I talk with a lot of founders with a climate tech startup, and one question that surprises me more than it should, given how often it comes up, is this: won’t corporate venture capital steal my soul? Obviously, I’m paraphrasing here, but you get the gist. Way too many founders think that a corporate VC will act as some dementor-level overlord while turning the founder into a husk of a human being. I have no idea where they get these ideas. Still, I imagine there are some apocryphal stories going around where the founder didn’t get the deal they wanted or the product ultimately didn’t align with the corporate vision.
This isn’t just me pushing for more investment in sustainable startups, although I’m totally on board with the concept. This is me echoing an Ernst and Young survey that found that 25% of CEOs saw social and environmental ethos as the reason they’re investing on the CVC level.
Here’s some food for thought. 2021, which admittedly was not a great year for lots of things, was a blockbuster for VC investing. According to Pitchbook, corporate funds put over $23 billion in the climate tech sector alone. When you dig a little deeper into the numbers, this was double the amount that CVCs invested in 2020, beating out the rest of the corporate VC deals by a whopping 85%. All this cash was spread out over 210 deals, up from 165.
What’s the incentive for corporations to throw all this cash at a climate tech startup? I’m sure there’s some level of tree-hugging altruism involved. But I’d guess that the broader imperative is that stockholders—even the big, cold-hearted institutional investors who really call all the shots—are demanding greater attention to innovation that will decarbonize these industries and slow down the inevitability of a warming planet. I mean, all the money in the world is pretty much useless if it’s too hot to grow food crops.
What’s the Difference Between VC and CVC?
I would think long and hard about turning down any investment capital. …But I understand at the granular level how both types of funding work and how the investor’s ultimate goals are not the same. So, I’m going to touch on investor-driven VC funds, but the focus will be on the corporate VC side.
When founders start making the rounds looking for funding to build their companies, they typically approach angel investors first. These are wealthy individuals who invest in startups. When you’ve outgrown the angels but still need more capital to grow and scale, the VCs are the next level of investors. These are funds that specialize in a given industry (climate tech, to be exact); they might buy a stake in your company.
As part of the deal, the VC usually wants a seat or two on your board, as well as advisory or oversight roles. Additional funding rounds continue to add capital, board seats, and occasionally too many cooks in the advisory kitchen. But everybody’s eye is on the same prize: an IPO or an acquisition. The deal closes, and everybody leaves with a big check and a smile.
CVCs Are Like Seraphim: Supercharged Angels
Let’s continue with the angel investor analogy. These individuals are critical in bridging the gap between bootstrapping your company and getting real money from a VC. But, as I said a minute ago, the VC is looking to maximize their investment and cash out so they can move on to the next thing.
Corporate VCs are like seraphim—the top of the angel hierarchy. They’re absolutely buying into your idea and are willing to invest a great deal of money. But they’re also taking the long view of believing that your technology will find synchronicity with their existing product line. They believe the relationship will be mutually beneficial in ways that extend beyond the finances.
Think of it this way: when a CVC comes calling, they’re looking at your product or service as a sort of extension of their research and development team.
Why a CVC Would Be Interested in a Climate Tech Startup
Here’s an example. You have developed a technology that converts worm castings into a low-carbon alternative to kerosene or gasoline. My hypothetical company is an airline that’s fully committed to finding ways to lower our carbon footprint. But our R&D department is spinning its wheels trying to find a cost-efficient way to turn biological waste into jet fuel.
So I’m looking for outside opportunities that might jumpstart my R&D. I might even bring in a whole new team if I can find a promising new technology. I’m more interested in getting the technology right than I am in being the one to develop it.
Because the VC/CVC universe is as close as any other industry, and I’ve got my ear to the ground, I hear that your company has figured out how to turn worm poop into a fuel source—and I want in while you’re still fine-tuning the product and scaling it up.
Reasons to Invest in Worms-R-Us
There are two fundamental reasons that Kirk Air would want to invest in Worms-R-Us. The first is that I want a stake in your business because I believe you could have the next hydrogen fuel cell on your hands with my funding and guidance—and I definitely want a piece of that disruptor pie.
Second, your technology meshes with what my R&D team is trying to do. I already have the infrastructure in place for you to scale your innovation so that it makes financial sense. Maybe I’ve been looking at dead leaves and already have access to thousands of acres of worms and microbes that you need. I’ve also got the production and test environments set up, so if you decide to join my company, that’s capital you don’t have to spend on infrastructure.
Oh, hell, there’s a third reason I’m interested. Because I don’t want Elon Air or anybody else to have access to this technology, I’m willing to pay a premium to keep it out of my competitor’s hands.
When the technology is scaled up and my planes are running on the microbes that live in worm poop, I’ll have dibs on the product. I can join you in either spinning off the company in an IPO or consider absorbing you into my business.
Differences in Value Creation
In short, a VC is looking for value creation that is purely financial. A CVC is generally more interested in the value created by synergies between the company and the climate tech startup.
This value is shape-shifting; it can be focused on sharing technology, then morph into developing business partnerships and sharing knowledge and information. Alternatively, it can focus on standing on its own in any of these capacities. The point of a CVC investment is to focus on strategic value first. Anything else that comes along is just a bonus.
How the CVC Deal Works
When you’re dealing with VCs, any number of investors and funds are ultimately invested in your company. A CVC operates differently; here at Kirk Airlines, we are not interested in being one partner among many. I want it all, so typically the CVC comes in as the sole Limited Partner.
Here’s what I’ll do for Worms-R-Us. First, you’ll have a credit line, or a lump cash sum, to work with. We’ll also provide managerial and marketing expertise and strategic planning, all in return for an equity stake in the company—just like a VC.
Again, the strategic value of the partnership is the primary focus, not direct financial gain.
Is There a Downside to a CVC Investment?
Of course, there’s the potential for choosing the wrong CVC partner. There is tremendous pressure on carbon-heavy companies to invest in carbon-reducing technologies. So for the founder of a climate tech startup, all this enthusiasm seems like a gold mine. This is a good time to revisit the funding food chain and see where the pressures to go green are coming from.
Stefan Gross-Selback, Global Managing Partner at BCG Digital Ventures (where they invest and incubate on both VC and CVC participation), says that major investors—BlackRock and Sequoia Capital come to mind—have warned their partners that funding may well dry up if they don’t come up with serious sustainability strategies.
So these companies are on the hunt for a climate tech startup that sort of fits the bill. But they don’t always do the due diligence that confirms the target’s fit for the company or complete a solid valuation.
What’s worse for a CEO looking for a startup sustainability partner—not jumping on the green bandwagon or losing Tiger’s money when they bet on the wrong startup? Let me put it this way: being smart about choosing a partner doesn’t close the door on future funding. Losing money on the wrong technology is never a good idea.
So from the founder’s perspective, here’s a pro tip: If you’re in the climate tech startup space, don’t get in bed with a company just looking for a place to park a check. Do your own due diligence to make sure you’re not risking everything on the wrong partner.
What’s the Main Objective for Your Climate Tech Startup?
With all this said, a CVC isn’t for every founder. The reality of a CVC deal is that you lose a lot of autonomy with this sort of deal. But the upside may well be worth it; you and your team can innovate and create without the constant worry of paying the bills and finding customers. On the other hand, do you believe your technology is a true game changer? Are you confident you can raise the money you need to scale the product and find the market? If so, then maybe you’re smart to say, “Thanks, but no.”
Make sure you’re aware of all your options when it comes to whether your partners are several VCs or one CVC. And one more thing—if your technology really is all that, the CVC may want to just buy out all the other investors. So there’s a big win for everybody.