Investing in Venture Capital Funds

The situation

In order to adapt to the challenges of an ever-changing business world and remain competitive, a regional energy supply and infrastructure company wants to invest in new technologies, disruptive business models, and emerging markets. As the client is interested in realising strategic added value in addition to financial returns, investments as a limited partner (LP) in venture capital funds were selected as the innovation vehicle. This is because LPs of VC funds additionally benefit from their network, expertise, and access to new technologies and innovations. This can help companies to develop their own ideas, strengthen their innovative power, and improve their competitive position.

Anyone wishing to invest in VC funds must assess the extent to which the funds can offer the desired strategic added value and whether this is anchored in their value proposition. Some VC funds have specialised teams that can assist the company in developing growth strategies, opening up new markets or launching new products, while others focus solely on financial returns. It is therefore crucial to compare funds across the market in order to select those that can best serve your strategic interests. However, one of the challenges here is that there is little publicly available information to assess the funds qualitatively and quantitatively. This makes it difficult to make well-founded investment decisions.

Our approach

The fund landscape in Europe has changed radically in recent years. In Germany alone, around 100 new funds with a total volume of USD 11.7 billion were added between 2005 and 2022.

The challenge: If you want to approach the topic of venture capital transactions by means of fund investments, you need a solid database and a method for analysing and comparing the various funds. A comprehensive data set with information on the individual funds, their investment focus, track records, and strategic partnerships is crucial for making informed decisions. PwC’s Global Centre of Excellence for Corporate Venturing has therefore developed a proprietary assessment model that helps corporate investors to identify the VC funds whose range of services best matches their strategic objectives.

The PwC model is comprised of five categories, which are weighted individually depending on the strategic focus:

• General factors: This category includes basic parameters such as fund size, investment focus or information on other LPs.
• Fees & performance expectations: This is where data is collected and analysed on, among other things, expected returns and the fund’s management costs.
• Investment team & performance: In this category, for example, the experience of the investment and management team and the success of past fund generations are analysed.
• Investment strategy: The focus here is on the startup selection process and the size of the target market, but also on the services for startups and LPs.
• Environmental, Social & Governance (ESG): In this category, ESG compliance is analysed in particular.

The added value

Experience from various projects, but also from PwC Germany’s own investment activities, has shown that this evaluation logic is best suited for setting up an investment strategy that reflects individual goals and resources, while simultaneously enabling market comparisons. This also makes fund investments accessible not only to large companies, but also to SMEs with smaller budgets. By spreading investments across different funds – even with small ticket sizes – companies can disperse their risk, while benefiting from the potential returns of the venture capital market. 

Overall, investing in VC funds offers an exciting opportunity to enter the innovation ecosystem and achieve both financial returns and strategic added value. 

In addition to the financial returns, the strategic advantages of an LP investment include:

• Market insights and trend radar: Insights into new technology trends and markets as well as innovative business models help you to stay one step ahead of the competition and adapt quickly to changing market situations.
• Early and direct access to technology: Competitive advantage in accessing deal flow and portfolio companies; contact with the most innovative start-ups at the junction of your own business model, for example to build strategic partnerships.
• Brand and ecosystem development: Strengthening your own corporate brand through the presence and active role in the innovation ecosystem; direct networking with relevant experts from VCs, start-ups and CVCs.

With a solid database, a sound framework, and the proper consultation, companies of all sizes can benefit from the opportunities offered by the venture capital market.