Basic knowledge of CVC
(Corporate Venture Capital)
Please tell me the difference between CVC and ordinary VC.
Venture Capital seeks out promising venture companies, investment and investing in private stocks through , stock listing (IPO), and M&A (sale) to large companies and so forth, and from this it in an investment in capital gains (gains in stock price) and leads to financial return. CVC (Corporate Venture Capital) is a type of VC, however it is not only a financial return, but also contains business seeds such as technology and ideas that contribute to the launch of new business for a company that becomes the founder of the fund. It is a VC fund as a tool to search for information to acquire as a measure to promote the launch of new business. The beginning of CVC investment in terms of gains as a strategic return was with companies such as Xerox in the United States in the 1960s, and it was already popular in Japan’s biggest companies. In cases such as the “innovation dilemma” in which no new innovation is created from within the company or cases where there is no internal R&D from the central research laboratories at semi-major or medium-sized enterprises, it has become an optimal tool for open innovation in such a situation.
How do you explore investment candidates?
Success or failure of CVC depends on uncovering candidates for investment. If we can not find a good case, we can not launch new business through collaboration. We will explore business plans by venture companies, the personal network of Dr. Satoshi Tomita, president of CVC JAPAN, and introduction from companies and universities of overseas affiliated partners of CVC JAPAN. Tomita has strengths in academic routes and connections with foreign countries.
Does one company alone make a contribution to the CVC fund?
A regular VC fund is often established through investment from multiple companies, but in the case of CVC funds, it is established for the purpose of launching unique new business, so the investee company It is usual that only one company will contribute. To establish this with venture capital and two companies of that company, we call it a two person association. CVC JAPAN is in a position as a partner (unlimited liability partner in the case of a fund under the Investment Limited Liability Partnership Act) to make a minimum of one investment, which is the same as for ordinary VC funds.
Does the fund have a deadline?
As long as it is a fund (investment partnership association), there is always a deadline (excluding company type investment trusts). There are five, seven, and ten year deadlines in many situations. In addition to he deadline of the fund, we may extend the period for about two years by extension each year.
What about the accounting and taxation of CVC funds?
As mentioned above, When taking the form of a voluntary association under the Civil Code, the mark-to-market valuation becomes unnecessary. It can continue to keep the acquired private equity as it is with the book value, On the other hand, when taking the form of Investment Limited Liability Partnership, quarterly mark-to-market valuation is required, with the most recent finance price for the valuation increase and the subjective criterion for the write-off in increments of 25%. As a result, in the settlement of accounts, you will be audited by a certified public accountant. In both cases, we have obligations to do the interim settlement in June, and the final settlement in December. On the tax side, in both forms, pass-through, investors will declare tax returns respectively.
How do you decide investment targets?
This is a very difficult problem, and in establishing and operating a CVC fund, we will hold a discussion between CVC JAPAN and the investee company (customer) who intends to establish it and then decide. Even after starting investment activities, we may adjust the target. First, we analyze the current situation of the company’s business situation, formulate a management strategy, and then decide what direction to take as a new business. Then, we will decide investment targets according to utilization of existing management resources, utilization of strengths by analyzing strengths and weaknesses, future corporate vision, and so forth. Regarding the region, we will consider and decide on the ratio of Japan to overseas, taking into consideration the ability to handle English as well.
Please tell me about the investment decision making process.
The venture capital investment decision methods includes decision by an individual (venture capitalist on the GP side managing funds, people prescribed in the key man clause, etc.), a partnership system decided by consultation of members of the investment committee members (Discussion), a majority vote determined by a majority vote of the members of the investment committee, unanimous decision by members of the investment committee, and others. In some cases, someone such as that on the LP side or Key-man may have a refusal right. As CVC JAPAN, I believe it is a good to make decisions of the two partners’ CVC funds by having members of the investment committee from both the investee company (customer company) and CVC JAPAN decide by majority decision. However, as investment performance will also change depending on the investment decision-making method, we would like to discuss with the investee company (customer company) individually and decide the optimal decision-making method for that CVC fund.
How should I engage with investment target venture companies?
The CVC fund is explained in 1. Instead of seeking a financial return, we will invest in venture companies that are likely to be positive for new business, and by collaboration (alliances) with their target investment venture companies, we will see profit from the next period. The goal is to establish new business. In pursuing such a strategic return, it is necessary not only to make investment but also to actively participate in nurturing and exchanging investment targets including those of the investee company (LP side) after investment. If this is not desired, we will simply invest. Specifically, CVC JAPAN will support the company and the creation of new business from such collaboration (alliance) by making full use of the consulting experience of 180 companies over the past 11 years.
Please tell me about the investment target’s exit method.
There is one main exit method in that the investment company of the fund acquires all shares from the fund, internalizes it, and makes it as a division or subsidiary. Alternatively, you may choose IPO or sell it to other major companies by M&A. By the time the fund’s deadline approaches, for various investee companies we will decide which exit is best and manage it. Also, it is important to assume to some extent what type of exit to make at the time of investment.