Corporate Venture Capital (“CVC”) got the nickname “tourist capital”, because of its high cyclicality: it tends to rise in the “high season” when markets are strong and has been historically quick to evaporate when markets get shaken up.
Over the past decade however, there’s been a lot of change in the typical profile – and activities – of corporate investors. Today 77% of Fortune 100 companies (Top 100 US Companies based on Revenue) invest in venture capital, and 52% of Fortune 100 companies have their own investment arms. The large tech companies like Intel (Intel Capital), Google (GV, Capital G, Gradient Ventures), Salesforce (Salesforce Ventures) or Microsoft (M12) are amongst some of the most active investors in tech, and have demonstrated strong financial performance to date.
But Corporates CVC arms go far beyond tech: Financial Services giants (Barclays, Goldman Sachs), Insurance companies (Axa Ventures, Allianz, Av8), Health and Pharma (Pfizer Ventures, Kaiser Permanente, Blue Cross Blue Shield) and big media companies (Disney, Comcast, Sky Ventures etc). And then of-course, there’s Softbank, which on its own nearly doubled the capital available for VC investments globally with its $100 billion Vision Fund.
US CVC investment passed traditional VC in 2018
The number of unique corporate investors in the US in 2018 was 212, nearly double the number of unique CVCs in 2008 which stood on 108 according to PitchBook.
In 2018, the total U.S. VC investments reached $135 billion, out of which $71.1 billion came from CVC. So, CVC activity represented 52% of total investment, exceeding non corporate VC for the first time. 2018 was not a blip, but instead, part of a long-term trend. According to PitchBook, the volume of CVC investments by US corporates grew from $6.4 billion in 2009 to over $38 billion in 2018.
European corporates are slower to adopt VC investments but volume is increasing
European corporates on the other hand, seem to be slower to adopt venture capital. Total European VC investments in 2018 reached $22.88 billion, out of which, CVC investments represented $8.87 Billion, or 38.7% of the total. Overall, the level of European VC investment has grown YoY, but the level of corporate VC investment in Europe hasn’t changed much. Are European corporates slower to adopt VC? There seems to be a growing appetite for venture in Europe, especially in the top markets UK, Germany and France with more and more corporates investing in more traditional VC funds as well as open direct investment arms.
Multinational corporates stormed the Israeli market
In Israel, one of the most active venture capital markets outside of Silicon Valley, 2018 was a banner year with $7.5 billion of Venture Capital invested. 43% of the total volume of deals ($3.26 billion) involved a CVC. According to IVC, the level of activity of CVC funds in Israel in the past few years has massively increased. From 773 deals involving CVCs in 2012 to 949 in 2018. On average, the rounds involving CVCs are larger, a function of the stage that CVCs get involved in. Anecdotally, I’ve seen CVCs invited to deals from Series B onwards, when the startup board is focused on strategic value and international expansion.
According to a recent report by PWC and Startup Nation Central, there are 536 multinational corporates innovating in Israel, out of which 16% (85) are investment led.
Corporate VC is now Just VC
Taking money from corporates isn’t a trivial decision for a startup, especially at the early stage. Also, not all CVCs are equal. Some invest for financial returns (aligning incentives with the entrepreneur and the other investors on the cap table), others invest for strategic value (an extension of their R&D), which might create misaligned incentives. There’s also the speed of decision making (depending on the CVC fund’s structure and investment committee). It’s also hard for the startup to assess the signalling risk (taking money from Coca Cola can often mean that their competitors might be turned off from working with the company) or the exit blocking risk in case of strategic investments.
On the flip side, corporates can truly be strategic partners for startups if leveraged the right way. CVCs can sometime open doors to commercial agreements, bring with them brand association and can become great design partners or reference customers, helping the startup cross the chasm and unlock capabilities. More often than not, this happens post series A.
Drivers for the rise of CVC activity
From the corporate perspective, it’s a natural evolution. Corporates with legacy businesses are facing unprecedented disruption from both large tech and startups across industries (“software is eating the world” after all). The CEOs and boards face a few options:
- Try to innovate internally (R&D) – tends to be expensive and depends on their talent
- External growth through M&A – often fails to deliver the synergies and requires deep pockets
- Invest direct into companies – there are various models of doing this. Independent investing arms vs. in-house, financial returns vs. strategic value, standalone fund vs. cap table
- Invest into VC funds – as LPs, for financial return, dealflow and strategic value
- Other means of driving innovation through accelerators, incubators, scouting, etc.
The excellent recent PitchBook analyst note, “The Golden Mean of Corporate Venture Capital” breaks down additional forces at work:
- Strategic drivers– “In addition to CVC units, corporations are also forming startup incubators and accelerators to benefit from startup innovation. Because of this trend, we believe CVC has become a core part of corporate innovation as a means of giving companies access to emerging technologies including artificial intelligence (AI), financial technology and biotechnology”.
- AI is a huge driver of this category: “9 out of 10 companies reported AI investments in a recent BCG survey
- Financial drivers – “they also found no relationship between cash balances and CVC activity”
- R&D and capital expenditure spending “Both R&D and capex spending had a positive relationship with CVC activity in 2018”
- Cash balances – “The study found no correlation between cash balances and the presence of a CVC program, but our data shows that average cash balances for 27 CVC parents increased by a record amount in 2018, suggesting that cash balances can fuel CVC activity“
- M&A spending – “Among CVC parents, M&A outflows sharply decreased in 2018”
- Market value (aka stock price)
“Companies that are perceived as more innovative as measured by R&D spending can outperform their less innovative peers, meaning that forming a CVC unit can be a part of a broader strategy to recategorize a company as
an innovator and boost market valuations.”
So, is the sentiment towards CVC investors changing too? As an example, in 2013 Fred Wilson vowed to never have a corporate investor in the syndicate (he later apologised). USV as since co-invested with GV, Capital G, Samsung Next, BDMI, Hearst Ventures, Qualcomm Ventures and others in more than one deal each, so the jury is still out.
In the words of James Mawson, CEO of Global Corporate Venturing:
“As with any potential investors, entrepreneurs need to make sure they ask corporate venturers the tough questions for how they can help them in their five primary needs of capital, customers, product development, hiring and, eventually, an exit. The best investors will have the track record and clear path to success for their portfolio companies. Together, they and the entrepreneurs can make the world a better place but only if both sides have their eyes wide open.”
***
For disclosure
I’m managing partner of Remagine Ventures. We invest in seed stage companies at the intersection of tech, entertainment data and commerce independently for financial returns but are backed by a number of corporates including ProsiebenSat1, Sky, Axel Springer and others, creating a hybrid model. Special thanks to PitchBook for the data my partner Kevin Baxpehler, who helped put together this post.
I'm a former general partner at google ventures, head of Google for Entrepreneurs in Europe and founding head of Campus London, Google's first physical hub for startups.
I'm also the founder of Techbikers, a non-profit bringing together the startup ecosystem on cycling challenges in support of Room to Read. Since inception in 2012 we've built 11 schools and 50 libraries in the developing world.
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