Corporate Venture Capital Trends: Market is Up

Corporate Investment in Startups Surges

The worldwide market for startup investment is experiencing substantial growth, with record amounts of capital being deployed this year. Simultaneously, the number of deals completed is increasing across numerous geographic areas.

Recent data compiled by CB Insights and Stryber reveals that corporate investors are participating in transactions of greater value than ever before.

While corporate venture capital (CVC) activity isn't experiencing uniform growth globally, the overall trend is undeniably upward.

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The increasing size of deals involving CVCs aligns with the broader trend in the venture capital landscape, which has seen a shift towards larger investments and greater capital allocation. However, this raises important questions.

How are corporate investors adjusting to the faster pace and higher costs within the current venture capital environment?

Key Questions for CVCs

We investigated whether CVCs are modifying their deal sourcing strategies.

Furthermore, we explored if the traditional conflict between strategic investments and financially driven capital deployment is influencing investment priorities.

To gain a deeper understanding of these trends, The Exchange consulted with Matt Goldstein of M12, Gen Tsuchikawa from Sony Innovation Fund, and Brian Walsh of WIND Ventures. (Recent coverage of WIND Ventures can be found here.)

The following analysis will first present the data, followed by a detailed examination of the underlying factors.

A Surge in Deal Values

Accurately gauging Corporate Venture Capital (CVC) activity presents inherent challenges. Defining what constitutes a venture capital deal – specifically, what should be included in calculations – is often subjective. For instance, the involvement of the SoftBank Vision Fund raises questions. Should deals it spearheads, with venture capital co-investment, be factored into overall VC statistics for a given timeframe? Similarly, how should investments originating from crossover funds be categorized?

Regardless of the chosen methodology, any compilation of venture capital data will inevitably incorporate funds from entities outside traditional venture capital. Therefore, the most practical approach is to strive for consistency. CVC faces a similar difficulty, but it is amplified. Because CVCs frequently participate in deals rather than leading them, particularly in later-stage startup funding, precisely quantifying corporate venture investment can be complex. Consequently, we adopt a comparable method to aggregate venture data, including deals where a specific investor type has participated.

While not flawless, this approach ensures consistency, which is arguably the most important factor. To clarify, CB Insights explicitly states that, for their analysis, “‘CVC-backed funding’ and ‘CVC-backed deals’ denote corporate venture capital participation in these funding rounds.”

According to CB Insights’ H1 2021 CVC report, CVCs contributed to $78.7 billion in funding during the first half of 2021, establishing a new record for a six-month period. This substantial figure was generated from approximately 2,099 deals globally. The true significance of these numbers isn't immediately apparent from their sheer magnitude.

Consider the following chart:

The first half of 2021 is remarkable not only due to the significant number of high-value deals involving CVCs, but also because of the increase in deal volume. If deal volume had remained constant while the value of CVC-participated deals increased, we might conclude that corporate investors were simply contributing to larger rounds. However, the concurrent rise in both deal count and volume since the H1 2020 low suggests heightened activity beyond merely increasing average deal sizes.

Therefore, when we assert that global CVC activity is at an all-time peak, we are confident in this assessment – acknowledging our data limitations. The current environment for CVC is exceptionally active.

A closer, quarter-by-quarter examination reveals an even more pronounced acceleration:

This perspective demonstrates that the increasing deal and dollar volume of CVC-participated rounds has been ongoing since late 2019 or early 2020, with recent results showing consistent progress. Even with certain caveats, this trend appears strongly positive.

The growing dollar amounts in venture rounds with CVC involvement are partly attributable to larger deals. According to the same CB Insights data, the “average CVC-backed deal size increased by 75% [year-over-year] to a record high of $46.9 million” in the first half of 2021. This percentage increase in average deal size exceeded the growth rate of venture deals overall, which was 68% over the same period.

What drove this increase in deal size? CVC participation in mega-rounds – transactions exceeding $100 million. CB Insights reported that CVCs participated in 218 mega-rounds in the first half of 2021, compared to 184 in all of 2020 and 124 in 2019. This indicates a greater willingness among CVCs to invest in increasingly expensive venture deals, which is favorable for startups seeking both strategic and traditional venture capital funding.

M12’s Goldstein corroborates this, stating that the CVC data is “influenced by a small number of very large deals and funds,” and adding that “the total number of participants in startup financing has increased” across the board.

Examining geographical trends, several records have been established. In the United States, CVC activity surged 111% to nearly $40 billion in the first half of 2021, matching the total for all of 2020. In Asia, CVC-participated deals totaled $20 billion in H1 2021, up from $10 billion in the prior-year period, representing a new record. Deal volume in Asia reached 767 in the first half of 2021, also a record, though a slight one.

Europe also experienced substantial growth: CVCs participated in $16.4 billion worth of deals in H1 2021, more than quadrupling the amount from the first half of 2020, according to CB Insights. Deal volume reached an all-time high of 392 during this period.

Stryber, described by Sifted as an “innovation consultancy,” identified 233 deals with CVC participation in Europe during Q1 and Q2 of this year, totaling approximately $10.4 billion. While counting methodologies differ, both sources demonstrate increasing dollar volume for CVC-participated deals in Europe during H1 2021, even if Stryber indicates a slight decline in deal volume from recent periods.

Not all markets achieved record results. For example, Indian deals with CVC participation matched their previous record for dollar value (from H2 2018) but remained relatively stable in deal volume.

Overall, the data illustrates a trend of increasing and more valuable deal participation from CVCs worldwide this year. Let us now explore the reasons and dynamics behind this evolving CVC landscape.

Increased Corporate Venture Capital Activity

Initially, our investigation focused on understanding the reasons behind the growing volume of corporate venture capital (CVC). While data provides insights, we sought perspectives from firms actively involved in CVC to determine the key drivers of this increase.

According to Walsh of WIND Ventures, corporate leaders now possess a greater appreciation for the need to evolve and embrace open innovation. This improved understanding, likely fueled by the accelerating rate of technological advancements across various industries, is resulting in more strategically focused CVC investments in startups.

Walsh believes that corporations are becoming more receptive to external innovation – including novel concepts and technologies – due to the imperative to maintain both their perceived and actual market leadership. This also serves to counter the growing threat from tech-enabled competitors and remain current with industry developments.

Therefore, CVC activity can be considered a crucial component of a corporation’s broader strategy to proactively address market shifts and defend against competition. Simultaneously, these efforts can potentially generate positive financial returns, effectively converting surplus capital into increased profitability.

Goldstein from M12 offered a different perspective. He suggests that corporate and non-traditional investors recognize the pervasive influence of software and the essential nature of technological exposure, whether for strategic or financial gain. This recognition may be contributing to the overall rise in CVC activity.

Goldstein also pointed out that, considering four of the world’s six largest companies are technology-focused, it’s somewhat surprising that the trend of “everyone becoming a VC” didn’t emerge sooner.

Tsuchikawa of Sony emphasized that, as digital transformation accelerates globally, CVC can serve as a valuable and effective instrument for companies seeking to deepen their engagement and comprehension of rapidly evolving landscapes, particularly when leveraging emerging technologies.

Essentially, Tsuchikawa posits that CVC allows established corporations to immerse themselves in the dynamic startup ecosystem, enabling them to both understand and potentially participate in emerging trends and technologies. This has always been a core benefit, but the increasing speed of change logically supports increased investment in this area. He also highlighted the growing number of CVCs currently operating.

Our next area of inquiry centered on how CVCs are navigating the increasingly competitive and costly venture capital landscape.

Adapting Strategies in a Competitive CVC Landscape

The proliferation of venture capital firms has intensified competition for promising investment opportunities. Goldstein noted that M12 has responded to this evolving landscape by actively refining its approach. They are focusing on expanding their team, developing a more focused investment thesis to uncover undervalued prospects, and enhancing their platform to become a more desirable partner for entrepreneurs facing numerous options.

Expanding Geographic Reach and Leveraging Data

The venture capital market has undergone significant shifts, particularly accelerated by the recent pandemic. According to Goldstein, this has led to a broader geographic focus for M12. This observation aligns with data from Stryber and Sifted, which indicates that U.S.-based CVCs, including GV and Salesforce Ventures, are among the most active investors in Europe.

Access to Diverse Deal Sources

Tsuchikawa highlighted that his firm is benefiting from a wider network of potential deal sources. This development is potentially advantageous for entrepreneurs, as it suggests CVCs are actively seeking opportunities outside of their conventional channels.

Prioritizing Diversity and Inclusion

CVCs are increasingly focused on incorporating underrepresented founders into their investment pipelines. Goldstein explained that M12 has established partnerships with organizations like Black & Brown Founders, Colorintech, Project W, and Women in Cloud to facilitate more inclusive investment practices and broaden deal flow.

Adjusting Investment Timing

Rising valuations are prompting CVCs to reconsider their investment entry points. Tsuchikawa stated that the Sony Innovation Fund is now more attuned to the timing of their investments.

Potential Risks of Earlier Stage Investments

Walsh from WIND cautioned that pursuing earlier-stage investments could introduce unforeseen risks for strategic investors, particularly if their core value proposition isn't sufficient to secure deals. This suggests a need for careful evaluation of the benefits and drawbacks of shifting investment strategies.

Important Considerations

The Corporate Venture Capitalists (CVCs) interviewed generally prioritized financial returns over broader strategic objectives. This suggests our findings might not fully represent CVCs with a stronger emphasis on strategic alignment.

It’s also crucial to recognize that upward trends aren't always positive indicators. For CVCs not primarily focused on returns, a high exit volume could be perceived as beneficial for corporate investors.

However, as WIND’s Walsh points out, this isn't necessarily the complete picture.

“The present market environment is accelerating financial gains beyond initial projections,” Walsh explained, potentially “hindering the achievement of strategic aims.” This dynamic manifests in practice as follows:

The investor shared that his firm has “experienced multiple exits shortly after making initial investments.” While acknowledging this as “a favorable result,” he noted that the firm’s corporate backer, or “corporate sponsor,” as Walsh termed it, “would benefit from a longer timeframe to cultivate and implement their own strategic value-creation initiatives within the company.”

The Tension Between Returns and Strategy

This highlights a potential conflict between the desire for quick financial returns and the long-term strategic goals of the corporate parent. Strategic goals often require sustained engagement and collaboration with portfolio companies.

A rapid exit, while financially rewarding, can disrupt these efforts. Therefore, evaluating CVC performance requires considering both financial returns and the progress towards achieving strategic objectives.

• Faster cash returns aren't always ideal.
• Corporate sponsors may prefer longer-term involvement.
• Balancing returns and strategy is key for CVC success.

Understanding this nuance is essential when interpreting data related to CVC activity and performance.

CVC Investment Trends: A Shift Towards Earlier Funding

Recent observations indicate that Corporate Venture Capital (CVC) firms are mirroring the broader venture capital landscape, prioritizing financial returns and adjusting to a rapidly evolving market.

This involves an increased focus on earlier-stage investments and a willingness to deploy larger capital amounts. Essentially, CVCs are behaving similarly to traditional, later-stage venture capital firms seeking to maintain strong investment performance.

The Impact of Market Dynamics

This trend isn't unexpected. The influx of capital from non-traditional venture funds into later-stage startups has compelled VCs to explore opportunities in earlier, more high-risk ventures.

It stands to reason that CVCs would experience the same pressures. Given that capital is fungible, their pursuit of earlier deals to secure access is a natural response.

Re-evaluating the CVC vs. VC Distinction

A potential shift in perspective may be warranted. Instead of rigidly separating CVCs from traditional VCs, it could be more accurate to categorize all investments before a Series C round as venture capital.

Deals occurring after this stage could then be classified as crossover funding. While this reclassification might be met with resistance, it arguably provides a more truthful representation of the current investment environment.

Implications for the Future

• Increased Competition: CVCs are now actively competing with traditional VCs for early-stage deals.
• Higher Valuations: The demand for early-stage companies is likely to drive up valuations.
• Blurred Lines: The distinction between CVC and VC investment strategies is becoming increasingly ambiguous.