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Decoding Corporate Venture Capital: Insights for Scientific Entrepreneurs | Deep Tech Catalyst

A chat with Yvonne Lutsch, Investment Principal @ Bosch Ventures

Welcome back to Deep Tech Catalyst, the channel where science and venture converge!

In today's episode, we're thrilled to welcome Yvonne Lutsch, Investment Principal at Bosch Ventures, from Sunnyvale, California.

Prepare to delve into the intriguing world of Corporate Venture Capital (CVC)! Uncover what sets CVCs apart from traditional venture capital firms and learn how to synchronize your initiatives with their objectives and requirements.

Embark on an enlightening exploration of the challenges and opportunities in collaboration, and the critical aspect of timing, as we reveal the transformative impact of CVCs on innovation and startup ecosystems.

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🏢 What is Corporate Venture Capital (CVC)?

Corporate CVC working with Deep Tech founders to build new ventures.

Corporate venture capital is often referred to as CVC. The key differentiator lies in the source of funds. In the realm of traditional financial venture capital, you typically find multiple Limited Partners (LPs) who invest with the primary aim of securing financial returns.

It's essentially a way to diversify their investment portfolios.

In contrast, CVC, or corporate venture capital, typically sources its capital from a single entity—the corporation itself. Although various business units within the corporation may contribute to a central investment pool, the capital ultimately stems from the corporation.

♟ Examples of Mandates and Investment Approaches of Corporate Venture Capital (CVC)

  1. Some CVCs, which I may interchangeably refer to as strategic VCs, allocate their investments strategically, focusing on areas that align with the corporation's interests. Their goal is to remain at the forefront of industry trends and emerging technologies to ensure the corporation stays ahead of the curve.

  2. On the other hand, certain CVCs operate with the mandate of creating a pipeline of potential acquisition targets. They invest in startups that hold the potential to be acquired, furthering the corporation's strategic objectives. Additionally, some CVCs concentrate on fostering business opportunities, often by providing services to these startups.

  3. Some corporate venture capital (CVC) entities aim to construct a robust M&A funnel, which involves investing in startups with the potential to become acquisition targets.

  4. On the flip side, other CVCs focus on generating extensive business opportunities for themselves, such as offering services to startups. Think of the major cloud providers as examples of this approach.

  5. Additionally, many CVCs leverage their platform to identify potential startups to collaborate with from the corporate side. A growing trend among CVCs is adopting a venture client model, which I'll elaborate on later.

  6. It's worth noting that CVCs often operate with a mixture of mandates. Some are purely financially focused, resembling traditional financial VCs, despite their corporate affiliations. The mechanisms for deploying funds can also vary. Some CVCs invest off the balance sheet, and their investment committees often include key corporate figures like the CEO, CTO, CFO, Head of Strategy, and Business Development.

  7. Conversely, other CVCs adopt a partner structure, resembling traditional VCs, and might utilize fund structures similar to traditional venture capital firms. It's important to mention that CVCs, particularly those with a partner structure, often incorporate a carry structure. This means that partners and team members have financial incentives tied to the fund's performance. While they seek a strategic fit, these CVCs tend to be more financially driven in their investment approach.

  8. There are even CVCs that operate Evergreen funds, receiving a lump sum of capital once every few years and reinvesting returns into new companies, ensuring a continuous cycle of investment.

🧗‍♀️ Main Challenges for Scientific Founders In Approaching CVCs

Now, let's shift our focus to the challenges faced by scientific founders when approaching a CVC for the first time, or more broadly, the corporate side.

It's crucial for STEM founders, as well as all Deep Tech founders, to recognize the diverse nature of CVCs and determine which one aligns best with their goals. They must understand that having a CVC as an investor doesn't automatically guarantee a proof of concept or a contract.

For instance, CVCs like ours, with a stronger financial focus, can assist in opening doors and facilitating introductions within the corporate sphere. However, there's no guarantee of a partnership or collaboration.

In some cases, seeking a partnership with a corporate entity might be more advantageous than obtaining funding from a CVC, depending on the founder's objectives.

It's also essential to note that some CVCs, particularly those with a strategic focus, prioritize strategic alignment and may be more inclined to explore partnerships and proof-of-concept opportunities. Each CVC operates with its unique approach and priorities, making it vital for founders to thoroughly understand their potential partners' objectives and expectations before engaging with them.

🤜🤛 Engaging with Corporate Venture Capital (CVC)

It's important to emphasize that seeking a partnership with a corporate entity may be more beneficial than obtaining financial support from a CVC in some cases. However, it's crucial to be aware that certain CVCs, especially the more strategically inclined ones, may require sponsorship or even proof of concept before their venture unit can invest. This process can be time-consuming, and founders must carefully assess whether it aligns with their timelines and funding needs.

When engaging with CVCs, it's imperative to be clear about who you are dealing with and understand their strategic priorities.

Financial ± Strategic Angles

Openly discussing their strategy can help you determine if your timing aligns with their requirements. Waiting for a proof of concept to be successfully conducted before investment might not be feasible for startups with limited runway. In such cases, founders should evaluate whether the corporate venture unit is genuinely helpful or could potentially complicate matters by influencing the startup in a direction that may not be ideal in the long run.

Diversification is key. Founders should avoid overly focusing on a single corporate partner. It's wise to have multiple options and ongoing discussions, as CVCs or corporate partners can change their strategies or priorities over time. Relying heavily on a single corporate entity can pose risks to a startup's flexibility and long-term plans.

Pros and Cons

Moreover, there's a concept of "contamination" to consider. Startups that raise substantial early-stage funding from a corporation, whether it's the CVC or the parent corporation itself, can sometimes face challenges. The outside world may not differentiate between the startup and the corporate entity, potentially confusing. This can affect the startup's relationships with other potential partners or investors who may assume exclusivity or a predetermined acquisition path. While corporate funding can be beneficial, it's essential to assess the timing and potential implications carefully.

⏳ When Deep Tech Startups Should Approach a CVC?

Determining the right time for a deep tech startup to initiate discussions with a CVC is a critical question.

At Bosch Ventures, we typically invest from series seed to later stages, although we approach series seed cautiously and selectively. This approach aligns with our goal of not sending a signal that Bosch exclusively owns the technology or startup.

In practice, we prefer to invest in series A or series B rounds, or even further along in a startup's journey when there is more capital and a broader investor base. This strategy helps mitigate the risk of stifling a startup's growth by maintaining a diverse investor network.

Additionally, we often seek opportunities to co-invest with other corporate VC firms, fostering collaboration and sharing expertise to support the growth of promising startups. This collaborative approach can enhance the startup's chances of success and provide valuable resources beyond just financial backing.

🍰 Collaborative Cap Tables Among Competing CVCs

The willingness of multiple Corporate Venture Capital (CVC) firms to share a startup's cap table might raise questions for scientific founders, especially considering that these corporations could be competitors.

Let's delve into this intriguing topic to provide a clearer perspective.

Overlapping Interests and Aligned Goals:

When multiple CVCs with similar mandates, such as being financially focused but with a strategic angle, come together, their interests often align significantly. This alignment can prove highly advantageous for the startup.

Having several CVCs around the table can provide a wealth of benefits.

Firstly, it creates a well-rounded syndicate with diverse expertise and connections. Each CVC can contribute unique insights about the industry, high-level product specifications, and industry requirements. This collective knowledge empowers the startup to better cater to market demands and refine its product offerings.

Sensitivity and Information Sharing:

It's important to note that, typically, when CVCs take board seats or observer seats, it's the investment team representing them. This separation allows for careful management of information sharing between the CVC and the corporate partner, as well as the startup.

Sharing highly sensitive proprietary information may be limited to protect the startup's competitive edge. Similarly, the startup may not receive access to all of the corporate partner's confidential projects and strategies. CVCs, being full-time investors, are well aware of the sensitivity surrounding such information.

Moreover, specific arrangements, such as closed board sessions, can be established to address sensitive discussions, ensuring that the collaboration remains fair and compliant with antitrust regulations.

🚀 Successful Collaborations Between Startups and Corporates

Strategic partnerships between startups and corporate entities can be facilitated by CVCs and can lead to accelerated market entry, broader adoption of innovative technologies, and mutual benefits for all parties involved. To illustrate the concept further, let's explore a few examples of successful collaborations between startups and corporates.

1. Enhanced Manufacturing Efficiency

One example showcases how a startup's technology significantly improved manufacturing efficiency. The collaboration commenced with a single plant, where the startup's solution proved highly effective. Subsequently, the startup successfully introduced its product across all plants within that specific business unit. Eventually, their offering expanded to encompass other corporate plants. This collaboration not only benefited the startup but also translated into cost savings for the corporate side, as it revolved around operational efficiency.

2. Leveraging Vendor Connections

Some startups focus on smaller companies rather than large enterprises like Bosch. In one such case, the corporation can leverage its extensive vendor network to benefit a portfolio startup. Bosch maintains relationships with numerous smaller suppliers within its supply chain. By leveraging these connections, we opened up new market opportunities for the startup, creating a win-win situation.

3. Innovation Team Collaborations

Another valuable facet of CVC-driven collaborations involves facilitating introductions between innovation teams within business units and startups. These teams explore the possibility of jointly developing future products. The process often begins with a proof of concept or pilot project. While not all initiatives result in a final product immediately, this approach offers critical insights to both parties. Startups gain a deep understanding of the corporation's needs, and corporations gauge the startup's capabilities at that particular juncture.

📈 Finding Alignment Between the Startup's Pace and Industry Needs

Timing plays a crucial role in these collaborations, particularly when strong technical founders, such as STEM founders, are involved. Startups may perceive their products as market-ready, but this might not align with the corporate perspective, especially for larger corporations. The initial investment and ongoing interaction help both parties become accustomed to each other.

Over time, as the corporation becomes more comfortable with the startup and vice versa, the groundwork for future collaboration is laid.

Win-Win Collaborations

Collaboration between a startup and a corporate entity can sometimes feel like an arranged marriage. In the early stages, there may be uncertainty and limited familiarity. However, as both parties become more acquainted and discover the synergies and advantages of working together, the relationship strengthens. Over time, they realize the value of their partnership and the mutual benefits it brings.

In summary, successful collaborations between startups and corporations, facilitated by CVCs, hinge on timing, information sharing, and a gradual alignment of goals and expectations. These partnerships can yield remarkable results, fostering innovation and efficiency within the corporate ecosystem while offering startups valuable opportunities to thrive and expand.

🤝 How to Prepare for the First Meeting with a CVC?

Now, let's delve into the optimal timing and preparation required when approaching Corporate Venture Capital (CVC). Specifically, when is the right moment for founders to knock on the CVC's door, and what should they have in place before initiating the conversation?

Timing for Approach

The ideal moment for founders to consider approaching a CVC is when their technology has reached a certain level of maturity, let's say Technology Readiness Level (TRL) five or higher. At this stage, you should be ready to test your first pilot or are moving toward TRL six. However, there can be other suitable moments in the hardware B2B company roadmap.

3 Tips to Identify Your Target CVC

Research the CVC thoroughly to understand its strategic orientation. You can find information online or engage in discussions with them directly to determine their strategic focus. Inquire about their need for proof of concepts, business unit sponsorships, and overall strategy.

A crucial aspect of preparation is understanding the type of CVC you are engaging with. Consider the following:

  1. Do they require a proof of concept before investing?

  2. Assess the readiness of your technology to ensure a successful proof of concept.

  3. Recognize that the right stage of readiness varies based on your specific circumstances, and it needs to be aligned with their target goals

Be aware: if your product is too early, there's a risk of damaging your reputation, even if you're enthusiastic. Additionally, the size of the corporate partner matters, as larger corporations typically have more stringent processes and higher product expectations. Consider engaging with smaller companies initially to address potential issues and refine your product before approaching larger corporate entities.

🏢 Venture Client Units

Some corporations, like Bosch, have established Venture Client Units. These units are dedicated to structured processes that facilitate partnerships between startups and corporates. They focus on enabling collaborations and removing barriers. If you identify a corporation with a successful and structured Venture Client Unit, consider it a valuable resource for partnership opportunities.

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Please be aware: this is not investment advice! The information provided in this publication is for educational purposes only and should not be construed as financial advice or a solicitation to buy or sell any assets or to make any financial decisions. Furthermore, we want to emphasize that the views and perspectives expressed by guests on The Scenarionist do not necessarily reflect the opinions or positions of our platform. Each guest contributes their unique viewpoint, and these opinions are solely their own. We remain committed to providing an inclusive and diverse environment for discussion, encouraging a variety of opinions and ideas.