6 STEPS TO EXPAND YOUR BUSINESS VIA CORPORATE CAPITAL VENTURE
Companies who want to acquire new expertise or access breakthrough technology and new markets, usually have three options:
- invest in ideas that are derived from internal activities,
- buy or invest in a company that can offer those, or
- form an alliance with another pre-existing entity.
Non-financial firms either invest in the development of a new activity (or in external target companies such as startups), or form alliances with third parties to gain access to new or complementary knowledge, or simply to obtain an advantage over competitors.
Strategic alliances, joint ventures, spin-outs, and ultimately mergers & acquisitions serve the same overall purpose: getting access to external knowledge to build up a company’s performance.
Despite this shared aim, they all have different characteristics and can take many forms depending on the level of control that the company wants to retain, and on the stages of development of the contemplated activity.
Step 1: Getting started, setting up a CVC arm
CVC units are usually independent units within a corporation which are afforded various degrees of autonomy, depending on the level of risk a parent company is willing to undertake. Autonomy can result in a faster decision-making and a quicker access to new markets and opportunities, but also comes with risks in terms of hasty selection, and evaluation.
This is why CVC units usually do more than just selecting potential investments. They map out goals, identify potential for growth, select targets, and monitor performances of newly found ventures.
VC arms are dedicated business units or structures within a company that will address those issues and will be in charge of:
-identifying new fields, knowledge, markets or innovation,
-selecting fields, sectors and companies of interest (start-up, assets, or lines of products) and investing in those, and
-defining metrics to analyze the performances of each investment strategy.
Their overall purpose is to manage corporate investments. They are different from the units or spin-outs that a parent may decide to create to accomplish the venture investment in itself.
Step 2: Isolating a new activity from the parent, creating a spin-out
CVCs can gain access to new markets via partnership with business units of the parent company. This is the most basic form of CVC. It involves creating a new businesses within a company. Spin-outs allow a company to test a market, convert cost centers into value-added units, and ultimately to re-acquire such unit later when the product is launched.
They take the form of a new company directed towards new markets and business objectives that are isolated from the parent.
Yet, because the technology, processes, or infrastructures are spun out from the parent, they remain under its control through the interplay of operational and financial check and balances.
For instance, in some cases, the new company that is spun out licenses certain assets and infrastructure from the parent.
Often, the management team is also issued from the parent company. But the isolation of the activity from that of its core parent allows for innovative approaches to thrive, without the traditional corporate barriers and constraints that new activities typically face.
Often used as a substitute to an acquisition or a way to restructure a business, spinouts will generally be formed for a specific purpose almost always originally identified in-house.
For companies who want to acquire external knowledge, the next step is to proceed to a careful goal mapping in furtherance of a well-targeted deal sourcing.
Step 3: Originating and assessing external investment opportunities, deal sourcing
Deal sourcing is the process of generation of investment opportunities. As such it is a crucial step in the corporate venturing process. It can be implemented by defining technology and market targets and then searching for relevant startups, or by considering unsolicited deals.
CVC is all about benefiting from synergies and intertwined or overlapping processes and resources. Accordingly the degree of connection between the parent’s an the portfolio company’s technologies, products, and services is crucial to a successful CVC investment strategy.
When implementing a deal sourcing process, CVCs may thus want to look to achieve an alignment of goals across the parent company, the venture fund, and the start-ups.
But because not all companies can afford to dedicate entire business units to searching among the many opportunities innovation has to offer, some companies team up with other investors in a process called “syndication.”
Step 4: Teaming up with other investors, Syndication
To allow companies a wider access to different expertise and to put more distance between their corporate structure and their venture arm, companies may use syndication.
Syndication is simply the alignment of several investors to invest jointly in a venture.
Syndication allows CVC units to rely on aggregated experience and ensures a collegial assessment and monitoring of the portfolio firms from different perspectives.
They also allow new CVC units to learn from co-investors’ processes. Finally, because they offer an all in-one access to multiple financing and technology knowledge, they have a propensity to attract more targets and facilitate deal sourcing.
Step 5: Forming a strategic alliance, joint ventures
A partnership with a third party can bring instant access to new markets or technologies that would otherwise take years to secure.
Depending on the purpose of the cooperation between the companies, the collaboration may range from merely sharing certain resources, intellectual property or infrastructures for a specific purposes, to creating a jointly owned new company.
A typical alliance or joint venture agreement will set minimum investment targets and asset commitments, but operating decision will be taken by joint committees or boards. It will also define what’s to remain proprietary to each party and what’s to be jointly owned or otherwise licensed.
Often used as the preamble to an acquisition of either the portfolio company, a specific line of product or service, or the joint venture itself, joint venture agreements often contain provisions that may limit opportunities for growth by restricting a particular area or affording priority rights (such as right of refusal or exclusive dealership).
While sometimes a necessary part of the venture to allow for a prompt buy-out, such provisions may hinder a start-up’s attractivity and undermine external exit strategies.
Step 6: Preparing a profitable exit
Exit strategies consist in the mechanism implemented by CVCs to put an end to an engagement in a start-up, or to terminate a joint venture.
Typical exit modes include integration into the corporate parent, Initial Public Offering (IPO), Management buy-out, or a sale to a third party of all or substantially all of a portfolio company’s assets. The exit represents a crucial phase where CVC derive the fruits of their investment. But because CVCs usually have more than a financial stake in a venture, the focus is often directed towards a sale of the target once potential risks have diminished.
This is often achieved through right of first refusals and exclusivity rights over the distribution of issuing products. However, the benefit/risk analysis of these clauses should be weighted in the light of the original purpose of the venture and how it may evolve over time.
Joint ventures, spinouts and other external capital venturing offer a flexible and enriching alternative to mere VC investing by precisely allowing the parties to modify their outlook and stake in the relationship overtime.
G. Rochenoir
Companies who want to acquire new expertise or access breakthrough technology and new markets, usually have three options:
- invest in ideas that are derived from internal activities,
- buy or invest in a company that can offer those, or
- form an alliance with another pre-existing entity.
Non-financial firms either invest in the development of a new activity (or in external target companies such as startups), or form alliances with third parties to gain access to new or complementary knowledge, or simply to obtain an advantage over competitors.
Strategic alliances, joint ventures, spin-outs, and ultimately mergers & acquisitions serve the same overall purpose: getting access to external knowledge to build up a company’s performance.
Despite this shared aim, they all have different characteristics and can take many forms depending on the level of control that the company wants to retain, and on the stages of development of the contemplated activity.
Step 1: Getting started, setting up a CVC arm
CVC units are usually independent units within a corporation which are afforded various degrees of autonomy, depending on the level of risk a parent company is willing to undertake. Autonomy can result in a faster decision-making and a quicker access to new markets and opportunities, but also comes with risks in terms of hasty selection, and evaluation.
This is why CVC units usually do more than just selecting potential investments. They map out goals, identify potential for growth, select targets, and monitor performances of newly found ventures.
VC arms are dedicated business units or structures within a company that will address those issues and will be in charge of:
-identifying new fields, knowledge, markets or innovation,
-selecting fields, sectors and companies of interest (start-up, assets, or lines of products) and investing in those, and
-defining metrics to analyze the performances of each investment strategy.
Their overall purpose is to manage corporate investments. They are different from the units or spin-outs that a parent may decide to create to accomplish the venture investment in itself.
Step 2: Isolating a new activity from the parent, creating a spin-out
CVCs can gain access to new markets via partnership with business units of the parent company. This is the most basic form of CVC. It involves creating a new businesses within a company. Spin-outs allow a company to test a market, convert cost centers into value-added units, and ultimately to re-acquire such unit later when the product is launched.
They take the form of a new company directed towards new markets and business objectives that are isolated from the parent.
Yet, because the technology, processes, or infrastructures are spun out from the parent, they remain under its control through the interplay of operational and financial check and balances.
For instance, in some cases, the new company that is spun out licenses certain assets and infrastructure from the parent.
Often, the management team is also issued from the parent company. But the isolation of the activity from that of its core parent allows for innovative approaches to thrive, without the traditional corporate barriers and constraints that new activities typically face.
Often used as a substitute to an acquisition or a way to restructure a business, spinouts will generally be formed for a specific purpose almost always originally identified in-house.
For companies who want to acquire external knowledge, the next step is to proceed to a careful goal mapping in furtherance of a well-targeted deal sourcing.
Step 3: Originating and assessing external investment opportunities, deal sourcing
Deal sourcing is the process of generation of investment opportunities. As such it is a crucial step in the corporate venturing process. It can be implemented by defining technology and market targets and then searching for relevant startups, or by considering unsolicited deals.
CVC is all about benefiting from synergies and intertwined or overlapping processes and resources. Accordingly the degree of connection between the parent’s an the portfolio company’s technologies, products, and services is crucial to a successful CVC investment strategy.
When implementing a deal sourcing process, CVCs may thus want to look to achieve an alignment of goals across the parent company, the venture fund, and the start-ups.
But because not all companies can afford to dedicate entire business units to searching among the many opportunities innovation has to offer, some companies team up with other investors in a process called “syndication.”
Step 4: Teaming up with other investors, Syndication
To allow companies a wider access to different expertise and to put more distance between their corporate structure and their venture arm, companies may use syndication.
Syndication is simply the alignment of several investors to invest jointly in a venture.
Syndication allows CVC units to rely on aggregated experience and ensures a collegial assessment and monitoring of the portfolio firms from different perspectives.
They also allow new CVC units to learn from co-investors’ processes. Finally, because they offer an all in-one access to multiple financing and technology knowledge, they have a propensity to attract more targets and facilitate deal sourcing.
Step 5: Forming a strategic alliance, joint ventures
A partnership with a third party can bring instant access to new markets or technologies that would otherwise take years to secure.
Depending on the purpose of the cooperation between the companies, the collaboration may range from merely sharing certain resources, intellectual property or infrastructures for a specific purposes, to creating a jointly owned new company.
A typical alliance or joint venture agreement will set minimum investment targets and asset commitments, but operating decision will be taken by joint committees or boards. It will also define what’s to remain proprietary to each party and what’s to be jointly owned or otherwise licensed.
Often used as the preamble to an acquisition of either the portfolio company, a specific line of product or service, or the joint venture itself, joint venture agreements often contain provisions that may limit opportunities for growth by restricting a particular area or affording priority rights (such as right of refusal or exclusive dealership).
While sometimes a necessary part of the venture to allow for a prompt buy-out, such provisions may hinder a start-up’s attractivity and undermine external exit strategies.
Step 6: Preparing a profitable exit
Exit strategies consist in the mechanism implemented by CVCs to put an end to an engagement in a start-up, or to terminate a joint venture.
Typical exit modes include integration into the corporate parent, Initial Public Offering (IPO), Management buy-out, or a sale to a third party of all or substantially all of a portfolio company’s assets. The exit represents a crucial phase where CVC derive the fruits of their investment. But because CVCs usually have more than a financial stake in a venture, the focus is often directed towards a sale of the target once potential risks have diminished.
This is often achieved through right of first refusals and exclusivity rights over the distribution of issuing products. However, the benefit/risk analysis of these clauses should be weighted in the light of the original purpose of the venture and how it may evolve over time.
Joint ventures, spinouts and other external capital venturing offer a flexible and enriching alternative to mere VC investing by precisely allowing the parties to modify their outlook and stake in the relationship overtime.
G. Rochenoir