CVCs and Financial Returns.

Thorsten,

We are raising our Series B now. We have a great lead investor. One of our strategic partners and suppliers also wants to invest: they want to participate with $4.5 million, almost 30% of the round. I’m not so much concerned about the signaling effect, but about the alignment of investor interest: assures me they are an institutional investor with a focus on financial returns. What’s your take?

Every CVC I know is interested in financial returns. You cannot invest your corporation’s money, which is maybe a public company, and tell your CEO or your shareholders that you don’t care if you lose the money, or point to some vague strategic benefit. Because usually, the investment managers are not the P&L managers and cannot claim strategic wins and revenue growth that they have only directed second-hand.

But there is a simple way to assess how serious these CVC investment managers are about financial returns:

  1. What is the investment manager’s personal GP commitment?
  2. What is her carried interest?
  3. What is her attitude towards her position and what is her character?

Regarding 3.: Is she building an investment track record for a continued place and career in venture capital investing? Or is he building a partnering, dealflow, product insight, M&A, etc. track record? Does he want to network for future dealflow and VC relationships or does she network for a position as Chief Product Officer, or Head of M&A, etc.? Is she genuinely interested and discussing portfolio construction, venture mechanics, and fund-raising dynamics? Or is he mostly talking about valuations, the share series names, and his co-investors?

If the CVC does not incentivize and hire financial-returns-oriented senior management, then they do not have a genuine interest in financial returns.

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