CVCs and EMs Are Changing the Venture Ecosystem—Together

When it was founded in 2017, the venture capital (VC) arm of consumer finance firm Synchrony focused on Series A and B deals. That emphasis changed in the last year or so. “When we looked at the funnel, we weren’t seeing quite the robustness around diverse talent that we wanted to see,” says Trish Mosconi, chief strategy officer and head of corporate development at Synchrony.

Mosconi and her team decided they needed to invest earlier in the cycle. They weren’t just looking at younger startups—they also began working with emerging managers who give Synchrony access to promising companies run by diverse founders. “We believe we can help grow these companies through our investment in the fund, and they can help us as they look to evolve in different areas,” Mosconi says.

Synchrony isn’t alone, either in its involvement in VC or in its interest in emerging managers (EMs), whom Silicon Valley Bank defines as operating three or fewer funds of less than $100 million in assets under management. Corporate venture capital (CVC) activity is more common than many in the VC community realize—at least in part because many CVC investments fly under the radar. At SVB, for instance, we see that roughly half of the most active CVCs hold limited partner (LP) positions in funds. And amid an increasingly fragmented VC landscape, CVC firms are seeing emerging managers as ever more attractive partners. In recent years, CVCs including Synchrony, Goldman Sachs and others have made public commitments to invest with EMs.

“We are looking to get involved and do our best to help these portfolio companies grow. If there are true commercial opportunities for Synchrony, we’re going to be there.” - Trish Mosconi, Synchrony

Synergies for emerging managers

For the last decade, we’ve seen emerging managers look to CVC firms as potential early customers for their portfolio companies. However, the relationship has much more to offer. Emerging managers are considering the following benefits to partnering with a CVC firm:

Commercialization. As early customers for portfolio companies, CVC firms’ corporate parents offer an opportunity to test the startup’s product or service with a strategic audience willing to give feedback. While CVC firms may invest beyond their parent’s industry, they typically seek to help portfolio companies commercialize their innovations—and sometimes even acquire them. “We are looking to get involved and do our best to help these portfolio companies grow,” says Mosconi. “If there are true commercial opportunities for Synchrony, we’re going to be there.”

Speed and flexibility. CVC firms are able to conduct due diligence and make investment decisions quickly—at least in part so they can follow through on priorities set by their corporate parent and customers. For example, in June 2020 Paypal Ventures committed to investing $530 million in Black and underrepresented minority businesses and communities. By the fall, it had already begun writing checks. CVCs including MassMutual and Bank of America have acted with similar urgency.

Industry expertise and connections. Like Amex Ventures and Synchrony, many CVC firms look to invest—either directly or via VC funds—in industries adjacent to their own. While emerging managers boast their own expertise, they can benefit from the established industry relationships and knowledge—from distribution channels to branding—that CVCs have to share. “They often get the value of what we bring to the table before we do,” Sanghi says of emerging managers.

Reputation. The CVC sector includes the venture arms of some of the world’s best-known companies. An investment from one of these firms can create a reputational halo, as other limited partners and the VC industry at large can see the CVC’s investment as an indication of institutional investors’ faith in the fund. “We can help shine a spotlight that helps emerging managers solidify and grow their place in the venture world,” says Mosconi.

Opportunities for corporate VC investors

CVCs participated in a quarter of all US VC deals in the second quarter of 2021—up from 16% in the same period five years earlier. Here’s a look at what CVC firms are considering when it comes to LP relationships with emerging managers:

Access. Corporations get involved in the innovation economy in many ways—through accelerators, acquisitions, their own research and development efforts, and, of course, early-stage investments. Investing with EMs allows CVC firms to broaden their reach even more. For instance, an emerging manager might provide access to an innovation in a different geographic area, niche industry or new technology. Some EMs offer extremely specialized investment theses based on their own experience as operators (or investors), which can be appealing to a CVC investor looking for disruption.

“Getting exposure to diverse emerging managers has been phenomenal for us.” - Harshul Sanghi, Amex Ventures

Diversity, equity and inclusion (DEI). We see more diversity in the emerging manager ecosystem as compared to the rest of the VC industry; their networks and portfolio companies also tend to reflect that diversity. This matters to CVC firms that are passionate about supporting DEI. Their corporate parents often have long track records of championing diversity, and investing with a diverse EM can be an additional way for a CVC firm to express its values. “Getting exposure to diverse emerging managers has been phenomenal for us,” says Sanghi. “We have a very purposeful strategy to gain more exposure to and invest in more underrepresented minorities. That community is another aspect of what EMs bring to the table.”

Performance. CVCs don’t invest in emerging managers solely out of the goodness of their hearts. They’re also looking for returns—and they believe that EMs can provide them. While the EM category is still in its early days, a 2020 paper by Cambridge Advisors reported that new and developing fund managers “consistently rank as some of the best performers” in VC.

Shaping the future of venture capital 

Given the natural synergies between CVC investors and EMs, we expect these relationships to grow stronger and more numerous in the years to come. As the venture ecosystem continues to evolve, new managers will enter the market, bringing unique skillsets, track records and expertise. Relationships between these emerging managers and CVCs can help diversify and strengthen the innovation economy, as thematic or industry-focused partnerships expand networks and, ultimately, produce returns.

To learn more about how SVB helps Emerging Managers and Corporate Venture groups be more successful, visit www.svb.com/investor-solutions.