The number of active Corporate Venture Capital (CVC) units in Southeast Asia (SEA) has increased by a considerable amount within the past few years.
Additionally, the new CVC units are more active which allows more deals to be made under its involvement.
This is in line with a global trend where big companies actively engage with startups as a strategy to stay competitive.
As the pace of innovation increases and industries face the struggle of keeping up, this strategy becomes more and more relevant.
For regional startups, this means that CVC is becoming an increasingly available source of capital.
Thus, any startup currently fundraising should take this into consideration.
Given that the growth of CVC in SEA is a relatively new phenomenon, many times there is often a lack of experience on both sides of the table — which could lead to misunderstandings.
In order to be prepared and increase the likelihood of success, here are five CVC must-knows for all startups.
Understanding the motivation of Corporate Venture units
Financial VC’s motivation for investing in startups is pretty straightforward – they are looking for a financial return.
Negotiating with financial VCs can be challenging, but when startups know their objective it becomes easier to find compromises and drive negotiations forward.
With CVC identifying their objective, it can be a bit more demanding.
On one end you have CV units that operate almost entirely as financial VC’s and have financial returns as their main goal.
On the other end, you have CVC units that aim to produce strategic value for the parent company. Their measure of success is how well their investments help to improve business in the parent company.
Most CVC funds have a mandate that incorporates both financial and strategic goals but it may be tricky to identify just how much weight they place on each of these goals.
To make things even trickier, a CVC unit can have a portfolio consisting of both strategic and financial investments.
For instance, an investment can even start out as a strategic investment but shift to a financial investment if it turns out the fit with the parent company is not as good as initially anticipated.
This can make it challenging for startups to know exactly what objectives the CVC unit has.
Hence, it is important to spend some time learning about the CVC unit’s position prior to investing and garner approval and opinions from the parent company.
Financial vs strategic investors
A financial investor has no desire to run the companies they invest in.
Sure, they might sit on the board and help with strategic decisions or even offer help with things like recruitment or accounting. However, the day-to-day running of the company is left to the founder(s).
This is different for strategic investors.
They invest in companies where they see synergies with their parent company. So, they may want a say in how to develop the product, which customers to pursue, which geographies to target, etcetera.
Some entrepreneurs may get surprised and suspicious when a potential investor has very specific opinions about things like this.
However, they should keep in mind that a strategic investor does this in order to make it easier for the startup to be integrated with the parent company through a partnership or acquisition later.
In other words: they are guiding the startup to build the product or service that has the most value to their parent company.
There is nothing wrong with this. But, the startup has to manage this relationship carefully so that they listen to the input while avoiding building something that is so specialized there is only one potential acquirer.
If the startup manages to balance the requests from the CVC with their overall strategies, this will be a win-win for both parties.
Aligning business collaboration goals
In addition to funding, many CVCs provide their investments with the opportunity to partner with their parent company.
The parent company could become a pilot customer or they could enter into a partnership on sales or marketing — basically any form of collaboration.
Partnering with a large company is a big validation for the startup which makes it a major part of their consideration when taking an investment from a CVC.
Misalignment of expectations around how quickly and how comprehensive a partnership will be is one of the most frequent issues that surface in the relationship between startups, CVCs and their parent company.
Many startups make the assumption that because the CVC is willing to invest a lot of money into their company then surely they will also provide the other help with the startup needs.
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It is also natural to leave most of this discussion until after the parties have agreed on the investment.
As a result, both parties might have contrasting expectations on how the business partnership should play out when they agree on the investment.
Startups are used to getting things done really quickly.
In fact, a lot of startups subscribe to the popular idea of a lean startup.
Simply put, this idea states that you should get your product in front of customers as early as possible so that you can learn what customers think and start improving.
For a startup, this approach makes sense given limited funds and having to quickly make as much of an impact as they can in order to raise the next round of funding.
Failing to do so means they go out of business.
Basically, a startup has everything to gain and very little to lose by launching early.
A big company has a different approach to this since they already have customers and revenues. Launching new products or services too early will almost certainly result in frustrated customers and complaints.
Because of this, big companies usually require rigorous testing and planning before anything new is introduced to their customers.
This is almost the exact opposite approach to what startups have.
In order to bridge this gap and give the partnership the best possible chances of success, both sides should come together to outline their shared expectations.
This should happen in tandem with investment discussions.
Understanding the CVCs investment process
Ideally, the investment process for a CVC should not take more time than a financial VC.
Given that CVCs compete with financial VCs for deals, they cannot afford to linger on important things.
CVC units often rely on the parent company for support in various non-core areas like legal or finance.
Unfortunately, this sometimes means that things take more time.
For example, the CVCs finances could be handled by the parent company’s finance department. These are the people that have a 60-90 days processing time on a regular invoice.
An investment is a non-standard transfer of a significant amount which might even trigger additional safety procedures like the personal signature of the finance manager or CEO (who happens to be on a two week holiday when your investment is being processed).
These kinds of delay can cause a lot of frustration with startups that are in a hurry to complete the investment and can’t understand why things are taking so long.
To avoid it, or at least prepare for it, startups should ask the CVC about their investment process.
They should clarify the internal steps the CVC needs to take in order to decide on the investment, complete the paperwork and transfer funds.
If any one of these steps seems to take an unnecessarily long time, startups should raise the issue early and ask if there is any way the CVC can expedite this.
End game scenarios
Say a CVC invested in your startup because it had strategic value for the parent company.
The intentions on both sides were for the parent company to acquire your startup when the product and market mature in a couple of years’ time.
Everything looked good. But then something changed.
Perhaps your product didn’t perform as well as they had hoped.
Perhaps the parent company changed their focus and is no longer interested in the market your startup serve.
For some reason, the acquisition is not happening. Now what?
For a CVC with a financial focus, one potential acquirer falling away should just be a bump in the road, even if it happens to be their parent company.
They would still want to assist you in finding other potential acquirers in order to maximize their return.
For a strategic CVC, it might be a little different.
If their overarching goal is to provide value for the parent company and your company no longer does that, then your startup would fail to achieve their goal.
So where does that leave you?
Ideally, they should be able to give you examples of investments where the collaboration did not go as planned, but how they helped the startup to find a good solution anyway.
When reading this, it may be easy to think that raising funds from a CVC unit is a lot more of a hassle than a financial VC.
It is true that you have to put in more effort during the negotiation phase to get to know your CVC investor but it is only because a CVC might bring a lot more value to the table than a financial VC.
So to wrap this up, I would just like to mention five short reasons why you might want to invest that extra time to get a CVC investor:
- They understand your business and its industry better than any financial VC.
- They can offer access to network and resources that can be more valuable than the investment itself.
- They might see fewer risks and more value in your company if it aligns with the interests of the parent company, leading to a higher valuation.
- They are usually more patient than financial VCs because they do not have LP and a fixed fund life.
- They can offer a route to acquisition so that founders have to worry less about fundraising and can focus more on building their business.
The advantages CVCs offer makes it patently clear that its recent emergence in SEA beckons exciting new opportunities for regional startups.
CVC might not be the right path for all startups, but for many, it is definitely something to consider.
Founders who understand how CVCs operate will be much more likely to identify the right CVC partner and have a successful collaboration.
This article was first published at www.cvcinsight.com
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