The rise of corporate sugar daddy for startups

It seems there is no holier cause than spending money on innovation and startup, for better or for worse. We thought it should be the specialty of VCs, but CVC, aka Corporate Venture Capital has been a dominant force as well. In 2016, CVC participated in USD24.9 billion of funding across 1,352 deal globally; 107 new CVC funds made their first investment. No doubt China CVC is also catching up such hype. 

However, the rise of corporate sugar daddy showering startup with money always raises eyebrow and controversy:

1. as just for the record most CVCs were simply bummers, if not all of them. According to CBinsights, the history of CVC dated back to the 60s in the US, went through 3 cycles of boom and bust, and all died out eventually. Now we are entering the unicorn era of resurgence, and some argued CVC is actually the evil force behind those meaningless creations of unicorns or decacorns. 

2. The motivation of CVC sometimes does not always mean serious commitment or in the best interests of the startup. One moment corporate sugar daddies grope the body of startups for ideas, then next moment they dump the startups heartlessly after full exploitation. Media is often filled with such bitter breakups. The recent one is between a startup Nucleus and Amazon’s Alexa Fund.

3. CVC can be lacking in professional expertise. After all, CVC recruits cannot possibly receive as much compensation as the traditional VC partners.

4. If it might feel comfortable to see tech giants arm around the waist of startups, we are so intrigued to see non-tech names like 7-Eleven, Campbell’s soup anxiously joining the club. One famous quote even concluded long time ago that “the only thing lamer than CVC is probably international non-tech CVC”. 7-Eleven even experienced a brain-freeze for its venture capital firm last year. 

Today CVC model faces one very important soul-searching question:

Do I seek financial return (the old school practice) or flirtatious inspiration from the startups, or maybe a bit both?

If purely for financial return, in the past it tended to lead to investments or acquisitions in later-stage start-ups, especially those with proven products or scalable businesses. This means that the CVC team can exit the investment sooner. However, the new trend is diving into early stage investments, which again few critics think it is dumb…” corporations should buy companies. Investing in companies makes no sense. Don’t waste your money being a minority investor in something you don’t control. You’re a corporation! You want the asset? Buy it”, said by Fred Wilson

If for inspirational flirtation, the toolkit of CVC suddenly expands into:

Accelerator: a highly structured program that usually lasts no more than 3 months

-Incubator: very close to accelerator, but provides a much longer term of support

So far above two are becoming most popular toys for non-financial driven CVC. It is said the percentage of companies using accelerators/incubators soared from 2% to 44% between 2010-2015. One database showed there are already over 70 accelerator programs run by the big corporations. While some might like to launch their own programs, others are actually propelled by seeking 3rd party partnership, for example: L’Oreal with Founders Factory, Target retailer with TechStar.

-Innovation Lab: Teams of in-house innovators convene for short, intensive projects, during which they rapidly prototype new products and services with the aim of developing and market testing a viable product by the end of the project (oh, btw, it is usually NOT involved with company’s internal R&D department). Examples would be Home Improvement Retailer Lowe’s Innovation Lab, or Accenture Fintech Innovation Lab (though Accenture described it more like an accelerator program; it does not invest in startups rather it helps them sell to its clients)

We assume in future the names of accelerator/incubator/innovation lab can be used interchangeably

Hackathons/Competition/Event: bring together startups in collaborative, intensive workshops, contests or conferences

Scouting mission/Learning trip: arrange visits or meetings with start-ups, entrepreneurs, inventors, and university researchers to seek out innovations

Strategic partnerships: build alliances between corporations and start-ups to bring the latter’s commercial-ready innovations to new or larger markets.

The variety of this list perhaps goes on…

Here is the thing, the desire of corporate sugar daddies engaging with young&sexy startups in order to feel themselves innovative and energetic again has been getting more intense than ever before, at least based on one survey below.

Therefore whether you like it or not, CVC is staying and will grow at a brisk pace. In the first place, we should stop disparaging CVCs. We consider them an equal player as VC, or even richer and more powerful sometimes, though quite different from traditional VC. The problem is: when CVC are abundant and resources are ample, startups are actually facing a more difficult choice, a choice between VC and CVC, a choice about selecting the right corporate sugar daddy, evaluating the strategic fitness between the two sides, and above all measuring how the relationship will develop over time.

Author: Cecilia Wu