Investments with a promising future

How established companies strengthen their innovative power 

Venture capital funds, business angels and state funding programs: the abundance of venture capitalists investing in young, up-and-coming start-ups seems almost endless. While traditional VC funds have been very cautious about risky investments in recent years due to the current situation on the capital market, corporate venture capital (CVC) has proven to be much more robust and resilient. More and more companies seem to be becoming aware of the added value that investments in innovative start-ups can bring for their own business success. 

The number of investments by traditional VC funds fell by a quarter globally in 2022, while CVCs only recorded a drop of 2% and even saw an increase in investments in some markets (such as Western Europe and Canada).1 This is presumably due to the structure of the start-ups in which venture capitalists invest: While traditional VC funds focus primarily on the scalability of the business model when selecting start-ups, CVC units of established companies also invest in start-ups in order to expand and diversify their own business - or to benefit from their promising technologies. 

It is therefore not surprising that the number of new CVCs launched each year has increased more than sixfold globally in the period from 2011 to 2022.2 From a German perspective, investments in future technologies in the fields of production technology (including 3D printing), automotive (including autonomous driving) and information technology (including cyber security and IoT) as well as healthcare (including digital medicine / devices) and materials (including 2D materials) are particularly promising. 
 

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In Germany, CVCs focus almost exclusively on start-ups that are still developing their product to market maturity. Only 4% of them invest in start-ups that have already reached this stage and are working on market penetration. The investments of CVCs are characterized by significantly lower participation rates for the initial investment. They almost exclusively seek investments of less than 25%, whereby investments of less than 10% are accepted much more frequently than by independent VCs.


Exploiting potential through the use of corporate venture capital 


Nowadays, start-ups play a central role when it comes to the development of future technologies. Companies are therefore well advised to think outside the box and take a closer look at the topic of corporate venture capital. The use of CVC not only promises access to new business models and trends, but primarily also to new technologies that can be forward-looking for established companies. Competitiveness can be maintained or even increased through suitable investments - and new growth opportunities can be opened up. 

Basically, if you recognize trends at an early stage, you can also react to them at an early stage. Companies can diversify their risk profile by investing in start-ups and secure their market position - or use them to penetrate new markets, develop new products or services or expand their customer base. CVC can play a key role in promoting a culture of innovation within the company and make an important contribution to the company's long-term success. 


Corporate venture capital: more than just capital 


CVC is a very good way for start-ups to obtain capital without having to approach traditional venture capitalists - such as business angels or venture capital funds. The potential that can arise from corporate venture capital for start-ups also goes far beyond the mere provision of capital. Start-ups can rely on professional support regarding the development of new products and the opening up of new markets - or hope for the support of the investor's employees. By making their expertise and network available, established companies can provide start-ups with new business partners, help with marketing and optimize internal processes. Such validation often also leads to an enormous gain in reputation for the start-ups. 


Risks and structure of corporate venture capital investments


Corporate venture capital may hold a lot of potential for both sides. However, as with any other investment, there is no guarantee of success. No matter how good the business model may be, at the end of the day, no start-up is immune to failure. And even if the figures are right, interpersonal disagreements or different corporate cultures can contribute significantly to the failure of the collaboration. 

For this reason, all factors that could contribute to joint success should be weighed up when structuring CVC investments. It is important to reconcile the sometimes very different interests and objectives of the company and start-up in order to create a viable structure for both sides. This essentially concerns the following factors:
 
  • Amount of the investment: The actual amount of the investment depends on various factors, such as the investment phase of the start-up, its financing requirements and its growth potential.
  • Type of investment: Depending on whether the investment is made as an equity investment, hybrid financing or loan, the exit provisions are defined and regulate the respective exit.
  • Voting and co-determination rights: The CVC's voting rights in the start-up's committees and operational areas, such as R&D, should be clearly defined.
  • Protection rights: The CVC can agree protection rights for its know-how and intellectual property rights in order to avoid subsequent misuse.

Anyone who supports a start-up financially is hoping for success. As an investor, you can make a significant contribution to this success by pledging your support to the start-up. Whether through mentoring and coaching measures, access to a comprehensive network or the provision of resources and infrastructure (such as office space and IT systems) - the possibilities are many and varied. Here too, however, it is advisable to take precautions. To this end, it is advisable to individually define and establish decision-making bodies, reporting obligations and dispute resolution.  

As a general rule, open and transparent communication is crucial in order to avoid misunderstandings and promote mutual interest. It forms the basis for a stable partnership. In a constantly changing market landscape, both the corporate investor and the start-up must be prepared to adapt to new conditions. This adaptability allows both parties to remain agile and respond effectively to change. In addition, both sides should be willing to learn from each other and share their experiences. This cross-fertilization allows both to grow and develop.
 

"CVCs open up a wide range of opportunities for companies, whether it's capitalizing on strategic growth opportunities, gaining a greater understanding of key industry developments or achieving financial returns.” 

Sohaila Ouffata - Director of Platform and Managing Director Europe, BMW i Ventures 3


Corporate venture capital investment: seven factors for success 

As with everything in life, the success of CVC investments is unfortunately not pre-programmed. But it can be positively influenced if a number of factors - both on the part of the start-up and the CVC - are taken into account.  
  1. Strong management team: A strong and experienced management team should be the basis of every start-up and is crucial for success. The founders should have a clear vision, a deep understanding of the market and the ability to lead and scale the company.
  2. Innovative product or service: The start-up must offer an innovative product or service with high market potential. The product or service must offer a clear benefit for customers and stand out from the competition.
  3. Scalable business model: The start-up's business model must be scalable, i.e. the company should be able to grow quickly and efficiently.
  4. Fit between start-up and corporate investor: the start-up's goals and corporate culture should match the goals and corporate culture of the corporate investor. 
  5. Clear CVC strategy: There must be a clear CVC strategy with defined goals, criteria for investment decisions and a governance framework that is firmly anchored in the company and has the support of top management. 
  6. Dedicated CVC team: The company must set up a dedicated CVC team with experienced specialists who have the necessary expertise in the areas of venture capital, start-up valuation and corporate management. In particular, their network in the start-up scene plays a significant role in gaining access to deal flow.
  7. Patience and perseverance: CVC is a long-term investment. Companies need to be patient and give start-ups time to develop.

 

1 Global Corporate Venturing, 2023: https://globalventuring.com/corporate/corporate-investors-2022-deal-numbers/ [Stand: 15.1.2023]
2 Global Corporate Venturing, 2023: https://globalventuring.com/corporate/corporate-investors-2022-deal-numbers/ [Stand: 15.1.2023]
3 Sohaila Ouffate: So bringt Corporate Venture Capital einen echten Mehrwert, 2023: https://www.deutsche-startups.de/2023/09/07/corporateventure-capital-mehrwert/ [Stand: 12.07.2024]