Raising Money for Your Startup? Learning the terminology and mechanics of venture capital is an important step in your journey!

This time I will focus on a question that I am frequently asked by entrepreneurs raising capital for the first time: what are the key differences between a Venture Capital fund (VC) and a Corporate Venture Capital fund (CVC)?

?While there are many similarities between them, with both providing a source of funding to startup companies, understanding their different objectives can help you drive more targeted discussions with potential investors.

?What is a venture capital firm (VC)?

In a nutshell, VCs are firms that invest in and provide financing to?potential high growth startups that have a limited operating history. With little collateral, startups usually lack access to traditional bank loans or other debt instruments.

General Partners of the VC invest in vetted companies with funds raised from external investors called Limited Partners (LPs). They hold the committed capital in a fund, typically for a 10-year period, and distribute returns gained from the sale of investment businesses both during and at the end of the fund’s lifetime. While there is significant risk of failure, the potential for high returns is an attractive incentive.

Keep in mind that the key objective of a typical VC fund is financial returns!?Successful VCs will have a much easier time raising money from their LPs for their next fund if they can demonstrate a high IRR.??

?And what is corporate venture capital (CVC)?

?A CVC describes an equity investment?made by a corporation?or its investment entity into high growth potential startups. Corporations realize the potential of?an open innovation strategy, where they invest in external startup ideas rather than only experimenting internally. That is why many corporations have investment funds specifically dedicated to startups. Corporate venture capital?is growing rapidly and now represents?over 20% of global venture.

?Corporate VC investment can have more than one objective, and it is typically tied to its structure:

·?Direct investment from the company balance sheet: the objective will usually be strategic. A company making a strategic investment will want to identify synergy between itself and the new venture, using it as a method for?enhancing innovation and gaining competitive advantage, corporate knowledge, R&D resources, and M&A opportunities.

·?Internal dedicated fund (GP model)?– the objective will?be a combination of financial?& strategic goals.

·?Investment as an LP in other funds –?the objective will usually be financial returns

However, no matter how strategic the formal objectives are, in the long term, ANY investment vehicle should also provide financial returns to survive.

?Final words of advice:?Do your homework! Prepare, learn, and understand?the structure of the CVC,?its strategic goals, what is important for them, and what is not.?It will most likely help you raise the capital you need for your venture.