When does it make sense to work with CVCs?
While it may be tempting to generalize CVCs, each CVC has its own unique approach and strengths. The added value of a CVC, beyond funding, depends a lot on the industry sector, but ultimately, success comes from the people involved.
If you are a startup raising funds, you have probably read many writeups about corporate venture capital (CVC) versus venture capital (VC) or other forms of private funding. One of the primary benefits you get from a CVC is access to corporate resources, everything from know-how to testing facilities, industry insights, partner networks and, importantly, an existing customer base. When you partner with a CVC, you take a very practical step towards real customers and generating revenue.
However, you will find that the value of these resources can vary depending on the industry. Some industries are more “closed” or specialized than others, such as pharmaceuticals. A software startup working on an AI-based solution for the energy sector, for example, would not get far if they try to use business terms from the consumer electronics industry.
Leverage CVC industry knowledge and networks
The energy sector is particularly complex, so finding an CVC partner is definitely worthwhile. Both old and highly regulated, with significant differences across regions, countries and markets, it would be hard to know how to move in this sector without insider knowledge. This is the sort of hands-on guidance and experience startups should expect from energy sector CVCs. Helen Ventures is no exception as we bring both industry and Nordic expertise to the table.
The Nordic energy market holds a unique position in the world. It is both technologically advanced and highly integrated across the whole region. Energy experts know each other, and the physical infrastructure is largely interconnected. This is not to say there is healthy competition, but in certain spaces, like district heating, the players work with each other for mutual benefit and assistance. Just look at the number of associations and collaboration projects across the Nordics.
There are many different spaces of operation in the energy sector. If a startup works with one regional player in district heating, for instance, it is highly desirable for all other Nordic players to get involved as everyone is literally connected through the local infrastructure. This opens the door to all many companies and a large customer base.
It is important to remember that working with a CVC doesn’t preclude other funding source. Your private VC may be reluctant about this at first, so you need to remind them that CVCs bring much more than funding. In addition to industry know-how that the private funding may lack, CVCs have a large network of contacts in the target industry sector. Particularly for start-ups who are first timers in the energy sector, these networks are vital to for visibility and credibility. Ultimately you want to balance VC and CVC involvement to maximize speed, growth and value of your company.
People make the difference
A sensible ROI projection is always the starting point for funding. However, money talk is just the beginning, it should never be the end. Whether it is a VC, CVC, or some other form of financing, the most important factor for success is people. Funding is at its heart a people business, and when it comes to CVC, the people part becomes even more important. That is because CVC and startup relationships are fundamentally long-term commitments. There are no quick wins in the journey to sustainable business. If that commitment is not underpinned by a balanced relationship and mutually beneficial terms, the relationship, and likely the business itself, will collapse.
What do we mean by “people business”? Quite simply, we mean the CVC-startup relationship is the whole package, on equal terms. The CVC partner does not come to the table as the big boss who can ask and do whatever he or she wants. Quite the contrary. For startups, it is important to understand that your CVC partner is part of your team.
Regardless of what kind investments the VC arm of a corporation is doing – minority or majority, acquisitions, and so forth – from the startup’s point of view, the difference is in who you are working with at the CVC. You have a real partner there, someone who is as personally interested and invested as you are in the success of your business.
This is precisely how Helen Ventures approaches startups looking to disrupt the energy sector. We come from a company with a long, well-established history and solid standing in the energy industry, but ultimately, we sit at the same table and share the same goals with startups. We’ll find that the companies whose valuation raises sky high also bring us the most strategic value.
When looking for CVC funding, you need to find a partner who is committed to carry your flag and be your cheerleader at the corporate organization. Your CVC partner is your primary link to what the corporation can offer in terms of R&D support, marketing, testing, and so forth.
Disruptors are often the key focus of CVCs, in part because CVCs are more willing to take big risks. Disruptors can break all the rules, while CVCs can absorb failed disruptions. Just one successful disruptor can generate an ROI that makes the whole CVC fund worth it.
The foundation of a balanced CVC-startup relationship is transparency. Being open and honest is a two-way street. If either party fails in this respect, the partnership is likely to fail as well. As a startup, you need to be as accurate and realistic as possible. Don’t worry about sharing dirty details with your CVC partner. Your partner is on your side and will help you solve those challenges as well as focus on communicating the positives to other parties.
People business is about all the tiny actions day to day. If you promise to do something tomorrow, you do it. If you can’t pull it off as planned, you let your partner know. Open communication channels and a smooth flow of actions will get you, step by step, to your goal. Build on the personal investments CVCs make to make your startup a success!
The author Mikko Huumo is Director at Helen Ventures.