Using startup investments to accelerate large-scale transformation

The transformation of corporate venturing

Corporate venture capital (CVC) has moved from the fringes of startup finance to become a substantial market presence over the past decade. Since the mid-2010s, the number of companies funding startups by making a CVC investment has more than tripled to over 2,000 annually, according to the industry trade body Global Corporate Venturing.

This expansion of CVC funding may be partly attributable to reduced investment volumes from private equity and venture capital in recent years. However, the rise of CVC is also directly related to intensifying pressure on large corporations to respond to new sources of competition and enter new markets, with more than half of business executives reporting plans to expand into new markets in the years ahead. For many, addressing what Clayton Christensen, the American business academic, described as the “innovator’s dilemma” has become increasingly challenging. Cloud-native technologies, accelerated software development and real-time customer feedback mean that rivals can now scale up disruptive solutions more rapidly than ever before.

Matt Banholzer, a Senior Partner at McKinsey & Company in Chicago, sees CVC as a logical response: “A company under attack cannot just throw more money at its research and development (R&D) department or internal incubators and accelerators. External innovation becomes very important.”

For corporates, CVC investments can open the door to a wide range of opportunities, including:

• Technical expertise and R&D support
• Access to market channels and distribution networks
• Use of operational infrastructure (manufacturing, logistics)
• Entry into industry networks and exposure to new regulatory approaches
• Growth opportunities in adjacent markets
• Development of strategic partnerships or joint ventures
• Integration potential with existing corporate offerings

For startups, the benefits can also be substantial. Corporate partnerships often help to create what Banholzer describes as “more stable growth paths to profitability.” According to research by McKinsey & Company, startups with CVC backing are less likely to fail and more likely to scale.

This increased resilience stems from the non-capital advantages a CVC investor can offer, including early product validation, customer introductions and supply-chain expertise. “For young companies in complex or capital-intensive sectors such as energy, mobility or advanced materials, this can be decisive,” says Nicholas Sauvage, President of TDK Ventures, which manages a $500m CVC fund for the Japanese electronics manufacturer, TDK Corporation.

Intelligence gathering or transformation tool

CVC investors typically acquire minority stakes in startups. Although approaches vary by sector, CVCs often target series B when startups have established product-market fit and are ready to scale their operations. In Europe, as a result, CVC investors sometimes play an important role in mitigating a local scarcity of scale-up funding.

Deal sizes are relatively modest. In Europe, corporates typically invest $8.5m per deal according to CBInsights. In the U.S., the average rises to approximately $15m (as of 2024).

Companies funding CVC deals fall into two categories:

1. Strategic investors seeking ongoing insight into innovations capable of transforming or disrupting entire industries. In Europe, Airbus Ventures exemplifies this approach, investing in sectors including cleantech, synthetic biology, materials science and quantum computing.
2. Transformation-driven investors using CVC as a part of an enterprise-wide reinvention plan. One notable example is Accor, the leading hospitality group, which has used CVC to navigate a decade of shifts including rising demand for luxury and sustainable travel and the digital disruption created by competitors such as Expedia and Airbnb.

Choosing the right route to innovation

Abou Merhi’s team works with CVC investors to conduct due diligence on startups. The process involves bridging the gap between process-heavy corporates and lean startups that may still be tracking their financial performance using Excel alone. He notes: “It is very different from our role in traditional mergers and acquisitions: you often need to hold detailed conversations with the startup over several days to understand their business.”

One key challenge involves selecting the right approach to achieve the desired outcome. If the goal is to gain an understanding of this new market, CVC is an option. Taking a minority stake can act as a strategic hedge, providing options for the future. Meanwhile, if the decision to enter a new market has already been taken, the best way forward may be a full acquisition or building an in-house startup (ie corporate venture building). Alternatively, the aim may be to pursue digital transformation, driving greater operational efficiency. In this case, either CVC or client venturing may prove to be the right way forward.

Extracting the benefits

Building a long-term relationship between a large, complex organisation and a small, agile startup can prove challenging. According to Abou Merhi, the most common challenge is building an innovative ecosystem that works effectively for both sides. Successful investors do not underestimate the need to work hard to secure access to innovation. Sometimes the barriers are external. Traditional venture capital firms who invest alongside CVC money are mostly interested in financial returns while the startup itself may be more interested in developing its roadmap. Meeting a CVC investor’s need for access to innovation is not always a top priority for other stakeholders.

Internal obstacles can also become a challenge. For example, within large organisations, an R&D department may recognise the potential of a startup’s technology. However, business units focused on day-to-day operations may struggle to fully comprehend the benefits or lack the agility to match the startup’s rapid decision making.

According to one recent survey, over half of CVC investors cite lack of speed, inefficiency and bureaucracy as major obstacles. Formal CVC management units risk creating unwelcome distance between the business units and the startups. In the worst-case scenario, this reduces the chance of transforming the startup into an innovation driver for the larger organisation.  

In the face of challenges like these, CVC investors must focus on articulating a clear value proposition for startups by clearly outlining the following elements:

• The operational and strategic support the CVC will provide
• The access to corporate expertise and established sales channels
• The extent to which startups leverage the investor’s brand reputation
• The ability of the corporate investor to facilitate entry into new markets
• The potential of the corporation to become a commercial partner or customer

Finally, Abou Merhi concludes that “It can be challenging to make this kind of investment a success, but your ability to capture the startup’s attention with something unique can make all the difference.”

Frequently asked questions