Israel is ready for CVCs

Corporate Venture Capital or CVC is mostly referred to a subsidiary or department of a large corporation that invest in startup companies, by using the funds of such corporation. CVCs are dated back to the mid twentieth century, featuring big conglomerates like Dupont, Dow, Ford, GE, and others. In Recent years a growing number of CVCs have started operating in Israel, some foreign, such as Google Ventures, Salesforce Ventures, and Intel Capital, Samsung, and Qualcomm but many others are local, among them are Irani Group (Factory 54 – Fashion), Tidhar (construction technology), Doral (Renewable energy) and Tnuva (Food tech). These corporate investment arms have now become a viable alternative to the more traditional VC funds.

Efrat Shuster

CVCs have started to grow and take a bigger and bigger stake in the investment scene, especially after the tech industry has started to gain its momentum. According to Global Corporate Venturing an estimated total of $69.6bn was invested globally in more than 1,500 corporate-backed deals, just in the first quarter of 2022. higher than any first quarter so far.

In the last few months, we have been warned by global market leaders, investors, VCs, and various experts, about the deceleration in investments in startups. This downtrend is already affecting the start-up nation, leaving startups in Israel in grave concern of their current and future fund raising, giving much bigger thought to their funding strategy. Startups in Israel are familiar with road shows, meeting and connecting with VCs and potential angel investors, but it seems that most avoid approaching CVCs, especially during their early-stage rounds. It’s time to change that!

Historically, CVCs tended to invest in fields that correlate with their parent company, however as time progresses, there are more and more CVCs interested in new sectors and innovation and some even have more financial tendencies than strategic. Still, synergy between the startup and CVC might lead to some benefits such as the ability to preform pilots on the CVC’s parent company's locations and to have them open markets and new sectors with ease.

There are few misconceptions about CVCs and their investments strategies. These misconceptions revolve around three major issues for a startup: 1. Timing – when to approach a CVC for investment, taking in mind the stage in which CVCs invest; 2. Time – how much time does the startup have for completing the funding round, and how much time will it take to close the investment with the CVC; and 3. Exclusivity – strategic investor or obstacles in working with the CVC’s parent’s competitors.

The tendency of startups is to approach CVCs at a later stage, in more advanced rounds of funding. This could be because of reasons within the startup, but a dominant cause is because of the wrong notion that CVCs only invest in later rounds and more advanced companies. However, in a recent survey of CVC leaders, performed by Silicon Valley Bank and Counterpart Ventures, they have discovered that 74% of the (CVCs) respondents invest in earlier stages (pre-seed/seed and up to Series B) than the common assumed later stages.

Israel and Israelis are known for their fast pace. Closing deals quickly, especially investments, is crucial for most startups, having to rely on the funds to keep on maintaining and advancing the company and their product. Since a CVC is usually a subsidiary of a large company, there is concern that closing an investment may take longer than with other investors; large companies usually have more people and departments that need to authorize and approve each transaction. CVC investments may be quicker than what most startups think, as suggested by the SVB and Counterpart’s survey report, nearly 50% approved deals of their initial meetings, some even completed deals in thirty days or less.

The time it takes to close an investment and the stage of the company in which such investment is closed, are important, but not necessarily as important as the identity of the investors. Startups inclination to seek strategic investors should steer them toward CVCs, however concerns that the parent may be competitor of the startup or its potential customers, may deter startups from even seeking such investment.

While locally the traditional VCs are still dominant in the investment playfield, we are starting to see more serious CVCs taking chunks of the investment pool. For many Israeli Startups this might be the perfect combination of funds, using not only the amounts of the CVC’s investment, but also use of the resources that may be available to them by the CVC or its parent company following such investment, like access to new sectors, new customers, and new markets.

Efrat Shuster is a cross-border M&A and commercial lawyer, she is the founding partner of Shuster Law Firm and a member of Neome – Women Investment Club