Corporate venture capital: compromise or cornerstone?
Corporate venture capital: compromise or cornerstone?
Think Salesforce, Google, Intel, Amazon, Nvidia and Microsoft: major companies that have moved into the direction of corporate investments in startups and scaleups. With the current climate driving financial returns as more of a focus than ever, corporate venture is becoming more important than ever before. Peter Wozny, Senior Legal Counsel at BTomorrow Ventures (the venture capital fund of British American Tobacco) and Alex Haskell, legal director at Salesforce Ventures, Salesforce’s venture capital arm, share stories from a market that has been expanding over the last decade: What are the advantages and the downsides? How do corporate investors manage conflicts and what is still to come?
Different types of CVCs
Alex’s and Peter’s venture capital funds are similar, but different: Salesforce Ventures started out as a strategic mandate 15 years ago, primarily to invest or acquire products or suppliers to Salesforce, and is now being measured based on financial returns to the parent, making it more akin to a traditional venture capital firm, with all of the trappings from the corporate parents. Alex’s job is “100% working on deals and working with portfolio companies” and working closely with the investment teams.
BT Ventures’ mandate is more strategic as opposed to financial: to take British American Tobacco, or BAT, away from tobacco and into fast-moving consumer goods (FMGC), as well as supporting BAT’s ongoing corporate processes around new vape technology or sustainable packaging, for example. Peter shares that BT Ventures (BTV) has made minority investments in caffeinated drinks and chocolates, CBD and melatonin, and his day-to-day involves working on corporate deals, portfolio management as a “de-facto general counsel” for the companies BTV acquires, as well as running the communications and brands for BTV. “BAT’s mission is to turn from being a tobacco company into an FMCG company. So it'll see itself like the next Nestle or Unilever, with all these different consumer brands underneath the umbrella parent, and BTV is helping drive that transformation strategy: which could be the next Red Bull, which could be the next Trip”.
The pros and the cons: very much in evolution
Alex spoke about theoretical negatives, since, as he puts it: “I think CVC has way more to offer than it takes away”. Some CVCs may impose more onerous terms when they invest in a company than a traditional venture capital would -- “putting a stronghold on it” -- but he doesn’t see that very often anymore. He says that there are concerns that CVCs are formed and then disappear completely when budgets get tight, but this was only the case some 15 years ago, as he notes that “CVC has been remarkably resilient over the downturn of the last year or two”. He also warns that CVCs may tend to be a bit clunkier, slower and less sophisticated than traditional VCs.
But, as Peter said, “when CVC works well, it can be magic”. He gave the example of BTV’s recent investment into a Brazilian company that sells healthy snacks, and the company went from 13,000 points of sale around the Sao Paulo area to over 130,000 points of sale worldwide with the partnership agreement and investment that BTV provided. He warns that even though CVC can help with “a big corporate boat view which really helps drive profits, innovation and support of portfolio companies”, there is also the chance that strategies -- on the company and the CVC side -- could change, leaving companies without support. Against this, he advises companies to do full due diligence before engaging with a CVC.
“I think CVC has way more to offer than it takes away.”
Turning to the main benefits, Alex says that the credibility that CVC can bring to a “young company” is huge, and that some CVCs have little constraints on the amount that they can invest, particularly if they are investing off the balance sheet. “I think the smallest check I've ever worked on was $500k, but we've ramped that up to over $100 million as well without that being an issue”.
Alex predicts that CVC will continue to be a heavy investor in the AI space, particularly because the amount of capital it can invest matches the amount of capital needed for AI to develop. “CVCs are…leading the charge on a lot of these investments right now,” he says.
How to manage competing internal conflicts and demands?
Peter says that conflicts are very common in his work, particularly in the competition space. BTV’s approach is to have the venture capital investments separated as much as possible from the core business, putting “relevant Chinese walls” in place. He says BTV tends to not share sensitive data about an invested company, such as revenues and gross margins, and tries to be very careful about investments and collaborations with companies in similar industries where BAT is developing products.
Alex adds that Salesforce Ventures tries to avoid conflicts altogether: “If the company is competitive with something that is already in the portfolio, we generally will not invest in that company,” but when it is unavoidable, the CVC makes sure to have strong NDAs in place and leans on its reputation as a reliable investor that will not “take your trade secrets and share it with our [main] product team.”