CVC Investment Schemes

In corporate venture capital (CVC) activities, selecting the right investment scheme is a critical strategic decision. This article introduces the three main investment schemes, highlighting their benefits, drawbacks, and specific examples.

At FIRST CVC, we provide support for the establishment of CVCs, among other services, so if you're unsure about which investment scheme to choose, feel free to contact us.

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1. Headquarters Balance Sheet Investment

This scheme involves making direct investments using the company's balance sheet.

Benefits

• Direct control and influence over the management of the investment target
• Incentives focused on strategic returns

Drawbacks

• The operational burden, such as approval processes, is large
• Subject to the parent company's accounting standards
• Potential delays in accumulating VC investment expertise due to the parent company's HR system

Example: TOPPAN

TOPPAN did not establish a CVC subsidiary but created a Strategic Investment Center under its Business Development Division. The center includes the following departments:

1. CVC Department: Investment execution
2. PoC Department: Conducting PoCs with key investment targets
3. Administration Department: Back-office operations

Notably, even the administrative staff have been given sourcing roles, and the center as a whole is actively engaged in startup development.

2. Subsidiary Balance Sheet Investment

This scheme involves setting up a subsidiary and making investments using the subsidiary's balance sheet.

Benefits

• Flexible human resources systems can be designed
• Avoids "coloring" investments, ensuring more freedom

Drawbacks

• Establishment and operational costs for the subsidiary
• Subject to the subsidiary's accounting standards
• The investment process can become complicated

Example: Japan Post

On November 1, 2017, Japan Post established a strategic subsidiary for venture investments, Japan Post Capital Co., Ltd.

• Annual budget: 5 to 6 billion yen (borrowed from the parent company)
• Investment scale: 200 million to 2 billion yen per company
• Notable point: After 2-3 years from establishment, the number of seconded employees from the Japan Post Group increased, improving the effectiveness of business collaboration

3. VC and Joint Investment Fund

This scheme involves jointly establishing a fund with an external venture capital firm to make investments.

Benefits

• Sharing of investment and operational returns and risks
• Accounting standards and operations based on limited liability laws
• Leverage the expertise of the investment process

Drawbacks

• Complex decision-making process
• Outsourcing costs for the establishment and operation of the fund
• Constraints related to the fund's operation period
• Potential focus on financial returns due to incentives

Example: Tokyu Construction

In February 2022, Tokyu Construction established the "TOKYU-CONST GB Innovation Fund L.P." (total amount of 5 billion yen) in collaboration with major VC firm Global Brain.

• Notable point: Separation of the investment and management sides, sharing risks and returns

Summary

CVC investment schemes vary depending on the company’s strategy, resources, and goals. Headquarters balance sheet investment is suitable when direct control is prioritized, subsidiary balance sheet investment works well when flexibility is needed, and VC joint investment funds are ideal when expertise and risk diversification are valued. Companies should thoroughly analyze their own situations and select the optimal scheme.

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