Corporate venture capital

Corporate venture capital (CVC) is the investment of corporate funds directly in external startup companies. CVC is defined by the Business Dictionary as the "practice where a large firm takes an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise; the objective is to gain a specific competitive advantage.

The definition of CVC often becomes clearer by explaining what it is not. An investment made through an external fund managed by a third party, even when the investment vehicle is funded by a single investing company, is not considered CVC. Most importantly, CVC is not synonymous with venture capital (VC); rather, it is a specific subset of venture capital.

In essence, it is best to think of CVC as a subset of venture capital whereby a company is investing, without using a third party investment firm, in an external start-up that it does not own.

Examples of CVCs include Google Ventures and Intel Capital.

As Henry Chesbrough, professor at Haas School of Business at UC Berkeley, explains in his "Making Sense of Corporate Venture Capital" article, CVC has two hallmarks: 1) its objective; and 2) the degree to which the operations of the start up and investing company are connected. CVC is unique from private VC in that it commonly strives to advance both strategic and financial objectives. Strategically driven CVC investments are made primarily to increase, directly or indirectly, the sales and profits of the incumbent firm’s business. A well established firm making a strategic CVC investment seeks to identify and exploit synergies between itself and the new venture. The Goal is to exploit the potential for additional growth within the parent firm. For instance, investing firms may want to obtain a window on new technologies, to enter new markets, to identify acquisition targets and/or to access new resources.

Financially driven CVC investments are investments where parent firms are looking for leverage on returns. The full potential of leverage is often achieved through exits such as initial public offering (IPO) or sales of stakes to third parties. The objective is to exploit the independent revenue and profit in the new venture itself. Specifically for CVC, the parent company seeks to do as well as if not better than private VC investors, hence the motivation to keep its VC efforts "in house". The CVC division often believes it has a competitive advantage over private VC firms due to what it considers to be superior knowledge of markets and technologies, its strong balance sheet, and its ability to be a patient investor. Chesbrough points out that a company's brand may signal the quality of the start-up to other investors and potential customers; this may eventually result in rewards to the initial investor. He gives the example of Dell Ventures, Dell Computer's in-house VC division, which made multiple Internet investments with the expectation of earning favorable returns. Although Dell hoped the seed money will help its own business grow, the primary motivation for the investments was the opportunity to earn high financial returns.

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