Corporate VCs: When Incumbents Bet on Disruption
Ana Carolina Mexia Ponce
Co-Founding Partner at Nido Ventures | Stanford CS & MBA | Ex LinkedIn
?? Corporate VCs: When Incumbents Bet on Disruption
In a market where innovation is increasingly critical for survival, Corporate Venture Capital (CVC) has emerged as a powerful tool for established companies. This week, we're exploring how this investment vehicle grew tenfold over the past decade.
Our analysis by Johan Petersmann reveals fascinating trends: while global CVC deal flow declined 12% in Q2 '24, average deal sizes jumped 27%. In LatAm, we uncover a unique landscape where fintech dominates with 80% of CVC investments, compared to just 10% in the US. From FEMSA Ventures to Clip's $100M American Express investment, we explore how Mexican CVCs are reshaping corporate innovation.
As always, you're reading ConteNIDO, your go-to place for all things Mexico/US, AI, and innovation. Make sure to subscribe to receive our up-to-date analysis ??
Nido Indicators ????????
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Inside Nido: What we are doing
Last week our Ana Caro had the chance to spend some quality time with one of our Fund's Advisors Barbara Piette ! Always incredible to connect in person!
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In the Know with Nido: What we are reading
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In-depth with Nido: What we are thinking
In today's rapidly evolving market, established companies must continuously innovate to survive. With the market constantly becoming more efficient—thanks to the rapid proliferation of information through the internet and the broad availability of venture capital to support the best ideas—it's easier than ever for companies to lose market share to newcomers (more on CNBC ). Since the best ideas will end up winning, the ability of established cash-strapped companies to invest in R&D and M&A no longer cuts it (more on Stanford GSB ). Hence, if you're an established corporation, it’s important to spot trends before they become existential threats (more on Bain ). Enter Corporate Venture Capital (CVC) or company-sponsored venture funds, which started to gain traction and grew more than ten-fold over the past ten years (more on Stanford GSB and Bain ).
Given the relative novelty of the investment vehicle, CVC structures tend to vary within the industry, generating some inefficiency (more on Stanford GSB ). Nonetheless, there is some level of consensus surrounding how corporations can extract the most value and avoid the biggest pitfalls. To ensure collaboration, it is important for the parent company to understand the VC model. As Matt Banholzer from McKinsey puts it: “When clients ask me, ‘Should I open a CVC?’ my tongue-in-cheek answer is, ‘Are you willing to endure an 80 percent failure rate on your investments?’” (more on McKinsey ). This is important because oftentimes CVCs don’t align with the company’s incentive to achieve strong short-term quarterly returns, which goes against the VC philosophy of sourcing innovative ideas to spot trends that will be relevant four or five years from today (more on Bain ). To ensure the right policies stay in place, consultants advise a degree of independence.
Besides spotting trends early on, CVCs are also helpful in developing divisions and talent (more on McKinsey ). Google’s Gradient Ventures, for instance, allows Google engineers to rotate at portfolio companies (more on CNBC ). Hence, sometimes the existence of the CVCs and their portfolio companies reassure talent of the company's seriousness and career path flexibility (more on McKinsey ). They are also a useful tool for companies to “de-risk” M&A targets and adopt emerging innovations to build out business divisions (more on Bain ). As explained in the article, by reviewing and collaborating with the company over two to four years (vs the typical three weeks), it becomes clearer whether it would make more sense to fold the company in via M&A or exit the investment. Hence, CVCs allow corporations to keep an eye on industry trends, innovate, and attract talent.
On the flip side, CVCs benefit startups in pretty unique ways too! According to McKinsey , CVC-backed startups are about 15% more likely to be exited by the seventh round of funding and are roughly 7% less likely to go out of business by the seventh round of funding (both assuming they were CVC-backed since round one and compared to their conventional VC-backed peers). This can be rationalized by the idea that CVCs often want to fold startups into their corporate network, which may provide them with some longer-term stability from fixed contracts and logistics & management expertise, but at the expense of sharing intellectual property and innovation. It turns out this sort of tradeoff is especially common in the LatAm region (more on McKinsey ). A good example of this is the Mexican startup Jüsto partnering with FEMSA Ventures. The mature FEMSA seeks to benefit from Jüsto’s disruptive business model, meanwhile Jüsto seeks to leverage the established logistic network (more on FEMSA ). (On a side note: Now Jüsto is also leveraging its relationship with Amazon to reach a greater customer base—more on Nido News.) This sort of arrangement is even more attractive to smaller startups trying to grow on the back of a more established company's reputation and channels.
Now that we have understood the dynamics that underpin the industry, we will proceed to talk about relevant global trends in the CVC ecosystem, as observed in the CB Insights State of CVC Q2 2024 Report , and try to provide a relevant explanation for them.
That’s it for this week. Make sure to subscribe to ConteNIDO to learn all the crucial information about LatAm and entrepreneurship.
And, if you are a founder seeking to start a conversation, don’t hesitate to reach out: https://www.nido.ventures/contact-us
Co-Founding Partner at Nido Ventures | Stanford Engineering + MBA
2 周So many other CVCs are coming to Mexico in the next few years. I'm super excited to see how this ecosystem is growing—they're definitely an amazing value-add.