When large organizations set aside a pool of capital to be deployed over many years as equity investments into startups, we call this corporate venture capital or corporate VC. These programs are typically expected to generate attractive financial returns over their lifetime, but the underlying investments are expected to have strategic relevance to the core business of the larger organization.

Image source: Shutterstock/noina
The amount of capital that has gone into corporate VC globally increased between 2019 & 2020, from $59.1bn in 2019 to $73.1bn across 3,359 transactions, despite the tumultuous effects of the COVID-19 pandemic.

Source: CB Insights
Unfortunately, research by CB Insights also found that ⅓ of corporate VC programs established in 2013, had become zombies by 2018 – they weren’t committing capital to new investments & in some cases the investment team no longer even existed. In a South African context, we’re aware of at least one corporate VC program that committed well over R100m into new startups investments between 2018 and 2020 and now has no one looking after those investments and no new capital commitments. Most corporate VC programs fail to meet stakeholder expectations and they’re eventually defunded.
When we launched the Imperial Venture Fund (IVF) corporate VC program with Imperial (JSE:IPL) in July 2019, we wanted to ensure that we avoided the obvious stumbling blocks. Two years later, the IVF has a portfolio of 9 startups, no write-downs, and has made 2 follow-on investments.
We thought we’d share some of the things that we think we got right and some that we got wrong and necessitated a change as things developed over the two years.
Some of the things that we got right:
- Investment theses – At the outset, we prepared a fund investment thesis in collaboration with many different internal stakeholders at Imperial. Subsequently, we prepare a service area-specific investment thesis for each logistics and supply chain service area that we’re looking to invest in, like road freight or supply chain visibility. They keep us honest about what the IVF’s objectives are and why we’re investing in a specific area. This also makes it much easier for us to source opportunities as fund managers because we know exactly what we’re looking for.
- No incubation – The IVF only invests in externally started and founder-managed startups less than 5 years old. It’s tempting to use the corporate VC program to fund internal projects that are otherwise struggling to get funded by business units. Internally incubated opportunities typically struggle to get economic & social incentives aligned and employees usually don’t make good entrepreneurs.
- Committed capital – The IVF is a $50m fund with a $20m first close or capital commitment. The committed capital is not affected by what is happening elsewhere in the Imperial group & the IVF doesn’t need to get involved in annual budget discussions to determine how much money we’re going to get in a specific year to invest. This ensures that the corporate VC program has guaranteed funding over its 7-10 year lifetime and that the fund manager can focus a consistent amount of resources on more productive pre-and post-investment activities.
- Timelines for results – The IVF invests at the Seed and Series A stage, into startups that are less than 5 years old. This necessarily means that the startups are sub-scale, haven’t fully solved for product-market fit, and are resource-constrained. Our internal stakeholders at Imperial are continuously reminded that early-stage startups can’t solve fundamental business problems at scale for large organizations. They’re immature and their ability to execute is limited. They need time and space to develop but if you give it to them, they can become very valuable, both financially and strategically in the case of corporate VC.
- External fund manager – The IVF is a single-investor venture capital fund that is managed by an external fund manager, Newtown Partners, in a typical 2% management fees, 20% carried interest VC arrangement. The external fund manager acts as the go-between between Imperial and the IVF startups and performs pre-and post-investment activities with the IVF startups. Imperial does not manage or otherwise exert influence over these startup investments directly. This ensures that the portfolio companies get all the benefits of taking capital from a corporate investor, like market knowledge, market access, and purchasing scale, without the disadvantages, like corporate antibodies, revenue pressure, IP leakage, and conflicts of interest. All of the startups in the IVF portfolio had initial concerns about taking money from a corporate, notwithstanding the value that Imperial would bring to the relationship. These concerns were overcome when we explained the external fund manager’s role and how we worked with them and Imperial pre-and-post-investment.
- Speed of investment approvals – The IVF investment committee (IC) is comprised of the Imperial Group CEO and the Group Head of Digital & IT, as well as two partners from Newtown Partners. The IC makes investment decisions by consensus & does not need to refer investment decisions to any other governance body at Imperial. The IC meets monthly and can also approve investments electronically by round-robin poll. It is empowered to act, but accountable to the Imperial group executive committee and board.
Some of the things that we got wrong:
- Lead vs follow investment relationships – When we launched the IVF, we thought we’d invest predominantly in Africa and that we’d be able to get a good mix between lead (typically more effort, time & cost) and follow (typically less effort, time and cost) investment opportunities. We subsequently found that there are few sophisticated lead investors in logistics and supply chain globally that are willing or able to share the investment rounds. The transactions that we lost out on were a result of another lead investor replacing us on the cap table. We’ve had to lead almost all of the transactions that the IVF has participated in, in order to get the terms and valuations that we wanted.
- Cheque sizes – We had originally intended to write first cheque sizes of up to $1m out of the IVF, but we found that some of the logistics and supply chain service areas that we wanted to invest into were further along the disruptive innovation cycle than we had anticipated, and in a low-interest-rate environment there is more cash looking for lower yields. Round sizes increased and we had to write larger cheques to participate. I don’t think that you can create a balanced portfolio of globally competitive startups with less than $20m and this apparently applies to corporate VC as much as it applies to traditional VC.
We’ve had lots of fun with Imperial and the IVF over the last 2 years and we’re looking forward to continuing to learn and build on the early successes that we’ve had.
If you’re thinking about starting a corporate VC program or you’re struggling to get it humming, feel free to get in touch. We’re always willing to share our thoughts.