significantly more difficult to measure than financial impact. The reasons for this are two-fold: 1. It’s difficult to determine what should be measured — partnerships, acquisitions, learnings, etc. 2. Most measures of impact will be lagging indicators, with benefits that won’t become obvious until years after an investment is made. These two factors make it difficult for CVCs to track the value they deliver to the business. Measuring financial performance is often straightforward and relatively easy. Internal rate of return (IRR) is the most commonly used financial measure, while TVPI is used by 15% of CVCs. N= 225 How do you measure financial returns? N= 241 Success helping portfolio companies build relationships with the business With the difficulty of measurement withstanding, building relationships between portfolio companies and business units is considered a key strategic success factor for many CVCs. When measuring their effectiveness at this, CVCs indicate there is room for improvement. Less than a fifth of respondents identify as highly successful in this area.
  15. 15. 15 THE BOTTOM LINE The value proposition of CVCs extends well beyond financial returns as corporations look to these programs more and more to help solve business challenges, especially challenges related to innovation. Without the ability to measure and in some cases deliver strategic value, the question becomes whether these groups will have staying power during the next financial downturn.
  16. 16. 16 The State of CVC, Part 3: It’s about who you know In the third part of our series, we look at the deal-making process.
  17. 17. 17 2018 Deal Volume: 2,859 2018 Average Deals: 5 (per CVC) 2018 Deal Stage: 58% Seed / Series A In the third part of our series, we look at the deal-making process. Our analysis finds that CVCs are consistent in how they structure and find deals, but this approach may serve some better than others. A look back at the deals from 2018 finds that CVCs were busy last year, making 2,858 investments globally — a 34% YoY increase from 2017. The top 10 CVCs in terms of deal activity each made more than 30 investments within the year. In total, these deals accounted for nearly a fifth of all deal activity. Looking at these numbers, how do you stack up?
  18. 18. 18 So how do you find the right companies to invest in? The majority of CVCs rely on personal networks and their relationships with traditional venture capital funds and business partners to identify startups. CVCs are also more likely to source deals from inbound pitches than from active outbound prospecting. FRIENDS OF FRIENDS Source of dealflow N= 225 When asked for their greatest challenge, CVCs frequently cited discovery and tracking of startups. This obstacle falls second only to the buy-in and engagement of corporate stakeholders. Greatest challenges N= 196 From VCs
  19. 19. 19 RULES OF ENGAGEMENT CVCs are generally split on whether they prefer to lead deals or not — a preference influenced by their maturity and experience. N= 233 Aside from preference for leading deals, CVCs are largely consistent in their approach to deal-making. Unhampered by a specific exit date, CVCs tend to have greater flexibility than their traditional VC counterparts. Preference for leading deals by CVC maturity Most CVCs do not have a defined minimum equity stake. For the minority that do, less than half have a minimum greater than 10%. Minimum equity stakes N= 236
  20. 20. 20 Right of first refusal Board positions Right of first refusal is the preference among CVCs, but nearly three-quarters of them will not let this condition prevent a promising deal. With 7 in 8 CVCs taking board seats, there is a clear interest in having a stewardship role. N= 234 N= 234
  21. 21. 21 THE BOTTOM LINE With just 30 CVCs accounting for more than a third of the total deal volume in 2018, activity in corporate venture is primarily driven by a handful of organizations. While operating under similar deal-making principles, CVCs are unequal in their access to dealflow. To date, for better or worse, the primary source of dealflow is personal networks.
  22. 22. 22 The State of CVC, Part 4: Emphasis on “corporate” In the fourth part of our series, we look at team composition and compensation.
  23. 23. 23 Number of full-time staff by size of capital pool* N= 240 *Nearly half of CVCs have $50M or less in committed capital In the fourth part of our series, we look at team composition and compensation. Our analysis finds that CVCs differ significantly from traditional venture capital firms in terms of the backgrounds and compensation of their team members. CVCs are small, with more than three-quarters employing 10 or fewer full-time staff members and more than half employing 5 or fewer. Headcount and capital are also correlated: CVCs with $50 to $150M in capital are three times more likely to employ 6 or more full-time staff than CVCs with less than $50M.
  24. 24. 24 Most of CVCs’ investment professionals are based in the corporate center as opposed to in a technology center (e.g. Silicon Valley, Tel Aviv, etc.) or business unit. One in five CVCs operate in more than one of these settings. On average, approximately 3 in 5 CVC staff members are investment professionals, typically with backgrounds in finance, corporate development, and consulting. These investment professionals frequently come from outside the parent organization: more than half of CVCs hire 75% or more of their investment professionals externally. A DIVERSE BACKGROUND Primary background of investment team N= 237 Location of investment professionals N= 235
  25. 25. 25 $$$$$ N= 234 CVCs differ in their approach to compensation. The majority compensate investment professionals the same way other company employees are compensated, while two-fifths either provide a carry based on fund returns or a custom incentive structure. THE BOTTOM LINE Compensation model CVCs are consistently small but tend to vary in how they compensate their staff and, to some extent, who they hire. The background of CVC investment professionals, their position within the corporate headquarters, and their financial incentive structure distance them from more traditional venture capital operations.
  26. 26. 26 The State of CVC, Part 5: Oversight and independence, a balancing act In the fifth part of our series, we look at CVC processes and workflow.
  27. 27. 27 84% of CVCs have an investment committee Oversight effectiveness N= 253 In the fifth part of our series, we look at CVC processes and workflow. Our analysis finds that organizations attempt to balance CVC oversight with independence and that CVCs acknowledge the importance of business unit engagement. Only about a third of CVCs find their oversight processes very effective and supportive of deal-making. An investment committee (which nearly all CVCs have) often plays a chief role in oversight and the deal-making process.
  28. 28. 28 OVERSIGHT AND INDEPENDENCE: A FINE LINE The vast majority of CVCs require sign-off on deals, and the most common approver is the investment committee, which more often than not includes the CEO and the CFO. Nearly half of organizations require deal approval from more than one internal stakeholder. N= 253 Signs off on deals N= 255 Budget from which CVCs are funded 47% of organizations require sign-off from more than 1 stakeholder Nearly two-thirds of CVCs are funded from a standalone budget, which frees them from the influence of business units and central functions (e.g. R&D, IT, etc.).
  29. 29. 29 VALUE THROUGH PARTNERSHIP CVCs keep their organizations well apprised of their dealflow: nearly 9 in 10 CVCs report on their funnel at least once per quarter to either leadership or business units, and almost half of CVCs report monthly or more frequently. Frequency of reporting N= 234 N= 229 Approaches to BU engagement To engage business units — a challenging task — CVCs employ a range of techniques. Coordinating meetings between business units and startups is most common, but many also provide reports on innovation based on their market research and startup due diligence. In general, however, CVCs have not found a scalable or repeatable way to share the insights learned from their operations.
  30. 30. 30 THE BOTTOM LINE Organizations walk a fine line between oversight and independence: almost all organizations require sign-off on investment deals, but budgets are largely independent of business units and other central functions. With or without heavy oversight, CVCs generally appreciate the importance of keeping stakeholders, specifically business units, informed. By communicating on a regular cadence and bringing important startup information to BU leadership, whether through meetings or demo days, CVCs help to build support and deliver strategic value.
  31. 31. 31 The State of CVC, Part 6: CVC in the age of digital In the sixth part of our series, we look at the technology and tools CVCs use to do their work.
  32. 32. 32 Primary dealflow tracking solution N= 226 In the sixth part of our series, we look at the technology and tools CVCs use to do their work. Our analysis finds that CVCs typically rely on manual solutions to manage their workflow, which frequently results in inefficiencies and information silos. A crucial element of a CVC’s job — tracking deal flow — is most commonly conducted using spreadsheets or a CRM solution. Both approaches have their drawbacks, namely the need for frequent updates. A surprising 12% of CVCs rely predominantly on email to manage their dealflow.
  33. 33. 33 TECHNOLOGY DISABLED When conducting diligence, CVCs are split as to whether they use deal room software or not. Of those that do, most employ an off-the-shelf cloud storage solution such as Dropbox or Google Drive. Far fewer CVCs use software to manage/track cap tables (i.e., equity management solutions). Two-thirds of CVCs do not have a central place where others in the corporation can access information on startup conversations and activity. With their activities siloed, it’s not surprising that the same percentage of CVCs admit that multiple teams within their organization have unknowingly engaged the same startup for different purposes. Does your CVC have a central repository of startup interactions? N= 226 Yes No 34% 66% Has your organization engaged the same startup unknowingly? Yes No 77% 23% N= 224 Does your CVC use software to manage cap tables? Yes No 67% 33% Does your CVC use a deal room software solution? Yes No 49% N= 225N= 224 51%
  34. 34. 34 Room for improvement CVCs generally report that their dealflow management capabilities are satisfactory, though more are dissatisfied than extremely satisfied. Dissatisfaction was highest among spreadsheet users and lowest among users of a VC-specific CRM solution. Areas for improvement likely center on breaking down data silos and gaining access to timely information. Satisfaction with dealflow management N= 227 40% of spreadsheet users are dissatisfied Note: “Other” responses frequently cited Microsoft Onedrive and Sharepoint. Dealroom software N= 115
  35. 35. 35 THE BOTTOM LINE Whether a reflection of their small size and youth or their unique workflow, most CVCs rely on technical solutions — like spreadsheets, CRM, and cloud storage — that are not built for their specific needs. Satisfaction is generally higher for customized solutions built for the high-speed, high-touch nature of CVC. Ultimately, the best solution will be one that increases transparency and breaks down information silos preventing efficient and effective interactions with startups.
  36. 36. 36 If you have any questions regarding the research or are interested in speaking with us about your experiences with corporate venture capital, please reach out to Matt Hopkins at matthew.hopkins@cbinsights.com. Interested in driving growth through corporate investing and partnerships? CB Insights’ Growth Collective is an exclusive network that offers access to peers, tools, and insights to overcome corporate growth challenges. Please reach out to Sara Lindholm at slindholm@cbinsights.com to learn more.

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