Corporate Venture Capital: What can you expect from letting a corporate in?

The surge of Corporate Venture Capital

Over the past decade, Corporate Venture Capital (CVC) activity has increased significantly, with a growing number of large multinational corporations creating CVC arms or investing directly in startups from their balance sheets. If we look at PitchBook data and exclude the well-known 2021 peak, the trend is clear.

‍

This surge in CVC investment is underpinned by a shift in corporate culture, with more companies embracing open innovation models and viewing startups as partners rather than competitors. At Cardumen Capital, we are heavily invested in corporate relationships: over 30% of our LP base consists of corporates, and in 32% of our investments, we have co-invested with at least one of our corporate partners. Given this context, we anticipate that CVC activity will continue to grow at the same or even faster rate in the coming years. However, while these numbers highlight an exciting landscape, the reality is that many companies leverage CVC as a strategic tool to avoid the ever-looming threat of being “disrupted”. In this article, we will distill how CVC dynamics play out in various scenarios and how to think strategically to capitalize on the benefits while mitigating the drawbacks. If you are a founder seeking an answer on whether to add a CVC to your investor cohort, look no further.

General Differences from Traditional VC

It is no news that CVC differs from traditional VC in many ways. Below is a fresh reminder of key structural differences.

‍Who is Who?

Using key parameters, we have mapped some of the most prominent CVC brands based on historical data from sources like PitchBook and Crunchbase. This matrix categorizes CVCs along two axes: Strategic vs. Financial focus and More vs. Less Active.

Activity Score has been calculated based on Total Investments, Total Investments in the Last 5 Years, and Total Investments in the Last 2 Years. Each of the three parameters has been given a weight of 10%, 30%, and 60% respectively. Hopefully, this serves as a great starting point for founders evaluating whether to include a corporate investor in their cap table.

Strategic Considerations: What to Expect from a CVC

While most readers probably were familiar already with the differences laid out in the section above, there are some second-order effects and implications that founders must consider when bringing a corporate onboard.

1. Funding Limitations and Follow-On Support

CVCs are typically smaller investors, at least at the beginning of your relationship. Their ability to deploy is conditioned to business goals and long-term strategy, and even minor management changes can drastically shift their appetite to invest in startups.

‍2. Shifting Commitment Levels

Following the same logic, CVC engagement can fluctuate, especially during challenging times. While some, like “young corporates” (e.g., multibillion-dollar startups such as Stripe), may empathize with a startup's struggles, others may distance themselves when things get tough.

‍3. Governance and Control

The level of influence and control a CVC might ask for will vary depending on a range of factors. Typically, corporates are less stringent in terms of governance than a traditional VC, but this comes with the trade-off of significantly higher demands for detailed and often bureaucratic reporting. However, there have been historical practices that serve as cautionary tales. For example, it was very typical for CVCs investing around the 2000s to ask for some kind of exclusivity of service or sneak a clause stating that, if your startup closes down, all the IP will be owned by them.

‍4. Exit Timelines and Alignment

Exit preferences and timelines are another aspect to think about. While it is true that CVC money is typically more patient than that of traditional VCs, their strategic goals can misalign with your desired exit opportunity. Remember that, generally, corporates invest with a strategic incentive, and that might conflict with a lucrative exit opportunity. It is common for corporates to include a Right of First Refusal clause. This requires founders to notify corporates on their cap table of any acquisition offers, allowing them to match the offer and secure the deal. However, there is a more founder-friendly M&A Notification clause requiring startups to simply notify corporates of the existence of an offer without disclosing sensitive details such as the buyer or the amount.

‍5. Conflicts of Interest

Although they are rare because CVCs take good care to protect their reputation, there are also potential conflicts of interest to be on the lookout for. Take the previous example of the abusive CVC that will get all the IP if your company goes bust. They have a perverse incentive to stir you towards bankruptcy to get that to happen. Another example could be the exit timeline we discussed. It is typical for potential acquirers to invest in your startup first to have internal information and understand how you operate. In this case, there might be an incentive to block an exit opportunity from an external or try and hinder your growth to buy you cheaper.

‍6. Market Perception

Lastly, there is always an impact on market perception when a corporate invests in your business. The great brand association and potential customer relation coin has another less attractive side. Let’s say you land FinTech Company A as an investor, it could be the case that the market would artificially tag you as “owned” by A, discouraging others like FinTech Company B from engaging with you.

‍

Best Practices: How to Get the Positives & Avoid the Negatives

If you’ve read this far, you might feel wary about accepting that CVC’s investment—or hesitant to even start conversations with others. However, there are ways to enjoy the benefits of CVC investment while avoiding the pitfalls.

‍1. Assess Readiness Before Engaging

First impressions matter, you should aim to impress from the very first minute. Ask yourself, even before engaging in a first conversation, key questions: Is it too early? Is my startup ready to demonstrate real value and not burn the bridge? Am I prepared for their reporting requirements? If the answer to any of these is “no”, make sure you spend a decent amount of time understanding their goals, aligning expectations, and setting up the guidelines of how the relationship will work.

‍2. Never Rely on CVC Money

Unlike your typical VC investor who could consider giving you a bit more air when runway is tight, a majority of corporates rarely provide follow-on money even when things go well. Therefore, you should never rely only on their money. Build a great syndicate with at least one deep enough pocket for your current and immediate next stage.

‍3. Take a Small Ticket Size

Paint this on the wall in front of your desk: The benefits of a CVC – brand association, customer engagement, distribution, or an exit opportunity – will be the same if the corporate is 10% or 1% of your cap table. If you have the luxury to do so, take the smallest ticket they can give you.

‍4. Consider Bringing Multiple CVCs Onboard

To mitigate market perception risk, consider bringing in more than one CVC simultaneously. These corporates don’t have to be direct competitors; even operating in the same industry will suffice. This will also create a competitive environment that you can leverage for better terms while incentivizing them to maximize their support for you.

‍5. Never Accept an Abusive Clause

Even if the probability of the clause coming to play feels remote, or several things have to align for it to happen. Take a look at the IP or exclusivity examples mentioned before. While these practices are rare today, their impact can be life-threatening. If something like this ever comes up during a negotiation, push back strongly or run away from that investor.

‍6. Protect Your Round from CVC Timelines

CVCs are generally much slower than traditional VCs, often involving different business units in their decision-making. Founders must ensure the speed and dynamism of their round is as high as possible while leaving room for corporates with a different pace. A great solution might be to do a deferred closing just for corporate investors. This allows them extra time without delaying the rest of the round.

‍

Closing Thoughts

Corporate Venture Capital presents both opportunities and challenges, but when approached thoughtfully, it can become a powerful tool for startups and corporates alike. Navigating this complex dynamic requires clarity, alignment, and a shared vision for success. At Cardumen Capital, we are deeply committed to bridging the gap between corporates and startups, fostering relationships that deliver strategic value and mutual growth. By helping both sides understand each other's goals and needs, we aim to create partnerships that are not just functional, but transformative.