Corporate Venture Capital and Proptech - A perfect marriage?

Corporate Venture Capital (CVC) gets a bad press. Pilloried internally within large conservative corporate machines as “laws unto themselves” and with a budget to burn on start-ups, they equally, are regarded by the VC world as risk averse, perpetually late to the investment party and unable to consistently stick to a strategy.

At The Proptech Connection, we have worked with nearly 100 different global CVCs in different guises, and we have a very different opinion. Yes, they can have challenges internally in managing expectations about strategy and risk, but if this is addressed with boards directly, they have some compelling advantages which can make them the “perfect investor” for many Proptechs as they seek to grow and a great opportunity for traditional corporates to embrace innovation and deliver returns.

CVCs in 2024

With some high-profile closures or mothballing of CVCs in 2022 and 2023, you may assume that the third major route for innovation in corporates (alongside R&D and business acquisitions) was a declining trend. According to CB Insights, 2022 saw the creation of over 100 new CVCs set up and $100 billion invested by CVCs alone in 5,000 investment rounds.

In terms of actual investments, we are seeing a global move towards direct investments in start-ups rather than via funds with AI being an obvious focus.

Interestingly, Pitchbook estimates that 54% of funding for AI rounds came via the CVC route in 2023 showing the importance of the CVC element in funding this innovation.

Differences in CVCs

Having worked with CVCs across sectors and regions we can honestly say that no two CVCs are the same.

The biggest differences we see are:

• Investment Thesis and Strategy

• Set Up and Governance

• Time Horizon

The investment thesis is where we see the largest variance between CVCs. Some leading CVCs see their role as purely strategic with their focus on disrupting their core business or providing a route for proof of concept/ pilots within individual departments. Others operate on a “naked” financial model - very similar to most VCs- where they are judged on investment metrics alone.

Other areas of variance we see are where CVCs sit within a business and their reporting lines. We have seen CVC units operate independently whilst others have been embedded in Innovation Teams, R&D functions but also within Finance functions.

Time Horizon is also a key consideration for CVCs. Whilst VCs will often have a ten-year time horizon for duration, CVCs can be more flexible. Some have no definite timelines for an investment holding but it is important to manage exceptions internally as traditional corporate reporting frequency (such as quarterly board meeting cadence) can be inappropriate for demonstrating progress for a higher-risk start-up business.

What is the Optimal Setup?

We have been asked by CVCs for the optimal set-up for their new CVC. This involves a large amount of discovery and unpacking the role of the CVC within the wider business, but we see 3 main areas to focus on:

• Decision-making

• Governance

• Budget

The best CVCs have a clear and simple decision-making process. Ideally an IC or equivalent that is empowered to invest funds within a wide mandate. This group (ideally 3 or 5 individuals) should have a strong understanding of risk, how to engage stakeholders and be accountable to senior management. An ideal setup would include one member from the CVC arm, one independent member and one Senior Manager/ Board member from the core business at least.

Governance is more nuanced as most CVCs will have less than 10 staff in total so may need to sit within a wider function for reporting lines. A completely independent CVC fund away from the business (the business as the investor) may be the cleanest structure but may limit some of the collaboration with the business units as the CVC gets forgotten about.

One aspect we see the more effective CVCs do well is pre-allocated multi-year budgets. A CVC, if truly embracing innovative solutions cannot be following the same annual budget process as other business line priorities especially when follow-on investments are essential for the portfolio to deliver.

Advantages of CVCs to Proptechs

When we work with Proptechs and ask them to describe their ideal investor they will often ask for an understanding of the business, a long-time horizon, resources, and staff to support, introductions to potential customers and enterprise validation. These factors, which a well-run CVC can provide, can really help transform and grow a Proptech business.

At The Proptech Connection, we have found CVCs from a variety of backgrounds to have a strong understanding and affinity with the Proptech space. The logical ones such as construction companies, commercial real estate owners and IT companies have identified problems and use cases in their businesses that can provide immediate scale and validation for the Proptech.

Less obvious routes have included hotel and leisure operators, logistics groups and insurance businesses which can help push Proptech into different channels or networks to achieve product development and scale in different ways.

Conclusion

We expect to see CVCs continue their growth in importance in funding the Proptech sector. The industry knowledge, ability to embed new technology in large enterprise projects and the scale of innovation required in some of the more traditional sectors such as commercial real estate and logistics.

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