Corporate venturing can be defined as the practice of direct investment in external startups through corporate funds. In most cases, large corporations are interested in investing in small but creative startup companies. Corporate venturing can also be referred to as corporate venture capital. Companies like Dow, Exxon, DuPont, and GE are good examples of companies that have put into practice the concept of CVC. On the other hand, Venture Capital (VC) is the kind of private capital and the kind of funding provided by investors to startups and small companies with long-term potential for growth (Drover et al., 2017). In general, venture capital is made up of well-off founders, investment banks, and every other financial institution. The battery of the United States of America, Monashees in Brazil, and Vertex in Israel are good examples of companies that practice the concept of Venture capital. These two ventures differ in various ways. Some of the areas in which they have differences include;
Investment Horizon
The average investment period of an Independent Venture Capital fund is ten years, but with the consent of the limited partner, it can be extended for further years in accordance with the guidance set out in the Limited Partnership Agreement. It is a closed-end term. On the other hand, Corporate Venture Capital funds are generally opened, which means they have no defined term.
Measurement of performance and value-added
General Partners face pressure to produce financial returns; otherwise, the chance of the General Partners raising a future fund is poor. Consequently, the key factor in calculating success is financial return. When it comes to IVC’s value-added, this means that investment track record, market experience, network, timely execution, and credibility are differentiated from each other.
For Corporate Venture Capital, the financial returns are one of the indicators of the fund’s success but not the only one.
Strategic return measurement can be less simple than financial return measurement (Drover et al., 2017). Management uses a variety of different indicators to calculate the strategic effect of Corporate Venture Capital on the enterprise, such as the impact of startups as providers, the number of pilots or projects implemented by startups, alliances, etc. As regards the value-added of the fund, it includes the Corporate Venture Capital’s industry expertise, geographical influence, networks, and brand awareness.
Deal sourcing and diligence
Deal sourcing involves differences in Independent Venture Capital and Corporate Venture Capital funds, which is mainly because of their histories. Corporate Venture Capital funds may also use their vast market networks and strategic alliances to reach a great pipeline source in their respective industries. Independent Venture Capitals, on the other hand, are normally relying on their key pipeline source from the team’s personal networks (mainly the GPs).
Corporate Venture Capital focuses on stakeholders and business procedures in a particular industry network. Additionally, due diligence on an investment opportunity is involved in these business programs. Although Independent Venture Capital funds conduct due diligence internally, some aspects are involved. For instance, the legal or technical components are often outsourced. According to Drover et al. (2017), Asel, Park, and Velarumi claim that CVC funds have substantial benefits in their industry domain in the due diligence phase compared with IVC funds due to their ability to draw on the experience and expertise of businesses and the industry, as well as large networks.
Fund structure
The structure of an Independent Venture Capital fund is generally external, determined by the GP-LP relation. The General Partners control the fund, and the Limited Partners give the investment money. The fund typically has tax advantages for investors in jurisdictions. In the case of Corporate Venture capital, the framework can be either external or internal.
More transparent investment management and financial autonomy with greater investment performance transparency are enabled by the external structure. Corporate sponsors finance investment with internal Corporate Venture Capital activities from their balance sheets on a transactional basis (Drover et al., 2017). The structure also has its various disadvantages and advantages. This practice exposes the Corporate Venture Capital program, since corporate sponsors generally invest in startups using disposable capital, to more insecurity and fluctuations based on corporate operative and business budgets. While this practice closely links internal Corporate Venture Capital to changing corporate goals and allows companies more flexibility in financing, it also undermines the continuity necessary to sustain investment across economic cycles. In economic declines, Independent Venture Capital funds can be used to take advantage of market opportunities and capture more value.
Final considerations for startups
The productive Independent Venture Capital and Corporate Venture Capital funds must build mutually advantageous ties with startups. The investor should ensure that the added value is analyzed and develop plans regarding exit alternatives. In general, an Independent Venture Capital fund invests in a startup prior to a Corporate Venture Capital fund and can add value by helping startups in their capital raise phase, team building, business, commercial growth, and governance.
