Corporate Venture Capital (CVC) funds have gained significant traction in recent years, offering large corporations an avenue to invest in startups and tap into innovation. However, it's a well-known fact that many CVC funds face an uphill battle and eventually falter. In fact, most CVC funds barely make it to the five year mark.
In this blog post, we delve into the common factors that contribute to the failure or shutdown of CVC funds, shedding light on the crucial lessons they offer to corporations looking to embark on their own CVC journeys.
1. Lack of Experienced Talent: A CVC fund is only as strong as the team behind it. Lack of seasoned professionals who understand the intricacies of venture capital can hinder effective decision-making and portfolio management.
2. Knowledge Gaps: Without a deep understanding of the startup landscape, technology trends, and market dynamics, CVC funds may struggle to identify promising investment opportunities.
3. Networking Shortfalls: Building relationships within the startup ecosystem is essential for sourcing quality deals. Insufficient networks can lead to a dearth of investment options.
4. Deal Flow Dilemma: Struggling to attract promising startups is a common pitfall. Without a continuous stream of quality deal flow, CVC funds may struggle to deploy capital effectively.
5. Weak Brand Presence: A lack of visibility in the market can deter startups from seeking investment from a CVC fund, limiting the fund's ability to assemble a diversified and promising portfolio.
6. Reporting Structure: Reporting to the wrong hierarchy within a corporation can hinder decision-making and alignment with broader corporate objectives.
7. Short-Term Focus: CVC funds often fail when they prioritize short-term gains over long-term strategic value creation, missing out on the full potential of their investments.
8. Inadequate Due Diligence: Failing to conduct thorough due diligence on potential investments can lead to poor decisions and suboptimal returns.
9. Ignoring Startup Growth: CVC funds that lack expertise in nurturing and scaling startups may miss opportunities to add value beyond capital injection.
10. Misalignment with Strategic Goals: A lack of clear strategic objectives and alignment with the parent corporation's goals can result in aimless investments and wasted resources.
11. Underutilizing Corporate Assets: Not leveraging the parent company's assets and resources to support portfolio startups can limit growth and innovation.
12. Lack of Executive Buy-In: Without support from key executives, CVC funds may struggle to gain traction within the organization.
13. Ignorance of VC Terms: Inadequate understanding of venture capital deal terms can lead to unfavorable investment agreements that see CVCs shut out of deals, or take advantage of naive founders who subsequently find themselves with un-investable cap tables.
14. Overeager Leadership: CVC funds that insist on leading funding rounds rather than collaborating with other investors may overextend their resources. The purpose for most CVC funds is strategic more than financial, so there's also no need to lead rounds when most of the benefit could be derived from taking minority stakes in a large pool of diverse startups.
15. Legal Entity Issues: Operating as a separate legal entity can help insulate the fund from corporate bureaucracy and red tape.
16. Team Incentives: CVC funds must offer competitive compensation and incentives to attract and retain top talent.
17. Risk Management: An inadequate risk profile and misunderstanding of VC power laws can result in portfolio underperformance.
In conclusion, while CVC funds hold immense potential for corporate innovation and growth, they are not immune to pitfalls. By recognizing and addressing these common factors that contribute to failure, corporations can better position their CVC funds for success. With the right talent, knowledge, networks, and strategic alignment, CVC can serve as a powerful engine for corporate innovation and long-term value creation.
<div class="upscribe-embed" data-src="https://upscri.be/f/gahdji">Loading...</div><script async src="https://upscri.be/js/snippet.js"></script>
The WorkFlow podcast is hosted by Steve Glaveski with a mission to help you unlock your potential to do more great work in far less time, whether you're working as part of a team or flying solo, and to set you up for a richer life.
To help you avoid stepping into these all too common pitfalls, we’ve reflected on our five years as an organization working on corporate innovation programs across the globe, and have prepared 100 DOs and DON’Ts.