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Here’s what CVCs see in the early stage

How VCs and CVCs approach their work is different, writes Nicolas Sauvage of TDK Ventures.

How VCs and CVCs approach their work is different compared to the other corporate strategies. As I describe in “What you need to unlearn to succeed in venture capital” (VCJ July 22, 2021), the standard corporate mindset relies on choosing investments with high predictability for “good” or “reasonable” returns. Doing so avoids both “poor” and “exceptional” returns in favor of consistency or lower risk.

VC and CVC, in contrast, operate under a paradigm of comparatively very low predictability and much higher risk. Most investments return little or even nothing, and VC portfolios are almost universally reliant on 10 to 15 percent exceptional investments returning more than 90 percent of the fund.

VC Venture Guest Column
Nicolas Sauvage, TDK Ventures

Furthermore, CVCs have a unique role in their tie to a corporate parent, which invests under a corporate strategy while still operating in a high-risk environment of venture capital and entrepreneurs. CVCs must balance a loose connection with their parent company, as TDK Ventures operates with TDK Corporation.

That relationship is established through knowledge sharing and collaboration building, which is inspired by our value of deep insight and one team. Still, it must maintain the necessary autonomy to succeed, including making decisions based on low predictability, with the potential for phenomenal return.

The low predictability makes early-stage investing not for the faint of heart, as it is exceptionally difficult to identify upcoming leaders in innovation and paradigm-shifting technology development. Some metrics are beyond quantification, especially given that any tech product may take five or 10 years to make. Being first to market would require crystal ball-like foresight.

At TDK Ventures, we seek to identify early-stage start-ups that align with our core values, and in doing so, we believe they have the potential to bring about disruptive positive change. As you will often hear us say, it starts with the entrepreneur. After the due diligence on the technology and business opportunity of a start-up, we have found one of the best indicators of success is the entrepreneurs themselves and whether they possess the necessary passion, special insights and tenacity to make their vision a reality.

Investing early provides a unique understanding and helps embrace disruptive technologies and changes. For VC, this means more “shots on goal” to find the exceptional projects that will return the fund. For corporations, learning from investing in these winning projects with their CVC arm allows a chance to shift returns to the right, leveraging disruptive change with much-reduced risks. In other words, the leap of faith for corporations is that early-stage investment is much less costly than being late to market.

In many ways, investing in early-stage allows one to place multiple bets on what the future might become. This is why we join entrepreneurs in their vision of the future. Each unique entrepreneurial vision paints a novel and sometimes contrarian view of the future and how different the world might look.

As investors, we can then choose which vision we would wish to see along with which entrepreneurial passion we believe can see that vision bear fruit. Those that prove correct, and, in the case of us at TDK Ventures, those that align with our values, will contribute to society and effect positive change. Doing so, well before it is obvious, creates the context for exceptional return and nurtures the possible futures we see as beneficial to all of humanity.

I see our duty as a CVC to find the winners of the future and invest in them early in search of the “next Tesla” or the “next Xiaomi.” By examining and embracing contrarian views, we seek out start-ups that bring strategic insight through their vision and depth of knowledge. I am convinced of the high correlation between such insight and VC-type financial returns, where in contrast we would probably learn little from those that don’t become category leaders.

In either case, I am betting on riskier investments in early-stage start-ups being the least risky way to embrace an uncertain future.

Nicolas Sauvage is president of TDK Ventures