#39 Three types of CVC Structures
Hi, I'm Jeppe, and welcome to my weekly newsletter on Corporate Venturing. My goal is to provide a comprehensive view of the latest developments in the field, drawing insights from top management, venture capitalists, founders, LPs, and family offices. This newsletter aims to offer valuable information and thought-provoking content to understand the importance of Corporate Venturing in business strategy.
Today, we delve into an intriguing aspect of Corporate Venture Capital (CVC): the Corporate Entity Structure and its Relationship with the Parent Company.
Understanding the Types of CVC Structures
Corporate Venture Capital, an integral part of the venture capital ecosystem, predominantly operates through three types of fund structures: Balance Sheet LP, Single LP, and Multi LP. Let's explore each of these:
Balance Sheet LP (Limited Partner): In this structure, the corporate directly invests its own funds from the Balance Sheet. Normally corporations make dedicated budgets to embrace the challenges around follow-on investments and the longevity of the investments. This model is farily straightforward (not taking into account they standard difficulties of CVC) and quick to execute, providing corporates with full control over their investments. It's often preferred for its simplicity and direct alignment with corporate strategic goals.
Single LP: A Single LP fund is a venture fund where the sole investor is the parent corporation. This structure offers a compromise between the agility of a dedicated fund and the corporation's strategic alignment. Even though the corporation keeps the "control" (being the only investor) over the entity the investment decision power is moved to the General Partner of the fund. This means that you have an entity that operates under a legal framework known as the Limited Partnership Agreement.
Multi LP: In a Multi LP structure, the corporate venture fund comprises investments from the parent company as well as external limited partners. This can include other corporates, institutional investors, or even competitors, diversifying the fund's capital source. A recent article by Kim Moore from Global Corporate Venturing highlighted the growing trend of such structures, noting their benefits in terms of increased capital and diverse technological insights.
The Merits of Each Structure
Balance Sheet LPs are characterized by their alignment to the corporate entity. Their decision-making process and investments are closely tied to the strategic objectives of the corporate. This structure is beneficial for corporates that wish to maintain tight control over their venture investments, providing a straightforward and quick way to execute investments directly aligned with corporate strategic goals. It is also easiere to extract the value of the Corporate into the start-ups through collaboration between the two.
Single LP funds are notable for their clear focus. With only one investor, the fund is aligned with the parent company's strategic goals, ensuring that investments are directed towards areas of mutual agreed interest. This structure is ideal for corporates looking to leverage venture investments for strategic innovation that is closely aligned with their core business without interfeering too mucht with daily operations of the Corporate.
The General Partners of the fund are financially incentivised to operate for financial returns, hence a carry structure is set in place.
Multi LP funds stand out for their diversity and resilience. Incorporating multiple investors, these funds benefit from a broader range of insights, market knowledge, and capital sources. This diversification can lead to more balanced investment decisions and safeguard the fund during economic downturns, as the risk and rewards are spread across several entities. The recent Global Corporate Venturing article highlights how such structures can attract more money, offer greater technology insights, and provide better support for startups.
Conclusion
Each CVC structure has its unique set of benefits, and the choice largely depends on the corporate’s strategic objectives, desired level of control, and the need for diversity in insights and capital. As the venture capital landscape continues to evolve, we may see more corporates experimenting with these structures to optimize their venture investment strategies
I hope you enjoyed this week's newsletter. If you have any suggestions or contributions that you would like to share with me, please do not hesitate to reach out. I would be delighted to hear from you. '
/Jeppe