The future of corporate venturing looks bright!

1 Ewa Grzechnik September 2015
Entrepreneurs` experience with CVC investors &
Reasons for collaboration between startups and corporates
Ewa Grzechnik
Investment Manager
3M New Ventures September 2015

Study Set-up
 Three main research questions:
― Why do entrepreneurs reach out to corporates for investment?
― How happy are they with their CVC investors?
― How does their experience compare to the experience with VC investors?
 Survey open for 2 months: May 2015 – July 2015
 Part of the Kauffman Fellows (kauffmanfellows.org) program
 Distributed through Corporate Venturing Unit managers to portfolio
companies and directly to startups via Linked-in
 Anonymous responses
 Results to be distributed to all participants
 In total 88 responses collected, 72 qualified responses (from
entrepreneurs)
72
16
0 10 20 30 40 50 60 70 80
HAVE YOU RECEIVED INVESTMENT
(OR FUNDING) FROM A
CORPORATION (N=88)?
No
Yes
Note: significant self selection bias possible. As the study was distributed primarily through CVC managers it is highly likely that they only
forwarded it to their best performing companies and hence these results portray a more positive picture of Corporate Venturing than what is
seen in the market at large.

(1) 80% of startups are happy or neutral about their corporate investors. If they were to choose again, they would either go with the same investor consortium
or even a higher participation from strategic investors.
(2) CVCs seem to give slightly better financial terms than VCs and they fill a capitalization gap in some sectors not served well enough by VCs (esp.
Chemicals & Materials as well as Hardware products).
(3) The future of CVC looks bright. 2/3 of startups believe that CVC investments will increase slightly or significantly over the new few years and most of them
are happy with today´s widely practiced model of doing CVC in-house (e.g. 3M New Ventures, BASF Ventures).
(4) Most startups (80%) wish to find a customer (50%) or a distribution partner (30%) in their corporate investor. Commercialization experience and market
access are the two most popular motives for an investment (from startups´ perspective). Brand and capital access are almost as important. Access to the
corporate`s technical know-how is significant, but secondary.
(5) When it comes to the actual value contributions by corporates, all startups – except for those in enterprise software space – think more could have been
done in providing market access. Especially Chemicals & Materials corporates have helped little in the commercialization efforts and mostly contributed
with technical support.
(6) 90% of corporates do not put limitations on exit any more, which is great news for startups!
(7) 75% of startups deem it unlikely to exit to their corporate partner.
(8) If you are a startup aiming to acquire funding from a corporate investor, plan at least 6 months (better 9) for the due diligence process. Also be prepared to
give up some exclusivities, especially if you are a materials or hardware supplier, albeit not in your core areas.
(9) Startups in areas completely new to the corporate are least likely to initiate any collaboration with their partner. Most successful collaborations are in areas
core or adjacent to corporate and have already started prior to an investment or the collaboration agreement was signed at investment closing.
(10) CVCs are good at many things, but not at board representation and investor acquisition for future rounds. Fortunately, VCs fill these gaps well.
Executive Summary

Demographics of Study Participants (n=64)
14,1% 14,1%
6,3% 6,3%
21,9%
7,8%
29,7%
11,7%
14,8%
11,7%
14,8%
23,4%
8,6%
14,8%
0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
30,0%
35,0%
Consumer
Software /
Internet
Enterprise
Software
Hardware -
full system
(e.g.
vehicle)
Hardware -
component
(e.g.
breaks)
Chemicals
& Materials
Pharma Other
SECTOR DISTRIBUTION
Startup Corporate
2% 2%
8%
2%
11%
2%
57%
17%
3,2% 4,8%
11,1%
49,2%
31,7%
0%
10%
20%
30%
40%
50%
60%
COUNTRY DISTRIBUTION
Since the network of the study´s author is mostly in Chemicals & Materials and Enterprise Software space, these two sectors were most well
represented in the sample. By far most startups and corporates are headquartered in the USA. USA is the dominant investment destination.

1. Investment Motivations and Experiences

Investment Unit Structure & Corporate Motivation
12,50%
25,00%
39,10%
21,90%
1,60%
HOW DID CORPORATE INVEST (N=64)
Through an institutional VC fund (e.g.
Pangaea Ventures)
Through a corporate fund, which is
financially and legally independent
from the corporate (e.g. Intel Capital)
Through a corporate venturing
division with a high degree of freedom
in investment decision making
Through a corporate venturing
division with a low degree of freedom
in investment decision making
I don't know
Corporate VC funds adopt different structures. Most of them are part of the corporate organization but can make independent investment decisions.
Their interest is predominantly strategic (e.g. technology access), financial return is secondary.
13,0%
50,0%
37,0%
0,0%
10,0%
20,0%
30,0%
40,0%
50,0%
60,0%
Financial Strategic Financial and strategic
equally important
Financial Strategic Financial and strategic
equally important
REASON FOR INVESTMENT FOR
CORPORATE (N=57)

Investment Process
9,3%
31,5%
29,6%
29,6%
LENGTH OF THE DD PROCESS
Below 3 month Below 3 month 3-6 month 3-6 month
6-9 month 6-9 month above 9 month above 9 month
Did the corporate put any investment terms, which limited your freedom to
commercialize with other parties? (n=57)
Yes 14 24,6%
No 43 75,4%
CVCs are often known for taking their time to make an investment.
60% take longer than 6 months, which is longer than in the
competitive VC market for consumer and enterprise software
startups. Corporate partners often require exclusivities from their
portfolio companies. But only in very few cases these exclusivities
cover the startups´ core business areas. Chemicals & Materials
companies are by far most restrictive in exclusivities: 12 of all 14
cases, in which limiting commercial agreements were put in place,
came from this sector. Surprisingly, not a single commercial
exclusivity was put forward from a pharma corporate.

Strategic Rationale for Investment
23,7%
32,2%
44,1%
PROXIMITY OF STARTUP BUSINESS TO
CORPORATE
Core: new product in the existing
and well established market
Adjacent: new product in an
adjacent market to corporate's
operations
New: new product in a completely
new market
8,5%
11,9%
49,2%
30,5%
33,9%
CORPORATE WOULD BE
STARTUP’S…
Manufacturer
Supplier
Customer
Distribution partner
Other
Many startups (44%) claim to have developed a product or a business, which is completely new to their corporate partner. At the same time half of
them intend to win their corporate parent as a customer. This might cause some frustration given how challenging it is for many corporates to
integrate new business into their offering.

Collaboration Success & Timing
25,9%
29,6%11,1%
33,3%
COLLABORATION TIMING (N=58)
Collaboration ongoing already
prior to the investment
Collaboration started at
investment
Collaboration started 6 or more
months after the investment
No collaboration has ever
taken place
18%
37%
25%
20%
INTRODUCTIONS THROUGH CVC (N=58)
Not at all, no valuable
commercial contacts
Some introductions, but no
specific projects yet
Moderate, ongoing
collaboration with positive
outlook
Strong, contract with the
corporate and executive-
level introductions
50% startups have an ongoing collaboration with the corporate.
The earlier a collaboration starts, the more likely is it that a startup gets
introduced to the corporate decision makers.
Collaboration has to be started either before the investment or at
investment. If this is not the case it is much less likely to happen at all
(and much less likely that any introductions will be made).
Collaboration is most likely to take place between startups with
businesses adjacent or core to the corporate´s business. Most
startups that started collaboration prior to the investment ran
adjacent or core business relative to the corporate.
11 of 18 companies where collaboration never happened were new
cases. Chemicals & Materials have the highest number of
collaborations started at investment. This is because – unlike for
software companies – they would not invest if there is no collaboration
in place, due to high capital costs and long investment horizons.

Reasons for Investment
7
3
1
2
7
1
7
8
5
6
7
1
12
11
25
17
9
13
15
17
9
4
16
15
19
0 5 10 15 20 25 30
Other
Manufacturing capability and/or capacity
Supply channels
Technical expertise
Lab facilities and R&D infrastructure
Specific corporate project for which our solution can be used
Experienced CVC professionals on the board
Brand
Well capitalized corporate venturing organisation
Investors network for future investment rounds
Better access to debt finance post investment
Experience in commercializing products similar to mine
Knowledge about the competitor landscape
Distribution channels
WHY ENTREPRENEURS ENGAGE WITH CVCS (N=57)
Most Important Stated
Capital
Access
Specific Project
Commercialization experience
Brand
Technical
Supply Chain
Entrepreneurs engage with corporates mostly because they want to get access to their commercial expertise and distribution channels. Brand and
access to capital are as important, while technical know how is significant, but secondary.

Expectations vs Real Contributions from Investment
7
3
1
2
7
1
7
8
5
6
7
1
12
11
25
17
9
13
15
17
9
4
16
15
19
Other
Supply channels
Technical expertise
Brand
Capital
Access
Specific Project
Brand
Technical
Supply Chain
Have corporates really contributed post
investment?
Not at all To some extent or to
significant extent
38% 44%
28% 58%
45% 45%
42% 23%
37% 53%
20% 65%
26% 62%
25% 62%
29% 49%
42% 35%
19% 77%
54% 21%
42% 22%
A cross study of contribution to startups development relative to corporate´s sector has shown that all startups – except those in the enterprise
software space – think that corporates have contributed too little in the commercialization process and market access. Corporates in Chemicals &
Materials have the best track record in terms of sharing technical expertise & capitalization, but the worst track record in terms of enabling
commercialization of products and helping with manufacturing.

Company Development post Investment
2
10
30
12
3
0
5
10
15
20
25
30
35
Much worse than
planned
Worse than
planned
As expected Better than
planned
Much better than
planned
DEVELOPMENT OF THE COMPANY
(N=57)
24,1%
36,2%
27,6%
12,1%
3,5%
28,1%
47,4%
21,1%
0,0%
10,0%
20,0%
30,0%
40,0%
50,0%
Seed- prototype building Early stage - pre
revenues
Mid stage - acquiring
first customers/first
customer in place
Late stage - multiple
customers, break even
COMPANY DEVELOPMENT OVER TIME (N=58)
Time of Investment Today
Most companies have developed as expected (>50%).
Investments from CVCs have helped startups grow from seed to
mid stage companies.

CVC Participation in the following Rounds
Not Neutral Yes
All sectors 20% 30% 50%
Chemicals &
Materials
31% 27% 42%
How likely is it that you would seek funds from the same CVC again?
Lack of CVC participation in the following investment rounds
(esp. if a startup is no longer strategic) is one of the startups`
largest fears. However, in the sample, only below 1/3 of
CVCs did not participate in the following investment rounds.
Did the CVC invest in all investment rounds following its initial investment? (n=59)
Yes 37,3% 22
No 27,1% 16
We did not have any further investment rounds 35,6% 21
Startups are generally satisfied with their investors and
would seek funds from them again.
The level of satisfaction with the Chemicals & Materials
corporates is slightly lower than average.

Exit Scenarios
Have any significant limitation on the exit been put? (n=57)
Yes 10.5% 6
No 89.5% 51
Has your company exited yet? (n=57) *
Yes 10.5% 6
No 89.5% 51
* 1 sale to CVC parent, 2 sales to another industrial company, 2 sales to a
financial partner
17
24
12
2
0
5
10
15
20
25
30
Very unlikely Rather unlikely Rather likely Very likely
LIKELIHOOD OF EXIT TO THE CVC
PARENT (N=55)
Exit to the CVC parent is unlikely (75% responses), i.e. startups
should not count on this exit path and corporates should not restrict
the exit path for the startups
Limitations on exiting the company to the best buyer can be
extremely detrimental for ventures. Fortunately, only 10%
corporates put any restriction on the exit.

2. Experience relative to VCs

VCs Activity in CVC dominated Spaces
CVC Capital fills a gap in the market for undercapitalized Companies:
70% of CVC backed entrepreneurs either did not have a chance to get
VC money at the investment or the funding was not sufficient (esp. in
Chemicals & Materials space, which is a very challenging space for VCs
– because of long investment horizon and high capital requirement).
VC investment terms are often less attractive than CVC investment
terms.
28%
56%
15%
FINANCIAL TERMS: VC VS CVC
Less attractive Less attractive
Same Same
More attractive More attractive
Do you have a financial VC investor on board?
Yes 60.4% 32
No 39.6% 21
The majority of startups would want the same investors on board
as they have today or even a more significant participation from
strategic partners. Close to 2/3 have a VC investor and those than
don’t are often in the Chemicals & Materials space.
19,6%
41,2%
35,3%
3,9%
FUTURE INVESTOR PREFERENCE
More financial investors
Same
More strategic investors
I would not have taken any
investor on board

Expectations vs Contributions from CVCs and VCs
7
3
1
2
7
1
7
8
5
6
7
1
12
11
25
17
9
13
15
17
9
4
16
15
19
Other
Supply channels
Technical expertise
Brand
Capital
Access
Specific Project
Brand
Technical
Supply Chain
VC CVC Neither
0% 61% 25%
27% 47% 20%
24% 48% 24%
45% 10% 14%
67% 10% 20%
50% 27% 17%
17% 48% 24%
50% 17% 23%
0% 52% 28%
0% 24% 48%
13% 57% 23%
7% 31% 24%
0% 41% 28%
If CVCs want to become even more value adding investors, they should staff more professional directors in the boards of their portfolio companies.
Also they should work on building out their investor network and making it available to their startups.

3. Future of CVC

Startups` Perspectives on the Future of CVC
3,9% 5,9%
23,5%
43,1%
23,5%
Decrease
significantly
Decrease slightly Stay at that level Increase slightly Increase
significantly
CVC ACTIVITY GOING FORWARD (N=51)
2
8
16
16
33
13
21
23
20
19
9
19
26
18
12
12
5
15
0 5 10 15 20 25 30 35
Corporate Venturing division investing in
startups (e.g. BASF Ventures)
Independent VC funds, which corporates
invest in (e.g. Emerald Technology
Ventures)
Accelerators/company building programs
associated with one corproate partners (e.g.
Wayra/Telefonica; Merck Incubator;…
Hybrid accelerator programs involving
multiple parties (Barclays Techstars
Accelerator)
Corporate competition challenges with cash
rewards (e.g. $50k)
Collaboration projects with corporate
partners with engineering fee committment
DIFFERENT MODELS OF COLLABORATION
Very attractive Somehow attractive Not attractive
CVC future is looking bright – 2/3 of startups believe that CVC activity will
increase slightly or significantly.
The commonly practiced model of doing Corporate Venturing in-house is the most preferred one by the startups. Outsourcing VC activities to a third
party fund is not so welcome, neither is running competition contests. This is likely a result of a strong self selection bias mentioned on page 2.

For questions or comments please contact me on twitter at @ewencja.

The future of corporate venturing looks bright!

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