“Hey! Teacher! Leave them kids alone!”
That’s a lyric from Pink Floyd’s “Another Brick in the Wall, Pt. 2,” and it’s the theme for corporate venture capitalists in 2024, said Counterpart Ventures cofounder and partner Patrick Eggen.
“Hey parents, leave your CVCs alone,” Eggen told Fortune. In this case, the parents are large companies who have in-house venture capital arms and who have a tendency to (perhaps) meddle a little too much. “We understand the scrutiny, but give them a little breathing room.”
Counterpart has just released its annual report in collaboration with Silicon Valley Bank, taking the temperature of the CVC landscape. For all the tumult that venture broadly and CVCs specifically have experienced over the last few years, CVCs remain a key part of the funding landscape—in 2024, CVCs participated in 28% of overall venture deals. That number has remained steady for nine years, lingering in the range between 27% and 31%.
But just because CVCs are entrenched doesn’t mean they’re not evolving. There’s certainly been a shift from 2023, which emphasized measured strategies, Eggen said. However, in 2024, he wants to remind everyone that in order for CVCs to be successful, they need some level of autonomy, even if that autonomy fundamentally needs to be earned.
The goal of a CVC varies company by company. Some seek to deliver financial returns, while others emphasize strategic goals. Some invest off the balance sheet, whereas others are more independent. So that means that there are many kinds of success, and many kinds of failure.
“CVCs are getting a lot more scrutiny, some fair and some not,” said Eggen, who was a VC at Qualcomm Ventures before launching Counterpart a few years ago. “But ideally, if CVCs are good actors and do really quality deals, serve as a sensor for the mothership, get all this market intelligence, balance both strategic and financials—if they check all those boxes, leave them alone.”
Broadly, it’s clear things have been shuffling around strategy-wise for CVCs. For example, CVCs are targeting earlier stages. Since 2021, the share of CVCs targeting pre-seed and seed companies has jumped from 6% to 13%, while the percentage of CVCs describing themselves as stage agnostic has dropped from 21% to 12%, according to the report.
CVCs have a unique set of risks to contend with, Eggen said. Those risks fall into three buckets: dependency risk (on the parent company), dormancy risk (lack of pressure to deploy capital), and disconnect risk (misalignment between the CVC and the parent company's understanding of venture investing).
So success then comes down to having the right structure, streamlining decisions, and embracing incentivized economics (looking at you, carried interest). Ideally, this will all be baked into the CVC cake from the beginning—and that is possible. Eggen points to Japan-based ceramics and electronics conglomerate Kyocera, which launched a new U.S.-based fund this month, as a CVC example worth emulating in these respects.
But above all else, the key factor that determines a CVC’s success is the parent’s knowledge of venture capital and willingness to hunker into the asset class.
"They have to be dedicated to it," said Eggen. “It's not a three-year tourist attraction.”
Elsewhere…Mira Murati is leaving OpenAI. Read more about the CTO’s departure here, and here’s Fortune’s profile of her from last year.
See you tomorrow,
Allie Garfinkle
Twitter: @agarfinks
Email: alexandra.garfinkle@fortune.com
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Nina Ajemian curated the deals section of today’s newsletter.
