Corporate venture capital (CVC) operates similarly to other forms of venture capital, except that non-financial companies or large conglomerates typically provide it with a specific goal or sector focus in mind. The primary function of CVC is to identify and nurture innovative businesses with high potential for growth and success.
While traditional venture capital firms raise funds from institutions like pension funds, banks, university endowments, or family offices, CVCs are established by large corporations that set aside a specific amount of capital to invest in start-ups and scale-ups at different stages of their development. These corporations invest in promising new ventures for several reasons, including ensuring they do not miss out on the next big thing.
Both forms of venture capital have unique advantages and disadvantages, and entrepreneurs should carefully consider and seek advice on which type of investment partner best suits their business needs. In some cases, a combination of both traditional venture capital and CVC may be most beneficial.
CVCs differ from traditional venture capital firms in several key ways. Although these differences can vary from one CVC to another, the formal and direct relationship between the CVC and the business is typically three-fold. First, the CVC will invest financially in exchange for an equity stake. Second, the CVC may provide debt finance to fund growth activities with an agreed-upon return on investment. Finally, the CVC may offer non-financial support, typically related to their specific sector expertise. This support could include access to established marketing or distribution channels, knowledge transfer, or other resources that can help the business grow and succeed.
For the investment to be successful, the aims of the corporation providing the CVC investment must align with those of the business receiving the investment. This alignment of goals is essential for creating a mutually beneficial relationship between the CVC and the business and ensuring the investment’s long-term success.