The Slow And Steady Rise of CVC Funds Infosys, Wipro, Amazon, Reliance and a few others are successfully running their Corporate Venture Capital funds and many more, including leading startups, are getting into it
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Corporate Venture Capital funds or CVC funds are investment vehicles of large companies that actively invest in startups, mostly directly, but sometimes through VC firms. A few global examples of CVCs include Intel, Google, Microsoft, Meta, among others. In India too, the space is slowly but steadily seeing increased participation.
"CVC concept is new to India. Large corporates are not used to taking bets on early-stage startups and partnering with founders who are working on ideas that have the potential to disrupt existing business models. However, that is fast changing," said Yagnesh Sanghrajka, co-founder and CFO, 100X.VC.
From what is observed globally and in India so far, these corporates have a separate team that runs the CVC independently and adopts the best practices of Venture Capital. Further, CVC investment is a win-win for both corporates and startups. While it gives large companies an additional revenue stream, it gives startups access to the vast network of the company and mentorship of corporate leaders.
The benefits of startup investing
Investing in startups is a long-term strategy that allows corporations to tap into innovative ideas and gain early access to emerging technologies. "The startups may disrupt their industries, become potential future competitors, or allow the corporation to expand in new sectors. It thus allows corporations to diversify their portfolios and potentially achieve financial returns in the long-term," said Rohan Joseph, Vice President, head of Global Investments and Corporate, Times Bridge & The Times Group. According to Joseph, 20% of all startup funding deals in India now involve a corporate investor or a family office fund.
The biggest challenge for large incumbents is to figure out how to balance the current business that brings in the revenue but at the same time not take their eye off the technologies and business models that could disrupt the existing enterprise and CVCs are one way of solving for it, say experts. "CVCs are one way to keep emerging technologies and startups close at hand, gain access to founders who are working in these domains and figure out ways as to how to transplant these learnings into the mother ship, either through strategic tie-ups or buyouts," said Mayuresh Raut, co-founder and managing partner, SeaFund VC, an early-stage focused fund.
Other than this primary reason, he added, some corporates may also look at this as one option to support the local startup ecosystem or burnish their brand by positioning themselves to be at the frontier of emerging technology. "In addition to this, it also enables corporates to overcome what Clayton Christensen famously called the Innovator's Dilemma, which says that incumbents have a strong disincentive to innovate in areas that will undermine existing business lines," added Raut.
Large corporations have realized that it is difficult for them to transform their existing organizations into agile tech-driven organizations overnight. "Hence they see value in investing in startups primarily in their field. They can get both the solutions and talent quickly. Also, they can invest in companies that can help augment their current offerings, especially in the digital space," said Shravan Shetty, MD, Primus Partners.
To sum up, corporates invest in startups for two primary reasons:
- To invest in startups that are building products, technology and services that may help them in the future
- To get faster returns, given the startup boom in the country
Why there aren't many CVCs in India yet
Internationally, most big tech companies, including Intel, Microsoft, Meta, Google have their CVC funds. In India too, we are surely seeing increased participation, but the trend is picking up slowly. "We are seeing the rise of more and more corporates wanting to partner with early-stage startups either by way of investing (thru CVC) or partnering by way of corporate innovation (CI) programs," said Sanghrajka.
The primary reason behind the slow trend is that Indian corporations have historically been risk-averse and preferred more traditional investment opportunities. "This mindset is gradually shifting with many corporations launching strategic investment arms and new regulations making investments more favorable," said Joseph. The Times Group's investment arm Times Bridge has backed global companies such as Uber, Airbnb, Coursera & Headspace and Indian startups such as Delhivery.
Another reason is that the US and other developed economies have been doing this since the late 1970s. "From the time 3M and Xerox established their own CVCs. They have been through several market cycles, technology platforms and organization changes through these 60 years that have enabled them to figure out how best to utilize CVCs. India has jumped on the VC bandwagon over the last 20 odd years and the homegrown corporates are still evaluating how the early CVCs from outside India like Shell, BP, Intel, Salesforce and Unilever are operating," said Raut.
Reasons are simple, says Sanghrajka. "Large corporates are not as nimble and cannot pivot from their existing business models so easily and hence they now are waking up to the fact that new age startups are bringing value to these large cos and hence the openness to engage in CVC/CI models," he said. 100X.VC is currently working with large corporates, Indian and multinational, like Pidilite Ventures and are seeing more and more corporates wishing to engage with early-stage startups.
Edge CVCs offer startups
One of the key advantages CVCs have is usually they have a longer investment horizon than traditional VCs. "They are thus largely looked upon as patient capital, but this is also dependent on how well the corporate is doing over sustained periods of time and the management staying the course, firstly by being in control and secondly, not letting strategic changes affect the CVC. CVCs can also lean on the parent to provide resources, expertise, talent, partnerships, customers and distribution to their startups," said Raut.
Joseph lists out the key advantages below:
- Strategic Alignment: CVCs often have a strategic interest in the industries or technologies relevant to their parent corporations. This can lead to valuable strategic partnerships, understanding of market trends, customer know-how, and industry-specific expertise.
- Access to Resources: Entrepreneurs backed by CVCs can tap into the resources, infrastructure, and networks of the parent corporation. This includes access to distribution channels, manufacturing capabilities, research and development facilities, and an existing customer base.
- Validation and Credibility: Securing investment from a reputable corporate partner can enhance an entrepreneur's credibility and validate the business model, technology, or product. This can attract additional funding from other investors in the long-term.
- Access to Global Markets: If the parent corporation is multinational, entrepreneurs can leverage the CVC's global reach to expand into international markets more effectively than with traditional investors.
Will we see more participation in the near future?
Experts say that trends in the developed ecosystems mostly get replicated in India. "Global examples will prompt large Indian corporates to replicate what Infosys, Wipro and Reliance have already done. Additionally, the rapidly maturing startup ecosystem will throw up immense opportunities that will make CVCs look at them," said Raut.
In addition to that, India's maturing startup ecosystem, especially in industries like e-commerce, logistics, enterprise tech and fintech will lead to the rise of CVC investments in India. "Government initiatives and policies that promote innovation and entrepreneurship, such as "Startup India" with favorable tax policies are key enablers," said Joseph.
With sufficient availability of domestic capital from the balance sheet of large Indian organizations, investing in new-age tech companies will continue to grow both from a financial & strategic perspective, he sums up.