Most important questions when starting a CVC fund ssanices (Y Following‘After I published my post on “The Goals for Corporate Venture ‘Capitat” the inquiries I received dealt with the questions what to focus ‘on when setting up a Comporate Venture Capital fund, Based on my experience and knowledge I would propose the three most important ‘topics to think about when implementing a fund structure, This ‘obviously follows the profound decision to start such an activity in the first place. 1 highly recommend to think i through before you stat In general starting a CVC activi 50 a company needs to communicate this new idea into the will involve the whole organization ‘organization top down and it needs the involvement of the CEO, himself, This is not a marketing or corporate strategy activity. The boss needs to drive this activity so everybody within the company ean refer to ths in times when critical discussion lke investment versus budget achievements need to made, It also needs the understanding on all levels that comporates - independent from the industry they are working in will benefit from the cooperation with startups and founders. ‘We are notin the year 2000 when all corporations started investment activities and left the venture business within the next three years again ‘That departure - mostly through secondaries - was a negative impact on the venture scene which most of the CVCs today suffer from. CVCs still have to explain wy other CVCs left the environment and damaged several of ther portfolio companies with their decisions, This time all esd pba 61 1209 TOTNES singe aatnarlomanepesettcAid a0rg C¥e Ae nash companies who think about stating CVC activities are doing a profound analysis and are careful when entering the market contacting potential target companies. The startups are well prepared when talking to VCs with a corporate background and have questions prepared Which needs to be answered before an investment takes place. Al in all this isa good development forthe venture ecosystems. Most of the decision makers I talked to recently focus on sustainability, mainly driven by the outside and inside view on those activities. The board needs to be convinced this is nota “one-trick-pony-show” and the portfolio companies and co-investors needs to be assured that this partner will bein the market for the long run {As a preparation and also as an altemative strategy the accelerator ‘model has been found as a valid model It will offer young companies space and cooperation on a working level. It will save some valuable cash in the beginning and open doors for product validation and pilot projects Corporates can lear how to deal with early stage startups and their processes while startups will understand thatthe complexity of a fortuneS00 company will impact sales cyele and product design. All of this benefits while not being tight to an equity investment and the long term duties of a shareholder with all egal boundaries. Even in the case of a failure ofthe startup as such, a fortuneS00 company could get access to talents from the startup ecosystem easily if employees of tis esd pba 61 1209 TOTNES owing atoning eset snorim. 1930 tinge qitne strstr CV he Lh particular startup are up for joining a bigger corporation to get back to a financial stable situation for the time being. But at the end it will come down tothe top three most important questions when starting a Corporate Venture Fund: 1) How to talk to your board? Setting up a venture fund involves a fot of regulatory and legal work so that approval from the boards isin almost all cases necessary, Such a process needs a profound information process of al stakeholders, Hence knowledge of this niche topic is not availabe in boards, the ‘education process is needed foreach stakeholder. Be aware that ‘educating the goals, the limitations and the demands for implementing such apart ofthe business needs extensive preparation. Also external consultants for this topic are not broadly available especially hence those funds need to be integrated into specific business environments and a corporate framework, the process needs lot of intemal support After explaining the structure ofthis fund and organizational setup it ‘most critical to communicate the goal for this fund, Ifthe siz i relatively small it will be hard to achieve a positive return for the whole Fund and the costs of needed personell. Therefore the focus should not be on return and a multiple on it’s invested capital. Focus will then be ‘on corporate culture, knowledge transfer and brand marketing. Usually esd pba 61 1209 TOTNES owing atoning eset 0et pst aso san CVC [nach it will bea very good outcome to return the investment overtime ofall invested resources during the lifetime of that business unit. Ifthe fund has a significant size the goals can be set higher in terms of returns of| invested capital and achieve a positive return above an agreed hurdle rate to offer an attractive cary for investment professionals. Overall the ‘goals of the fund and the taxgted company it should focus on needs te be matched with the own product portfolio and business units, Involving general business goals into this fund goal setting is erucial for the success ofthis activity especially to present results to the board in the first yeas time after founding it 2) How big needs the fund to be? "Next important questions to be answered is the size ofthe fund, While the answer is depending on available assets and future EBIT planning of the corporation in general it needs to be understood that sizes indicates the strategy for the fund. In ease the fund isin the smaller range of $20m - $60m volume over a five years investing period the focus should be on knowledge transfer and returning invested resources ‘over fund life time (meaning invested capital and operational costs). In terms of bigger funds from $250m to $500m this will be a VC fund focusing on returning certain multiples on the invested capital and hurdle rate covering the management costs ofthis fund. Additonal proceeds from investment activities will be available for future fund esd pba 61 1209 TOTNES owing atoning eset 0rg C¥e Ae nash generations and carry for fund managers. Depending on the fund size communication activities intemally and with external focus will be fundamentally different, Stakeholders will need to be handled based on the expectation management set during the initialization of the fund Changing the initial taget setting over time will lead to a possible failure of the investment activities inthe short term and will make future investment activities impossible. History has taught us that positive or negative press will reach the board rather sooner so make sure your PR activities are setup right from the beginning. 3) How to set up the organizational structure for a CVC? Many fortuneS00 companies believe in a principal leader structure, One person at the top of a business unit will make sure thatthe business runs smoothly and has a strong guidance. This isnot tue for Venture Capital in general and itis the most impractical structure for a CVC. ‘Venture funds need a balance of power and a strong “propose & challenge” mentality. Whenever preparing a decision on a deal ora “live or die” ofan investment it is a necessity to have a counter part to look independently on this case. Therefore the partner structure in the ‘VC world has been the best proven model. As uncommon this model seam for @ corporation it isthe only way to run a CVC. Itis one ofthe main issues to be discussed with the board during the set up process. When VCs pushing their portfolio companies to be lean and fast the esd pba 61 1209 TOTNES owing atoning eset enoet pst aso san CVC [nach same is true for the VC fund itself, Less personell insures fast and proper decision making. With two partners and a limited number of associates will bea good starting point for a CVC. Overtime some additional investment professionals are needed depending onthe size of the fund and portfolio, Usually some supporting activities can be sourced from the corporation itself such as technical due diligence expertise, legal, finance and compliance, For the rest some extemal consultants will be useful for special activities. Following the current VC model additional resources to serve the portfolio companies during their investment phase are advisors to support those companies on topics such as HR, product design, product marketing and general intemal process support. Those resources of expertise are mostly available inside the fortuneS00 companies and employees are often happy to get this side role to work with young founders and new technologies and business models. ‘What will happen in the near future? Overall [have seen most ofthe corporations setting up or have set up their new venture fim are following those main guidelines. The rest .will rom my perspective adapt this framework rather sooner than later after they made their first experiences from markets and thei internal stakeholders, The market will drive decision makers to implement the ‘most efficient structure, We will see more CVCs in the near future esd pba 61 1209 TOTNES owing atoning eset norg C¥e Ae nash ‘with smaller and bigger fund sizes in Europe. This is good for the investing clime overall and it wil fuel the transformation processes tal world as we know it today. Report this Dublished by Thomas Geote 3s (Fraiowing) Suke — Seomment share 0161 comment = &@ 4 2O8BL2R : som @ were S sere unde, Wnt, a VC 208i? @ ie | ret csr be 061 120769 OTN Ssingotanantlonstng-restteeAd woThomas Grote Senior Expert in novation, rategy & Tachology vestments More from Thomas Grota —_ When jour strategic outlook bites you ‘Thomas Geotaon Linked Worting in the New Decades locally om rote Thomas Grota on inked / esr pba 61 1209 TOT nosing restedSustainability wl eat the Worle Thomas Grota on inked See a 35 articles esd pba 61 1209 TOTNES owing atoning eset