Innovative and technology driven start-ups have typically attracted the most investment and limelight compared to other early stage companies. Yet the funding landscape has changed dramatically over the last few years and the continued trend of decreasing venture capital (VC) funding levels has meant that other forms of funding have gained traction.
Certainly in the deals we’ve seen recently, corporate venture capital (CVC), in particular, has been a popular option.
At this point, it’s probably useful to clarify what CVC means. Essentially, CVC is just another form of equity investment, and while it shares many characteristics with the more traditional VC model, the key difference between the two stems from who’s investing. In a traditional VC investment a fund invests by deploying capital raised from external investors, whereas CVC tends to involve large corporations investing directly for their own benefit.
Research from Sirris suggests that CVC accounted for almost 300 investment deals together worth $4 billion in 2016 – and that FinTech saw the most of these investments, totaling 42 deals worth $499 million from 48 corporates. Similarly, a recent CB Insights report notes that tech giants dominated the list of most active CVCs in 2014, 2015 and 2016, with Intel Capital and Google Ventures competing for the top spot. Although there’s a long way to go, 2017 seems to be continuing these trends.
A key benefit of having a CVC as an investor for an innovative start-up is the knowledge it has from operating in the sector. One of the single biggest challenges for a disruptive start-up can be navigating the regulatory environment it is trying to disrupt. CVCs, in comparison to institutional VC funds, can offer these start-ups experience and connections from operating in globally regulated markets. Furthermore, a CVC can open up its customer and supplier networks to start-ups which could significantly aid them in scaling their business.
Another key driver towards a CVC is that CVCs often have a longer-term investment horizon than traditional VCs. As a result, they may be more patient and willing to take a longer-term view on the investment. This is key for start-ups where there’s a long lead time before they generate profits, which can be key for companies who are developing new technologies before taking them to market.
These, and many other benefits, are the reasons why CVC funding for innovative businesses has been referred to as the new “smart” money. We must, however, remember the wealth of benefits and experience the institutional VC funds bring to start-ups. They know how to nurture innovation and scale a start-up into a global business whilst simultaneously achieving the best return.
In today’s multifaceted funding environment, these aren’t the only options on the table. Accelerators and Incubators like Founders Factory help take carefully targeted start-ups to a new level by offering physical office space to grow, expert mentors and plenty of networking events, as well as facilitating access to their corporate partners (which, in the case of Founders Factory, includes stellar names such as Holtzbrinck/Macmillan, Guardian Media Group, L’Oreal, Aviva, CSC and easyJet).
In addition, Crowdfunding platforms like Crowdcube offer young businesses the opportunity to not only raise funds but also test the concepts of their new idea directly with interested consumers, helping them to develop their products and grow their business simultaneously.