the future of corporate venturing looks bright!

1 Ewa Grzechnik September 2015

Entrepreneurs` experience with CVC investors & Reasons for collaboration between startups and corporates

Ewa Grzechnik

Investment Manager

3M New Ventures September 2015


Study Set-up

Three main research questions:

― Why do entrepreneurs reach out to corporates for investment?

― How happy are they with their CVC investors?

― How does their experience compare to the experience with VC investors?

Survey open for 2 months: May 2015 – July 2015

Part of the Kauffman Fellows (kauffmanfellows.org) program

Distributed through Corporate Venturing Unit managers to portfolio

companies and directly to startups via Linked-in

Anonymous responses

Results to be distributed to all participants

In total 88 responses collected, 72 qualified responses (from

entrepreneurs)

72

16

0 10 20 30 40 50 60 70 80

HAVE YOU RECEIVED INVESTMENT(OR FUNDING) FROM A CORPORATION (N=88)?

No

Yes

Note: significant self selection bias possible. As the study was distributed primarily through CVC managers it is highly likely that they only

forwarded it to their best performing companies and hence these results portray a more positive picture of Corporate Venturing than what is

seen in the market at large.


(1) 80% of startups are happy or neutral about their corporate investors. If they were to choose again, they would either go with the same investor consortium

or even a higher participation from strategic investors.

(2) CVCs seem to give slightly better financial terms than VCs and they fill a capitalization gap in some sectors not served well enough by VCs (esp.

Chemicals & Materials as well as Hardware products).

(3) The future of CVC looks bright. 2/3 of startups believe that CVC investments will increase slightly or significantly over the new few years and most of them

are happy with today´s widely practiced model of doing CVC in-house (e.g. 3M New Ventures, BASF Ventures).

(4) Most startups (80%) wish to find a customer (50%) or a distribution partner (30%) in their corporate investor. Commercialization experience and market

access are the two most popular motives for an investment (from startups´ perspective). Brand and capital access are almost as important. Access to the

corporate`s technical know-how is significant, but secondary.

(5) When it comes to the actual value contributions by corporates, all startups – except for those in enterprise software space – think more could have been

done in providing market access. Especially Chemicals & Materials corporates have helped little in the commercialization efforts and mostly contributed

with technical support.

(6) 90% of corporates do not put limitations on exit any more, which is great news for startups!

(7) 75% of startups deem it unlikely to exit to their corporate partner.

(8) If you are a startup aiming to acquire funding from a corporate investor, plan at least 6 months (better 9) for the due diligence process. Also be prepared to

give up some exclusivities, especially if you are a materials or hardware supplier, albeit not in your core areas.

(9) Startups in areas completely new to the corporate are least likely to initiate any collaboration with their partner. Most successful collaborations are in areas

core or adjacent to corporate and have already started prior to an investment or the collaboration agreement was signed at investment closing.

(10) CVCs are good at many things, but not at board representation and investor acquisition for future rounds. Fortunately, VCs fill these gaps well.

Executive Summary


Demographics of Study Participants (n=64)

14,1% 14,1%

6,3% 6,3%

21,9%

7,8%

29,7%

11,7%14,8%

11,7%

14,8%

23,4%

8,6%

14,8%

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

35,0%

ConsumerSoftware /Internet

EnterpriseSoftware

Hardware -full system

(e.g.vehicle)

Hardware -component

(e.g.breaks)

Chemicals& Materials

Pharma Other

SECTOR DISTRIBUTION

Startup Corporate

2% 2%

8%

2%

11%

2%

57%

17%

3,2% 4,8%

11,1%

49,2%

31,7%

0%

10%

20%

30%

40%

50%

60%

COUNTRY DISTRIBUTION

Since the network of the study´s author is mostly in Chemicals & Materials and Enterprise Software space, these two sectors were most well

represented in the sample. By far most startups and corporates are headquartered in the USA. USA is the dominant investment destination.


1. Investment Motivations and Experiences


Investment Unit Structure & Corporate Motivation

12,50%

25,00%

39,10%

21,90%

1,60%

HOW DID CORPORATE INVEST (N=64)

Through an institutional VC fund (e.g.Pangaea Ventures)

Through a corporate fund, which isfinancially and legally independentfrom the corporate (e.g. Intel Capital)

Through a corporate venturingdivision with a high degree of freedomin investment decision making

Through a corporate venturingdivision with a low degree of freedomin investment decision making

I don't know

Corporate VC funds adopt different structures. Most of them are part of the corporate organization but can make independent investment decisions.

Their interest is predominantly strategic (e.g. technology access), financial return is secondary.

13,0%

50,0%

37,0%

0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

60,0%

Financial Strategic Financial and strategicequally important

Financial Strategic Financial and strategicequally important

REASON FOR INVESTMENT FORCORPORATE (N=57)


Investment Process

9,3%

31,5%

29,6%

29,6%

LENGTH OF THE DD PROCESSBelow 3 month Below 3 month 3-6 month 3-6 month

6-9 month 6-9 month above 9 month above 9 month

Did the corporate put any investment terms, which limited your freedom to

commercialize with other parties? (n=57)

Yes 14 24,6%

No 43 75,4%

CVCs are often known for taking their time to make an investment.

60% take longer than 6 months, which is longer than in the

competitive VC market for consumer and enterprise software

startups. Corporate partners often require exclusivities from their

portfolio companies. But only in very few cases these exclusivities

cover the startups´ core business areas. Chemicals & Materials

companies are by far most restrictive in exclusivities: 12 of all 14

cases, in which limiting commercial agreements were put in place,

came from this sector. Surprisingly, not a single commercial

exclusivity was put forward from a pharma corporate.


Strategic Rationale for Investment

23,7%

32,2%

44,1%

PROXIMITY OF STARTUP BUSINESS TOCORPORATE

Core: new product in the existingand well established market

Adjacent: new product in anadjacent market to corporate'soperations

New: new product in a completelynew market

8,5%

11,9%

49,2%30,5%

33,9%

CORPORATE WOULD BE STARTUP’S…

Manufacturer

Supplier

Customer

Distribution partner

Other

Many startups (44%) claim to have developed a product or a business, which is completely new to their corporate partner. At the same time half of

them intend to win their corporate parent as a customer. This might cause some frustration given how challenging it is for many corporates to

integrate new business into their offering.


Collaboration Success & Timing

25,9%

29,6%11,1%

33,3%

COLLABORATION TIMING (N=58)

Collaboration ongoing alreadyprior to the investment

Collaboration started atinvestment

Collaboration started 6 or moremonths after the investment

No collaboration has evertaken place

18%

37%

25%

20%

INTRODUCTIONS THROUGH CVC (N=58)

Not at all, no valuablecommercial contacts

Some introductions, but nospecific projects yet

Moderate, ongoingcollaboration with positiveoutlook

Strong, contract with thecorporate and executive-level introductions

50% startups have an ongoing collaboration with the corporate.

The earlier a collaboration starts, the more likely is it that a startup gets

introduced to the corporate decision makers.

Collaboration has to be started either before the investment or at

investment. If this is not the case it is much less likely to happen at all

(and much less likely that any introductions will be made).

Collaboration is most likely to take place between startups with

businesses adjacent or core to the corporate´s business. Most

startups that started collaboration prior to the investment ran

adjacent or core business relative to the corporate.

11 of 18 companies where collaboration never happened were new

cases. Chemicals & Materials have the highest number of

collaborations started at investment. This is because – unlike for

software companies – they would not invest if there is no collaboration

in place, due to high capital costs and long investment horizons.


Reasons for Investment

7

3

1

2

7

1

7

8

5

6

7

1

12

11

25

17

9

13

15

17

9

4

16

15

19

0 5 10 15 20 25 30

Other

Manufacturing capability and/or capacity

Supply channels

Technical expertise

Lab facilities and R&D infrastructure

Specific corporate project for which our solution can be used

Experienced CVC professionals on the board

Brand

Well capitalized corporate venturing organisation

Investors network for future investment rounds

Better access to debt finance post investment

Experience in commercializing products similar to mine

Knowledge about the competitor landscape

Distribution channels

WHY ENTREPRENEURS ENGAGE WITH CVCS (N=57)

Most Important Stated

Capital

Access

Specific Project

Commercialization experience

Brand

Technical

Supply Chain

Entrepreneurs engage with corporates mostly because they want to get access to their commercial expertise and distribution channels. Brand and

access to capital are as important, while technical know how is significant, but secondary.


Expectations vs Real Contributions from Investment

7

3

1

2

7

1

7

8

5

6

7

1

12

11

25

17

9

13

15

17

9

4

16

15

19

Other


Supply channels

Technical expertise




Brand








Capital

Access

Specific Project


Brand

Technical

Supply Chain

Have corporates really contributed post

investment?

Not at all To some extent or to

significant extent

38% 44%

28% 58%

45% 45%

42% 23%

37% 53%

20% 65%

26% 62%

25% 62%

29% 49%

42% 35%

19% 77%

54% 21%

42% 22%

A cross study of contribution to startups development relative to corporate´s sector has shown that all startups – except those in the enterprise

software space – think that corporates have contributed too little in the commercialization process and market access. Corporates in Chemicals &

Materials have the best track record in terms of sharing technical expertise & capitalization, but the worst track record in terms of enabling

commercialization of products and helping with manufacturing.


Company Development post Investment

2

10

30

12

3

0

5

10

15

20

25

30

35

Much worse thanplanned

Worse thanplanned

As expected Better thanplanned

Much better thanplanned

DEVELOPMENT OF THE COMPANY(N=57)

24,1%

36,2%

27,6%

12,1%

3,5%

28,1%

47,4%

21,1%

0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

Seed- prototype building Early stage - prerevenues

Mid stage - acquiringfirst customers/firstcustomer in place

Late stage - multiplecustomers, break even

COMPANY DEVELOPMENT OVER TIME (N=58)

Time of Investment Today

Most companies have developed as expected (>50%).

Investments from CVCs have helped startups grow from seed to

mid stage companies.


CVC Participation in the following Rounds

Not Neutral Yes

All sectors 20% 30% 50%

Chemicals &

Materials

31% 27% 42%

How likely is it that you would seek funds from the same CVC again?

Lack of CVC participation in the following investment rounds

(esp. if a startup is no longer strategic) is one of the startups`

largest fears. However, in the sample, only below 1/3 of

CVCs did not participate in the following investment rounds.

Did the CVC invest in all investment rounds following its initial investment? (n=59)

Yes 37,3% 22

No 27,1% 16

We did not have any further investment rounds 35,6% 21

Startups are generally satisfied with their investors and

would seek funds from them again.

The level of satisfaction with the Chemicals & Materials

corporates is slightly lower than average.


Exit Scenarios

Have any significant limitation on the exit been put? (n=57)

Yes 10.5% 6

No 89.5% 51

Has your company exited yet? (n=57) *

Yes 10.5% 6

No 89.5% 51

* 1 sale to CVC parent, 2 sales to another industrial company, 2 sales to a

financial partner

17

24

12

2

0

5

10

15

20

25

30

Very unlikely Rather unlikely Rather likely Very likely

LIKELIHOOD OF EXIT TO THE CVC PARENT (N=55)

Exit to the CVC parent is unlikely (75% responses), i.e. startups

should not count on this exit path and corporates should not restrict

the exit path for the startups

Limitations on exiting the company to the best buyer can be

extremely detrimental for ventures. Fortunately, only 10%

corporates put any restriction on the exit.


2. Experience relative to VCs


VCs Activity in CVC dominated Spaces

CVC Capital fills a gap in the market for undercapitalized Companies:

70% of CVC backed entrepreneurs either did not have a chance to get

VC money at the investment or the funding was not sufficient (esp. in

Chemicals & Materials space, which is a very challenging space for VCs

– because of long investment horizon and high capital requirement).

VC investment terms are often less attractive than CVC investment

terms.

28%

56%

15%

FINANCIAL TERMS: VC VS CVC

Less attractive Less attractive

Same Same

More attractive More attractive

Do you have a financial VC investor on board?

Yes 60.4% 32

No 39.6% 21

The majority of startups would want the same investors on board

as they have today or even a more significant participation from

strategic partners. Close to 2/3 have a VC investor and those than

don’t are often in the Chemicals & Materials space.

19,6%

41,2%

35,3%

3,9%

FUTURE INVESTOR PREFERENCE

More financial investors

Same

More strategic investors

I would not have taken anyinvestor on board


Expectations vs Contributions from CVCs and VCs

7

3

1

2

7

1

7

8

5

6

7

1

12

11

25

17

9

13

15

17

9

4

16

15

19

Other


Supply channels

Technical expertise




Brand








Capital

Access

Specific Project


Brand

Technical

Supply Chain

VC CVC Neither

0% 61% 25%

27% 47% 20%

24% 48% 24%

45% 10% 14%

67% 10% 20%

50% 27% 17%

17% 48% 24%

50% 17% 23%

0% 52% 28%

0% 24% 48%

13% 57% 23%

7% 31% 24%

0% 41% 28%

If CVCs want to become even more value adding investors, they should staff more professional directors in the boards of their portfolio companies.

Also they should work on building out their investor network and making it available to their startups.


3. Future of CVC


Startups` Perspectives on the Future of CVC

3,9%5,9%

23,5%

43,1%

23,5%

Decreasesignificantly

Decrease slightly Stay at that level Increase slightly Increasesignificantly

CVC ACTIVITY GOING FORWARD (N=51)

2

8

16

16

33

13

21

23

20

19

9

19

26

18

12

12

5

15

0 5 10 15 20 25 30 35

Corporate Venturing division investing instartups (e.g. BASF Ventures)

Independent VC funds, which corporatesinvest in (e.g. Emerald Technology

Ventures)

Accelerators/company building programsassociated with one corproate partners (e.g.

Wayra/Telefonica; Merck Incubator;…

Hybrid accelerator programs involvingmultiple parties (Barclays Techstars

Accelerator)

Corporate competition challenges with cashrewards (e.g. $50k)

Collaboration projects with corporatepartners with engineering fee committment

DIFFERENT MODELS OF COLLABORATION

Very attractive Somehow attractive Not attractive

CVC future is looking bright – 2/3 of startups believe that CVC activity will

increase slightly or significantly.

The commonly practiced model of doing Corporate Venturing in-house is the most preferred one by the startups. Outsourcing VC activities to a third

party fund is not so welcome, neither is running competition contests. This is likely a result of a strong self selection bias mentioned on page 2.


For questions or comments please contact me on twitter at @ewencja.

the future of corporate venturing looks bright!

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