Why Corporate Venture Capital (CVC) cannot be driven by the M&A team?
Corporate Venturing (CV) and specifically corporate Venturing Capital (CVC) is relatively new in Australia. And while we now have half a dozen corporates active in the space, there are still a lot of misconceptions about why these are needed and especially about the difference between CVC and M&A. But before we get into the differences let’s start with some basic definitions.
The Merger and Acquisition team or better known as the M&A team in a large corporation is responsible for finding targets for a buyout, negotiating deals and often integrating the acquired companies into the corporation. The merger of the new company could take months or years unless the acquired company is kept independent.
Corporate Venturing is often divided into Internal and external innovation where the internal innovation has to do with promoting innovation and creative mindset, encouraging employees to explore new ideas and enabling experimentation with the goal of improving existing processes or generating new revenue sources. Corporate Venturing Capital (CVC) is an activity dedicated to making minority investments in emerging high growth companies (startups). The investment mechanism is often similar to a traditional Venture Capital (VC) firm with the added motivation being the strategic value to the corporate.
Corporate Venturing Capital (CVC) is an activity dedicated to making minority investments in emerging high growth companies (startups).
There are many different approaches to CVC and M&A and there is no one strategy that fits all. Let’s take the example of two of the most prominent players in 90’s being Intel and Cisco. Back then, Intel had built one of the largest Venturing arms in the world called Intel Capital. At the late 90’s Intel Capital had the largest portfolio in the world valued some $3 billion. It had a very wide investment charter which was to enlarge the computing world. The possibility of future acquisition of a prospect was not part of the evaluation criteria. M&A was handled by a different group in the mother company. Intel Capital was a separate entity from Intel Corporation but fully financed by Intel. And while Intel did buy other companies from time to time it was extremely rare for it to buy a company from Intel Capital’s portfolio of more than 300 startups.
And while Intel did buy other companies from time to time it was extremely rare for it to buy a company from Intel Capital’s portfolio of more than 300 startups.
Cisco, on the other hand, was known to be very active in its M&A activities. Founded in 1987, by the end of 2000, Cisco acquired 74 companies with a staggering 43 just between 1999 and 2000. At the time Cisco did not have a large venture arm and mostly did minority investments in startups that were acquisition targets. The motivation then was to date before you marry or in other words invest a small amount to get to know the company before committing to acquire it.
The motivation then was to date before you marry or in other words invest a small amount to get to know the company before committing to acquire it.
So what makes CVC so different from M&A?
M&A transactions usually support current business expansion. An acquisition could open up new markets, shorten product development and time to market. It could also speed up talent acquisition in the case of an acquihire. Buying other companies could also increase market share in the case competitors. The focus is relatively short term and the benefits are mostly financial.
CVC investing, on the other hand, is for the long term, often 10 years. And although it has to be financially beneficial it is driven by a variety of strategic goals. As in the Intel example mentioned before, Intel Capital invested in startups that expand the computing ecosystem so that the PC market of which Intel’s had 90% market share would grow larger.
A common motive is having “eyes and ears” in the startup ecosystem with the purpose to react on time to disruptive technologies and business models threatening the current business before it is too late. For example, a bank investing in a new payment system or an online micro-loans platform. Other benefits of CVC investments may include the support of the corporate customers and partners, knowledge transfer and in some cases the generation of deal flow for future acquisitions.
A common motive is having “eyes and ears” in the startup ecosystem with the purpose to react on time to disruptive technologies and business models threatening the current business before it is too late.
Evaluation and execution
Evaluation and execution of M&A transactions are much more complicated and time-consuming than CVC minority investment in startups. An Investment Memorandum (IM) for a sale would include hundreds if not thousands of pages covering the history, present situation and future plans. It would include a detailed business plan and a thorough risk assessment. The brand risk in the case of acquisition is much greater as well as the cultural integration of startups into an established corporation. History, unfortunately, is full of acquisition failures.
Although it is advisable that for each CVC investment there would be a business unit champion, the evaluation, negotiation and execution should not be that different than the one of a regular VC firm. A CVC could choose to lead or join other investors but rarely would be a sole investor. Therefore, much of the due diligence and the investment terms negotiation are shared with the other co-investors. Other considerations for CVC investments could be a conflict of interest with other investors, the ability of the corporate to add value and the execution of a separate commercial agreement, like a joint development, with the startup.
A CVC could choose to lead or join other investors but rarely would be a sole investor. Therefore, much of the due diligence and the investment terms negotiation are shared with the other co-investors.
Team and skills
The skills required for an M&A transaction are very different than those needed for a successful CVC investment. An M&A deal would probably be led by a business unit manager if not the CEO of the corporation. A strong operational, strategic, financial and planing background is needed to make sure the acquired business would be successfully integrated and drive product/market expansion in the shortest possible time.
The skills required for an M&A transaction are very different than those needed for a successful CVC investment.
The successful head of a CVC unit, on the other hand, need to have similar skills to a partner in a VC firm plus a strong understanding of the corporate business and strategy. This includes contacts and the ability to network within the startup ecosystem and a long term technology vision and business horizon. He or she would also need experience in assessing startup investments and the ability to mentor and advise early-stage companies. Portfolio and exit management are also skills that are required within the CVC team and not relevant to M&A.
To summarise, M&A and CVC are very different activities which cannot be carried out by the same team. And while the two activities may complement each other at times, they require a very different focus and skill set.
Eitan Bienstock is the founder of Everything IoT and Techbench Capital and a former Strategic Investment Manager at Intel Capital in the US. Techbench Capital is a VC as-a-Service company supporting CVC activities from strategy through discovery, investments and portfolio management.