(This is part two of a two-part series on corporate venturing for family-owned companies)
On the last post I described a window of opportunity where family-owned industrial companies can help fill the funding gap for early-stage DeepTech startups, in a time when valuations are relatively low, but the strategic value of engaging early-stage startups is as strong as ever.
Of the CVCs studied by Stanford Business School in 2020, most had established strong relationships between portfolio companies and the business itself (over half of those surveyed reported that at least two-thirds of their portfolio had established relationships with their parent business). Similarly, Silicon Valley Bank’s survey found that 98% of “strategic” CVCs had business unit engagement, with two-thirds saying it was “significant” or “required”.
Source: "Organizational Structure and Decision-Making in Corporate Venture Capital", Ilya A. Strebulaev & Amanda Ying Wang, Stanford Business School, November 2, 2021
Some examples:
Atlanta-based Cox Enterprises has been making direct investments in startups for over twenty years, while also supporting the Atlanta entrepreneurial ecosystem and sponsoring Techstars’ impact accelerator for early-stage startups. This year it announced its new $300M corporate venture fund, Socium Ventures, for investments in Series A and beyond.
German family-owned company Kärcher’s venture arm has invested in Israeli window cleaning robot company Skyline Robotics and California-based robot management software startup InOrbit (among other investments), while also continuing to release new autonomous cleaning robots with its own R&D capabilities.
Saint-Gobain, the building materials company, has been operating open innovation programs and making investments in startups since 2017, in adjacencies (such as robotics and energy systems) and closer to its core. This includes last year’s investment in circular/modular wall system company Juunoo; technically Juunoo is a replacement for Saint-Gobain’s own wall products, but Saint-Gobain is comfortable disrupting itself. The company is continuing to grow its portfolio and venture team in North America, Europe and Asia
Family-owned Husqvarna, based in Sweden, has been operating a CVC arm since 2018. Along with its investments in ConstructionTech and other digital domains, it made a strategic investment in WaterTech startup Molaer in 2022, and the companies aim to co-develop water management products together, strengthening Husqvarna’s position in the water management space (which also includes a 2021 acquisition of Utah-based Orbit).
The current VC investment downturn, while posing challenges for DeepTech startups and venture funds, presents a compelling opportunity for family-owned industrial companies. Have corporate VCs started to fill the gap in funding yet? According to Silicon Valley Bank, CVC participation in VC deals steadily rose from 16% in 2012 to an estimated 25% in 2022. Recently, Crunchbase has noticed more CVCs leading deals.
By stepping in to fill the investment gap, these businesses can not only help support groundbreaking innovation but also establish a sustainable competitive advantage for themselves. The time for these businesses to seize this opportunity is now.
Should corporations do it alone?
John Gannon surveyed over 515 VCs last year, and found that average partner-level VC in the US takes home over $360,000 in salary and bonus (with high variability based upon assets under management), while in Europe the average was $162,000 (with Europe’s sample size being much smaller and average AUM much less).
Most CVCs can’t do the job with only a single team member. In fact, SVB found that the median team size for “strategic” CVCs is 5 (with many requiring overhead staff and business development professionals, generally a higher headcount overhead than institutional VCs). Even a micro-CVC operation can expect to cost $500,000 - $1,000,000 per year in opex alone. This kind of budget would support the 2% management fees for $25 million - $50 million position in a fund. Larger corporations can make the financial case for doing it alone; but is it still worth it?
Some other factors are at play:
Many CVCs cannot move fast enough to make quick decisions on pre-seed and seed-stage startups where much of the breakthrough innovation happens. By the time they are able to invest, their competitors or large VCs already have their seat at the table and better investment terms.
Many also are reluctant to invest directly at very early stage, given the typical failure rates of pre-seed and seed-stage startups and the perception that may create within the company.
Turnover rates are much higher for CVC than institutional VCs (often attributed to lack of carried interest or profit-sharing structures; it’s not a good look to have a CVC staff member make more money than the company’s CEO. Although family-owned companies tend to see more stable executive positions, CVC staff turnover is still an issue.
Luckily there are other, more pragmatic ways that corporations can get the benefit of strategic partnerships with startups, while also getting some financial stake in the most promising ones.
Firms, particularly family-owned corporations, can start right away in 2023 by teaming up with companies like Sente Ventures. They can choose from a variety of investment and collaboration options with the global startup ecosystem without wasting time assembling a CVC team and generating deal flow on their own.