Corporate Venture Funding Models: Determining the Sweet Spot between Risk and Control
Is all capital equal? As long as your venture gets the cash it needs, does it matter how? If you’re building a corporate venture, your answers to these questions might be more important than you think.
Today, many corporations turn to venture building to launch new businesses and capture new markets. While most understand that a diversified portfolio of innovation investments is required to secure future growth and avoid disruption, fewer know how to structure and fund each investment.
Watch this short video to learn more about these archetypes, the tradeoffs and considerations for each.
The importance of funding models in a corporate venture
Even the most seasoned captain would find themselves lost at sea without a functional navigation system when charting unfamiliar territory. Likewise, a misaligned funding strategy with corporate ventures can spell trouble for the vessel.
Venture capital-backed startups benefit from a large pool of potential investors who play by the same rules. Investment term sheets are today more or less standardised. The journey from angel investment to seed round to Series A and onward is predictable and well-trodden.
But while venture capital-backed startups have a single objective to build a large sustainable business, investing company resources towards corporate ventures is an exercise of balancing dual objectives:
- Ventures need to be able to create long-term value for the organisation whilst also being able to
- Function as standalone businesses with robust products or services at their core.
This means that the journey is not always predictable, and a ‘one size fits all’ approach to funding doesn’t work.
We have found four archetypes of corporate venture funding models that serve as a starting point to achieve those objectives. So, which factors determine the suitable model for a specific corporate venture?
Risk and Control: Determining the Sweet Spot
Determining the right funding model for a corporate venture is based on two primary factors:
- Risk Exposure – The amount of risk that the corporation is willing to bear
- Strategic Control – The amount of strategic control the corporation wants to retain compared to other current or future shareholders in the venture
Calibrating the optimal level of risk vs control is mainly dependent on four major factors that corporate venture builders must evaluate for each venture:
- Strategic Importance – To what degree is the venture addressing a critical market to future-proofing the core corporate business?
- Integration with Core Business – How intensely is the venture reliant on close ties with the core business? Are these links there to achieve strategic goals or leverage existing capabilities and infrastructure?
- Association Risk – To what extent does the venture benefit from direct brand association with the corporation? And how much would this association impact the corporation?
- Affiliate and Subsidiary Status – Depending on the jurisdiction, would this venture be considered an affiliate or a subsidiary? To what degree would this increase bureaucratic necessities like reporting consolidated taxes and earnings?
Evaluating these factors helps guide a discussion to determine how much funding from outside investors will be allowed and how much equity is granted to the team building the venture (if at all).
We have found four funding models that serve as a guideline for potential funding structures, beginning with the lowest risk exposure and need for control and ending with the most risk & control.
- Shared Risk and Reward – The new venture is partially funded by the corporation and external investors, and significant equity is shared with the founding team.
- Controlled Incentives – The corporation provides 100 per cent of the funding but still allocates equity to the founding team with a buyout option.
- Joint Venture – Partially funded by two or more corporations & investors, and the founding team may be given equity, but it is shared case by case.
- Full Control – Fully funded by the corporation, with little to no equity package for the founding team.