Corporate Venture Capital (CVC) is surging. Recent data from Pitchbook (3Q 2017 European Venture Report) confirms that Corporate VC dealmaking has been on an impressive growth trajectory from 2009-2016, as the number of deals with CVC participation has increased at an 18% compound annual growth rate.
Does this burgeoning source of capital present an opportunity for Tech companies to review their funding strategies and diversify the investor base? In some cases – yes – but only when there is clear alignment with the long-term interests of the business. This requires a much more considered approach to investment preparation.
Corporate VC investments at an all time high
Like other forms of Venture Capital this recent trend has its roots in the US Tech funding market. Research published recently in the Harvard Business Review (HBR) showed that from 2011 to 2015 the number of corporate VC units in the United States had risen from 1,068 to 1,501, and from 2012 to 2015 the amount their firms invested quintupled, to more than $75 billion.
European CVC investing is also demonstrating real growth. According to Pitchbook, “On a deal value basis, CVC participation through 3Q 2017 is higher than any full-year total prior to 2015. At the current pace, 2017 will set a new decade high of deal value with CVC participation of €5.36 billion across a projected 578 deals.”
This growth in Corporate VC activity is not restricted to Europe and the US. The Chinese search engine company, Baidu, recently announced a 10bn yuan ($1.1bn) self-driving car fund as part of a wider plan to speed up its technical development and compete with US rivals. The Apollo Fund will invest in 100 autonomous driving projects over the next three years.
Wherever we look, corporate investment activity in Tech is on the upswing.
What is driving this increase?
HBR noted that whilst traditional VCs are all about financial returns, most corporate VCs – at least historically – have been motivated by strategic payoffs. They recognize that big companies often can’t match the ability of start-ups to create breakthrough innovations, so they use their in-house VC operation to gain insight into new products that could affect their competitive position - and perhaps to get a jump on acquiring the start-up if its innovation turns out to be a game changer.
In recent years we have seen a number of highly acquisitive US Tech companies establish engineering centres across Europe. The likes of Amazon, Apple, Facebook, Google, Microsoft and others are all seeking to tap into Europe’s deep tech expertise, especially in AI and related sectors. This gives these companies significantly better insight into prospective investment and acquisition opportunities.
Corporates are also increasing their involvement in accelerator programmes for the same reason, especially in the UK. A recent report published by Nesta and the Department of Business, noted that the number of accelerators created since 2014 that are funded by corporates is 65%, compared with only 29% created before 2014.
In The State of European Tech 2016 report published by Slush & Atomico, the investment activity of the top 10 European publicly-listed companies (by market cap) in 5 key industries was investigated. It found that over 50% were running active CVC funds and two thirds had made direct investments in Tech companies. One third had acquired a tech company outright since 2015.
But some observers have seen a shift in recent years, where an increasing number of European CVCs seem to be focussing more on financial returns. Pitchbook notes: “In the current low growth/low-return environment, CVC can be a compelling strategy for companies to diversify or invest their cash. For instance, Daimler has made 16 CVC investments since 2000; however, the parent company has acquired only two of those portfolio companies.”
The right CVC can deliver great outcomes
Duet Partners is a specialist fund-raising advisor to early stage Tech companies. We track over 350 Corporate VCs of which around 80 have invested in private UK businesses. Many of these are US and European corporates that do not have to operate with the same geographic restrictions as other VC funds, which can give them a real edge.
Of course, not all sources of CVC capital are equal and understanding the investment motives of each corporate is an essential part of our investment research. Does their investment track record support downstream value creation or is it really an M&A play in disguise that will effectively create an ‘early exit’? Our goal is to align interests – they may not be the same interests, but they will be complimentary.
In addition to the cash, CVC involvement, especially as a cornerstone investor, can be a strong endorsement of the company’s vision. This can give great comfort to other early stage co-investors that may otherwise find it hard to risk-assess the technical proposition.
This approach has led to some great outcomes: Over half the capital raising transactions Duet has completed in the past 5 years have involved corporate funding. In all cases these deals have been syndicated with other parties, such as VC funds and even Family Offices, with everyone investing on the same terms.
The funding strategy must ensure alignment of interests
There is no doubt that Corporate VC investment is providing an increasingly important source of capital for Tech companies. Corporates want more involvement in the innovative Tech scene in Europe and are putting up the funds to make it happen.
The challenge most businesses face is having sufficient knowledge and time to develop a funding strategy that targets the right corporate partners, ensuring interests will be truly aligned. Establishing the right mode of dialog with Corporate VCs requires a different approach to other types of investor. It takes longer and is based as much in the art of strategic multi-level selling as it is in classic investment pitching.
The payoffs can, however, be significant. Clients have commented that putting together a quality syndicate at the A Round, with a top tier CVC investor as part of the mix, has placed them in a very good position going forward. The combination of patient capital from deep pockets, combined with strategic insight and feedback, is giving them real market advantage.
All things considered, Corporate VC can provide an excellent source of capital for Tech businesses at all stages. Provided the process is started in good time it is possible to identify prospective investment partners whose interests align with the business. If chosen wisely, the benefits will far outweigh the monetary investment over time.