The difference between Venture Capital and Corporate Venture Capital

‍"Corporate investing is dumb. I think corporations should buy companies. Investing in companies makes no sense."

This quote from Fred Wilson, an American businessman and investor, speaking at the CB Insights Future of Fintech Conference, illustrates the skepticism that many corporates hold towards minority investments. However, in recent years, both Corporate Venture Capital (CVC) and Venture Capital (VC) have gained traction across various industries, with more investors finding success through these investment strategies.

To invest successfully, it is crucial to possess the necessary know-how, consider organizational aspects, and follow some basic investment principles. In this post, we explore the fundamentals of CVC and the key differences between VC and CVC.

What is Venture Capital?

VC refers to the investments made by professionally managed funds in various ventures, particularly in startups. They provide funding in exchange for equity stakes in these companies. For instance, they might invest 1 million Euros for a 20% ownership stake in a startup, implying a pre-money valuation of 4 million Euros. When private individuals make such investments, they are referred to as Business Angels. They typically invest in smaller ticket sizes and in earlier stages than VC funds.

Such investments are inherently risky, as young companies often have a high failure rate, offering little protection to investors if the business does not succeed. However, successful ventures can yield impressive returns, and the potential for growth attracts these early-stage investors.

Why is it important?

VC plays a vital role in providing funding for young companies with a limited operational history, making them less attractive for traditional bank loans or other debt-based instruments. Venture capitalists are instrumental in fostering innovation and supporting economic ecosystems.

The emergence of Corporate Venture Capital

CVC has been around for over a century, with one of its earliest examples being Pierre S. Du Pont’s investment in General Motors in 1914. However, the landscape of CVC has significantly evolved, with global CVC-backed funding and deals tripling in recent years. In Q2 2024, CVC-backed funding reached $15.6 billion, although this still trails behind traditional VC-backed funding, which totalled $65.7 billion globally that same period.

Why do corporates invest in risky ventures?

CVC involves large businesses investing in innovative startups, similar to angel groups and VC funds. On top of financial ambitions, CVCs aim to fulfil strategic ambitions, such as; to acquire equity stakes in these startups to gain competitive advantages and access new ideas, markets, and technologies.

CVC investments can hence be driven by both strategic and financial goals:

• Strategic Investments: Here the focus is on acquiring new technologies and identifying potential acquisition targets early, aiming to create value for both the corporate and the startup.

Also, for startups, having a corporate as investor is different than having a VC fund in the same position. Startups that get an investment from a CVC benefit not only from the invested money but also from the corporate's industry expertise, administrative support, and network ("smart money"). Here it is important to note that whilst every VC will also claim that they bring "smart money" parts of this will remain promises, whilst with CVC there is a certainty regarding the know-how that a corporate has and can bring to the startup.

• Financial Investments: Here the focus is on financial returns, similar to traditional VC funds. Some CVC departments are rather decoupled from other venturing or M&A colleagues and operate with a strong financial focus.

Down below, you find a table  that explains the relevant differences between a traditional VC and a CVC.

The characteristics described reflect the typical differences between VC and CVC, but specific details can vary widely from case to case.

CVC and venture building

At WhatAVenture, we believe that venture building and CVC can work hand in hand to accelerate growth. For example, venture builders can leapfrog the early phases of development by acquiring early-stage startups that may be too small for traditional corporate M&A teams to consider. Given the nature of these startups, CVC teams are often best equipped to conduct the necessary due diligence, ensuring a thorough assessment of the investment opportunity. These scenarios highlight the strong potential strategic link between CVC and venture building, a link that can be fully leveraged through the expertise of experienced venture builders.