Corporate ventures: An alternate source of funding for startups

WHEN corporations invest in privately-held businesses, which are typically startups, either directly or through a separate investment arm, they are engaging in corporate venture capital (or corporate venturing). Unlike a private venture capital (VC), where the general partners of the venture capital fund manage and invest funds raised from external investors known as limited partners, the corporate venture capital is founded and owned by a corporate, which is the owner and lone limited partner.

The origins of corporate funding can be traced back to 1914 when DuPont, a chemical and plastic manufacturer, invested in a 6-year-old startup, General Motors. General Motors proved to be a rainmaker when there was an increase in the demand for automobiles during World War I, resulting in its stocks increasing multi-fold. It can be said that the veterans of American industry such as DuPont, 3M, Boeing, Dow, Ford, GE, Singer and Union Carbide, were the original pioneers of corporate venturing. However, the prime objective of corporate venturing back in the day was certainly not technology or innovation but rather diversification of business.

Despite corporate venture capital setting the tone for private funding, modern-day startups typically look at 3 primary sources of funding (in no particular order of preference): (i) venture capital; (ii) angel investors; and (iii) family funds during early stage funding. With the current dry spell of traditional funding, startups have started facing the new reality of a lack of capital. Global venture funding fell by 23 per cent in the second quarter of 2022. Startups have therefore started exploring a fourth route of funding - corporate venture capital.

Funding through corporate venture capital in Singapore is not a recent trend; it has been on the rise since 2014. Singapore’s regional headquarters hub status, ease of doing business, rule of law, and geographical location has long led to an influx of the world’s multinational corporations, and now we see a similar push for startups and innovation.

Startups, being more nimble, are able to match the changing and varying demands of the market. Corporates try to ride on the market demand by investing in startups. Further, corporates often tap into startups to expand their regional presence. For instance, Gojek invested in Pathao, a Bangladeshi ride-hailing app, to enter the Bangladesh market. This is also true of Singapore corporates trying to get a foothold in other regions, as well as foreign companies seeking to expand in the Singapore and South-east Asian markets. Alibaba’s investments into a score of regional startups such as Ninja Van and Tokopedia in Singapore, are a few recent examples. There are likely to be more corporate venture capital deals in the regional markets in the years ahead.

And the setting up of corporate venture capital funds is not just limited to corporations; recent trends reveal that mature startups are also establishing investment arms. Most of these startups are investing in entities from the same or adjacent sectors with the objective of aligning technologies and building an ecosystem of related services. In India, One97 Communications, the parent company of Paytm, was one of the earliest startups to set up a venture capital arm. More recently, other startups such as Dream Sports launched a fund to invest in gaming, fitness and sports-focussed startups. Similarly, Lenskart has set up a fund to invest in the eye care, eyewear and related sectors.

Corporate ventures can broadly be categorised as strategic, financial or hybrid. Typically, strategic corporate venture investments are long-term investments that are made for the growth and diversification of the parent company. More often than not, the investment seeks to pursue synergies between the corporate and a new venture. Such corporations are patient and can accept lower than typical VC returns on their investments if the parent company’s business improves as a result of such investments.

Unlike strategic corporate ventures, financial corporate ventures focus on maximising their return on investment, similar to more traditional funds. They function independently of the parent organisation and their objective is purely financial rather than broadening the parent’s business horizon. Therefore, it is not uncommon to see financial corporate ventures investing in entities that are completely unrelated to the business of the parent company.

Hybrid corporate ventures adopt a dual approach: they align objectives strategically while still prioritising financial returns. From a founder’s perspective, the hybrid model is the most appealing.

Corporate venture capital brings more to the table than just capital. Startups get preferred access to an extensive network of connections including potential clients, marketing, distribution and development support, and reap the benefits of market expertise, brand goodwill, and established financial position. Moreover, having an established corporate on the board adds to the governance standards of the investee and strengthens its bargaining power in future fundraising rounds.

From the corporate ventures’ perspective, investing in startups gives them access to technology and innovation outside their four walls. If the startup becomes an acquisition target, then they have early insight to the workings of the company, which reduces the investment risk, in comparison to a standard months-long diligence process.

That said, corporate venture capital is still not the preferred source of funding for founders and startups. Strategic corporate venture capital prefers moulding the startups to align with the strategic interests of the parent company, which could put them in a conflict with other investors. While corporate ventures can bring substantial value to the startup, it may not be everyone’s cup of tea. In order to ensure a long-term collaborative relationship, founders must understand the nature and objective of the corporate venture capital, especially on whether the investments are being made from a strategic standpoint or financial perspective. The startups should also consider analysing the relationship between the management at the corporate venture capital and the parent company, before inviting them as shareholders. When chosen correctly, the right corporate venture capital can prove to be a valuable partner in a startup’s growth and success.

The writers are from Cyril Amarchand Mangaldas, Singapore. Vivek Kathpalia is managing director, and Shambhawi Mishra is senior associate.