In recent years, corporations have increasingly invested into early-stage businesses and start-ups, as they attempt to gain insight into disruptive technologies and start-up ecosystems worldwide.
In 2019, major companies worldwide took part in a record 3237 corporate venture capital (CVC) deals, according to Global Corporate Venturing (GCV) Analytics. This is more than four times the number of corporate venture capital-backed deals in 2011.
The number of CVC players has also grown. Today there are almost 2000 corporations that engage in VC, more than double the number a decade ago, according to GCV Analytics.
“Corporate executives have become increasingly aware and thoughtful about how to apply [CVC] to support their own innovation programmes and the advancement of technologies within their industry,” says Paul Asel, managing partner at NGP Capital, the CVC arm of Finnish hardware giant Nokia.
In 2019, the three most active CVC investors were all US technology giants, according to CB Insights – namely Google Ventures, Salesforce Ventures and Intel Capital – while Asian CVCs, such as Japan’s SBI Investments and Korea’s Samsung Ventures, were also piling into deals.
The IT sector has accounted for more than a fifth of global CVC-backed deals since 2011, with the health and services sectors ranking in second and third place respectively.
In a world in which industries have been redefined by disruptive technology and start-ups, from the likes of ride-hailing to financial technology, corporates have made minority investments into start-ups to ensure they don’t miss any of the action. But what drives these investments, and how does this relate to FDI?
While the reasons for CVC investment vary relative to the sector and focus of the corporation it serves, there are some common threads.
“Corporate VCs typically invest for optionality. They are looking at an acquisition of a technology that they want to use or their customers might want to use,” says Dave Rosenberg, a tech executive at software company NetSuite, who formerly worked at the CVC arms of both General Electric and Merck.
GCV Analytics analyst Kaloyan Andonov agrees, adding that CVC units are also “used indirectly as a market intelligence gathering tool, pointing to the parent corporation what new thing there is, and if it should be aware or wary of it”.
For example, in February 2020, Israeli dairy-free yoghurt start-up Yofix Priobiotics received a $2.5m VC injection from a consortium of investors, including both German dairy giant Müller and France’s Bel Group. Similarly, US meat giant Tyson Foods has made investments into various meat alternative start-ups such as Beyond Meat (see page 12), Memphis Meats and Future Meat Technologies.
Some CVCs look for emerging businesses to include within their ecosystem. Salesforce Ventures is focused on creating the world’s largest ecosystem of enterprise cloud companies, helping to bolster its core business.
Unlike institutional VC firms – which are primarily driven by returns on investment – corporate VCs investment rationale is based on the ambitions of their parent company. “The really important thing is that we’re providing strategic value to Samsung Electronics through as many means as possible,” says Christina Bechhold Russ, a London-based director at Samsung Next Ventures, the CVC arm of the South Korean technology giant.
Part of the strategy of many corporations is to monitor new innovations and technology, and CVC arms often answer directly to chief technology officers when making and deciding on investments. “CVC arms are a much more ingrained part of the research and development [R&D] and growth programmes of corporates now than they were a decade ago,” says Kyle Stanford, an analyst at private data provider PitchBook.
CVC is often used as a means of outsourcing R&D, as corporations acquire access to new innovation rather than have to invest internally.
Nigel Vaz, CEO at digital transformation consultancy Publicis Sapient, says 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.
Bala Nagarajan, investment director at Equinor Energy Ventures, the CVC arm of Norwegian energy giant Equinor, says the type of investment chosen depends on a “host of factors including strategic relevance, implementation value and internal competence”.
While the main motivation for corporates to use CVC is to gain insight into innovation and scope out the newest technology, it can be a precursor to FDI. “It is not uncommon to see an established corporation invest in a promising start-up in some geography where it seeks to potentially establish more presence,” says Mr Andonov. He adds that this could involve M&A, but could also be a joint marketing effort.
However, it is difficult to assess the extent to which CVC is used as a means to invest across borders, as many CVC arms set up an office in start-up ecosystems they want access to.
Other observers claim setting up a new subsidiary abroad through FDI can be another way to integrate newly acquired technology into large corporations. “I think FDI is a dramatically underleveraged tool when integrating new capabilities into a business,” says Saneel Radia, chief innovation officer at global transformation consulting firm R/GA.
While the availability of capital at CVC arms varies between corporates from different countries, such as between the US and Europe, they all have similar strategic goals.
Peter Rowan, a former corporate venture capitalist turned academic who has studied the investment behaviour of CVCs globally, says there isn’t a discernible difference. “International VCs have mimicked the behaviour of traditional [US] players. The goal is always to get more information,” he clarifies.
However, a few regions are seeing far more CVC involvement than others. GCV Analytics data shows that Asia-Pacific was the leading global region for CVC-backed deals between 2011 and 2019, with almost 40% of deals tracked in the period. The Americas ranks second, followed by Europe, for CVC involvement in start-up funding rounds.
Some investment promotion agencies (IPAs) that typically focus on attracting FDI are now vying for CVC investment into domestic start-ups. Apex Brazil, the IPA of Latin America’s largest economy, has held an annual corporate venture capital event since 2015, aimed at convincing international corporate VCs to invest into domestic Brazilian start-ups.
Meanwhile, the small Baltic state of Estonia has also pursued CVC investment to bolster its local start-ups. “We negotiated with [German automaker] Daimler for two years to invest into Estonian start-ups to help them incorporate their services into their portfolio,” says Raido Lember, director of Invest in Estonia.
This charm offensive brought a $175m investment into Estonia’s ride-hailing company Bolt, pushing its valuation above $1bn, and helping to foster the country’s tech ecosystem, where Bolt still has its headquarters and reinvests.
Anu Wadhwa, an associate professor of strategy and entrepreneurship at Imperial College London, says the locations into which CVCs invest are “determined largely by availability of the pool of start-ups. Governments can indirectly attract [CVC] by making their location a vibrant place for entrepreneurs.”
While corporates usually do not use CVC as a primary tool to expand into new markets, they often help the start-ups in their portfolio to internationalise. Gen Tschikawa, CEO of the Sony Innovation Fund, the corporate VC arm of the Japanese tech conglomerate, says that start-ups often approach them to internationalise.
“Many start-ups come to us because they believe that we can support them on the international expansion side, and of course we spend a lot of time doing that. When we invest into Japanese start-ups, they look at us as a launch pad into the world,” he says.
As multinationals often have wide networks of subsidiaries and personnel across the globe, this can help start-ups to expand into new markets.
Despite CVC activity being down across the board in 2020, particularly in March and April, due to the coronavirus pandemic, new CVC investors have jumped into deals.
In the first six months of 2020 there were a record 368 first-time corporate investors in VC, more than double the number in the previous year, according to GCV Analytics.
“The initial focus [of CVCs] was to aid and capitalise existing portfolio companies and then, if possible, look for some new opportunities as the pandemic lockdown has inevitably driven some valuations of start-ups down,” says GCV Analytics' Mr Andonov.
In many sectors, Covid-19 has accelerated the transition to future technologies. This is particularly true of the energy sector, which saw oil prices fall into negative territory for the first time in history in April 2020. Mr Nagarajan at Equinor says it invested in three cleantech start-ups across the UK, US and Brazil between May and July 2020.
“Covid-19 has in many ways reinforced the importance of, and urgency in, transitioning to a low carbon world. Net zero emission goals by both countries and corporates will continue to drive the need for innovation and investments in clean energy,” he says.
With the coronavirus crisis causing mass disruption to industries worldwide, corporates are likely to continue their stampede into VC, in order to be ready for a post-pandemic world.
This article first appeared in the August - September edition of fDi Magazine. View a digital edition of the magazine here.