The Rise of Corporate Venture Capital

The Rise of Corporate Venture Capital

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In March 2021, CBInsights reported that the number of “megarounds” corporate venture capital groups participated in has been dramatically increasing over the last 5 years. In 2016, the number of megarounds (deals over $100 million) was 36, involving $32.9 billion in capital. By 2020, this had increased to 182 megarounds, amounting to $73.1 billion in capital. Corporate venture capital groups are therefore increasingly enthusiastic about setting aside funds to invest into companies they think can improve their businesses, and ultimately raise their bottom lines. 

Nevertheless, despite the risks, CVC investing has not only continued, but explosively grown over the last decade.

Corporations have been struggling with innovation since the industrial age. Corporate venture capital (CVC) investment involves the investment of funds into innovative start-up or scale-up companies, which operate in industries similar to the investing group. When corporate venture capital groups choose to invest in smaller companies, they look for the prospect of financial returns, much like conventional venture capital (VC) investing groups. 

However, another incentive for groups to invest is the prospect of establishing symbiotic relationships with companies that can supplement the operations, commercial and technological development, and the research and development (R&D), performed by the larger companies the investing groups represent. In return, the smaller companies receive resources, connections, and information of their own, establishing an innovative symbiosis. FDIntelligence quotes Nigel Vaz, CEO at Publicis Sapient, to explain why companies opt for different forms of investment and funding – “the decision of whether to use CVC, internal investments or mergers and acquisitions to further innovation depends on the corporate’s organisational goals. ‘We look at all these [forms of investment] in different contexts as a means to bring new innovation into companies,’ he says, adding it is very case specific and difficult to draw broad conclusions.”

Despite the fear, uncertainty, and doubt thrust upon global markets by the COVID-19 pandemic, CVC investing has continued to grow in absolute terms – indicating sustained confidence among investing groups. And much of the CVC investment that has taken place recently has been in highly innovative sectors. There is rarely a sector more innovative than industries involving new technology. As FDIntelligence explains, for example, in 2019 the three most active CVC groups were “all US technology giants”, namely Google Ventures, Salesforce Ventures, and Intel Capital. However, the activity of CVC investing groups outside of Europe and the United States has also recently been on the rise, with “Japan’s SBI Investments and Korea’s Samsung Ventures also piling into deals” – in Asian markets too, the emphasis on technological innovation is clear. By 2020, CVC deals closed in emerging markets outside North America and Europe, with especially high concentrations in Asia, had increased to 33% of all deals.

Source: CBInsights

As CBInsights extensively explained in a March 2017 report, CVC has a rich recent history, dating as far back as the late 1960s-early 1970s. From these beginnings until today, CVC activity has risen and fallen in waves, determined in part by wider market trends. The most recent rise of CVC activity has its early origins in 2002, and has been dubbed the “unicorn era” by analysts and commentators. From 2011, this rise in CVC activity saw a meteoric explosion, a trend which has continued until 2021. 

Source: CBInsights

Although the recent explosive resurgence of CVC activity over the past decade indicates confidence in the investment opportunities available in the market among current investors, the history of CVC activity for investing groups betrays lessons that today’s investors would be prudent to bear in mind. In Q2 2001 alone, “corporations were forced to write down $9.5B of venture losses” – some big players suffered, including Microsoft, Wells Fargo, and Intel. Experts think that these losses were in part caused by CVC groups lacking clear strategic objectives after decisions had been made to invest in companies. As CBInsights put the matter, “the frothy atmosphere of speculation often meant that financial returns clouded out their original focus. As a result, they were swept away by the moment and over-invested in flashy startups with unclear benefits to the parent company’s core business.”

Nevertheless, despite the risks, CVC investing has not only continued, but explosively grown over the last decade. CVC activity in 2021 has been little different thus far. Between 17th June 2021 and 13th July 2021 alone, Phronesis Partners have accounted for CVC deals amounting to over $2.25 billion so far, involving a wide range of CVC groups operating across diverse industries including consumer technology, AI, FinTech, and health, biotech, and pharmaceuticals. The incentives for investment have not changed – the two major factors contributing to CVC activity remain, firstly, the prospect of greater financial returns, and, secondly, the strategic value gained from partnering with and establishing symbiotic relationships with innovative young companies, which the corporate investing groups think can supplement their business operations and bolster their R&D programmes. 

Between June 2021 to July 2021, there were several high-profile CVC megarounds involving well-known young companies and corporate investing groups. On June 17th 2021, for instance, Beamery, the AI-powered talent acquisition and recruitment company announced a $138 million Series C raise supported by Accenture Ventures, Workday Ventures, and M12. Given Beamery’s sophisticated software and its focus on talent acquisition and recruitment, the strategic value Accenture, Workday, and Microsoft stand to gain from this partnership is clear.  

In Beamery CEO Abakar Saidov’s words, “global enterprises are looking to solutions like Beamery that provide a single platform to manage the entire talent lifestyle, help organizations quickly identify candidates that are likely to thrive at their organization, reach diversity targets, provide better career pathways for existing employees, and understand the skills and capabilities they need to build their workforce of the future.”

On July 22nd 2021, Sky News reported that Zilch, the buy now, pay later (BNPL) company had acquired a further $110 million from Goldman Sachs and dmg ventures, taking their Series B investment round to roughly $200 million. Other players in the BNPL market have, within the last 12 months, also received extensive investment from banks, financial services companies, and technology investing groups. In September 2020, Klarna raised $650 million in a private equity funding round led by Silver Lake and supported by BlackRock, joining Sequoia Capital and the Commonwealth Bank of Australia, among other high-profile investing groups. 

In June 2021, Divido, another BNPL firm, raised $30 million in a Series B round supported by HSBC and other capital investing groups. Competition to secure the support of banks and financial services firms in the BNPL market is evidently fierce – it is clear that these CVC and VC groups view partnerships with BNPL groups as strategically beneficial. Above all, the CVC investment activity in June and July 2021 indicates confidence among investors. 

Plugandplay explains that in 2011, CVC investment activity was focalised predominantly in the United States, Europe, and the Middle East – but that emerging markets have seen increased CVC investment within “the past 3 years”, as “Asia has steadily increased their CVC activity”, by 2020 making up about 33% of all global CVC investments. CBInsights illustrate this phenomenon clearly, showing that of the 3,359 CVC deals to have been closed in 2020, 3,258 (or 97%) of all deals took place in North America, Europe, and Asia. 

This continued growing trend of CVC activity, encapsulated by recent investment activity across diverse industries, underlies sustained and burgeoning confidence among CVC investors. 

These CVC groups continue to seek advantages against their competitors by investing in companies that can complement their processes, establish new industry connections, and add to their products. The activity of 2021 so far indicates that this trend is likely to continue. 

Image source: CBInsights

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