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Innnovation Advice

The Cube: Part 2: The Systems to Operate a Corporate Venture Program

Updated: Apr 11, 2023

We sat down with Mark Kaiser, who has consulted on innovation and corporate venturing for companies like Coca-Cola, Nestle, and Cigna, to get his advice on starting a CVC.

As a Cube insider, you'll get access to interesting new trends, what we think about them and how you can benefit.

Part 2: Learn how other companies manage corporate venture programs.

In the last post, we talked about the benefits of corporate venturing. Investing in startups can be a strategic and financial boon for many companies. And while for decades this practice was relegated to the very biggest technology companies, and then over time to the giants of other industries, new practices and an evolving startup ecosystem mean that smaller companies can now invest in startups, too.

To run a CVC (corporate venture capital) fund, there are a few systems you need to put in place. Those systems will help with:

  1. Deal flow

  2. Due diligence

  3. Fund deployment

  4. Post investment support & insights

Let’s look at them one at a time.

Deal Flow

Deal flow is the lifeblood of any investment effort. Deal flow is measured by the number and quality of investable startups that are entering your network.

As you may know, finding an investable startup is rare. Few startups raise capital and of those that do, a small percentage go on to be successful. Many professional VCs might look at a thousand pitch decks before making a single investment.

Very established investors - those who have had many successful investments or those with big brand names (like A16Z and General Catalyst in the VC world, or Intel Capital and GV, Google’s venture arm, in the corporate venture world) see their deal flow coming from many angles. Startups email them directly, large teams of associates outreach to startups, the founders they’ve invested previously in bring deals from their founder friends, other VCs bring them deals to participate in, etc.

It takes many years (and a bit of luck) to build the brand and credibility required to get that much deal flow. But when a VC or corporate venture program is just getting started, things aren’t so easy.

Most new investors need to start building their deal flow the old fashioned way: networking. Network with startups and find the founders you want to invest in. Network with other investors and tell them you’re a capable and relevant investor. Start making a few investments and go above and beyond in helping those startups, so other founders give you good feedback and introduce you to their founder friends.

Your first few investments are about building track record and reputation. Every time you make an investment, your credibility, brand recognition, and network get better, and future investments become easier and higher quality.

Due Diligence

Due diligence is a fancy word for research. Doing reference checks on the founders to get a sense for their integrity and track record. Researching the industry to see if there are notable competitors. Talking to customers to see how valuable the product really is.

When doing diligence for a startup, an investor has fewer data points off of which to base a decision than they may be accustomed to. There are usually few, if any, customers. Revenue is small, if it exists at all. Depending on the startup’s stage, an investor may be making their entire decision based on the founder’s integrity, track record, and pitch.

Different investors see value in different features of a startup. Some look for traction or experienced founders, while others want to see a strong team in a big market. For a corporate venture fund, due diligence may often involve conversations to understand the impact the startup might, if successful, have on your industry or company challenges. If the impact could be big for your company or industry, but smaller in the broader market, an investment might make sense for you anyway, where another VC would have passed.

Depending on investment stage, diligence can vary in intensity. If your business is investing in early stage startups (at a Series A or earlier) then you’ll have fewer facts to go off of. You’re investing in the vision of the founding team more than any proven metrics. And while you may want to do a lot of research to de-risk the startup as much as possible, it’s important to be respectful of the founder’s time. A $25,000 decision, for example, shouldn’t take more than 2-3 meetings. A $500,000 investment can take a month or two and involve more contingencies, like a requirement that the startup hit specific milestones.

Fund Deployment

Once you’ve made the decision to invest in a startup, you should have the money ready to be wired quickly. Time is a startup’s most precious resource. And if you commit to investing, you should be ready to wire money the day the contract is signed. Being the sort of investor who takes a month to get the money together will reflect poorly on your brand and disincentivize startups from working with you in the future.

Most corporate investments into startups with use a SAFE note with limited strings. SAFE notes were developed specifically for startup investing. They’re light, proven, simple, and founder friendly. While a traditional M&A group might want to add clauses like a right of first refusal around acquisitions, this can be detrimental to the startup. A SAFE note makes you a valued investment partner, and helps the startup be more successful. It’s a win-win.

Post Investment Support & Insights

After you’ve invested in a startup, your relationship should be mutually beneficial. You should give the startup help in every way possible, and you should learn about the technology and market trends its innovation uncovers.

Helping the startup should include finding ways to pilot the product in your own business, making introductions to suppliers, and providing design, marketing, and operations support. Whatever your company’s specialties are, they can save the startup from many costly and time consuming investments and mistakes.

As the startup grows, you’ll want to spend time with them to understand what they’re learning. Their innovative technologies and market learnings are the reason you invested. So you can schedule a recurring meeting to share ideas, ask questions, and help each other.

In the end, a startup investment is a relationship. As the more established company, you can help and guide the startup. And to be a good investor that attracts more founders into your network, you should be empathetic to the data limitations and time urgency of your founder-CEO partners.

In the next post, we’ll talk about metrics by which to judge your CVC’s success, and pitfalls to avoid.

Are you ready to explore CVC? We can help you evaluate the market and determine the best next steps. If you are interested in learning more , Contact us today!

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