t first glance little seems to connect General Electric’s purchases of Bit Stew and ServiceMax, Monsanto’s Climate Corporation subsidiary’s acquisition of VitalFields, Intel buying Voke and Dr Pepper snapping up Bai Brands. Apart from the fact that they are all deals struck in the past month, they range in size up to $1.7bn, cover a range of geographies from Estonia to the US and sectors from agriculture to soft drinks to data analytics to virtual reality.
Dig a little closer, however, and all the target companies’ purchasers have been insiders, as existing shareholders through their corporate venturing units.
Earlier analysis before this decade by academic Martin Haemmig indicated parent corporations on average bought between 3% to 5% of their corporate venturing units’ portfolio companies. But with the wave of CVC launches since the start of the decade has come a greater emphasis on buying portfolio companies.
Since 2014 to the end of November this year, parent corporations have bought 74 of the 398 venturing portfolio companies exited through trade sales, according to GCV Analytics.
The exit data excludes the 183 flotations during this time and acquisitions of listed companies that had been CVC portfolio companies prior to the initial public offering, such as Symantec’s $2.3bn recently-agreed purchase of LifeLock, a US-listed identity theft protection services company, according to GCV Analytics.
While these CVC exits by trade sales remain only a fraction of the total number of venture capital-backed mergers and acquisitions, the proportion has been rising.
Data provider PitchBook tracked 1,191 VC exits by M&A in 2014 worth an aggregate $77bn. Using GCV Analytics data, this meant CVC-backed trade sales were about 8.5% of the total that year.
PitchBook noted 1,173 VC exits by M&A in 2015 worth $48bn, which meant CVC-backed stakes were 12.5% of the total, according to GCV Analytics.
In the first half of this year, PitchBook recorded 430 VC-backed acquisitions worth $28bn, which put CVCs selling to their parents at about 16% in this period, again using GCV Analytics, although there is a potential differential depending on announced versus closing date.
Overall, M&A activity globally has been growing in recent years, hitting almost $5 trillion in deal value last year, favoured by strong market fundamentals, such as access to low-cost capital, low organic growth opportunities, and access to new markets, among other things, according to news provider Consultancy.
In a survey of 1,700 CEOs, chief finance officers and other C-level executives from 18 sectors, accountancy firm EY’s Global Capital Confidence Barometer found executives were again eyeing deals after a slowdown earlier this year. Almost 50% of respondents said they had more than five potential deals in their pipeline, up from 20% in April), and more than half (57%) expected to pursue an M&A deal in the next 12 months, up from 50% in April’s report.
When asked by EY about the strategic drivers affecting respondents’ decision to pursue an acquisition within their sector, “growing market share” came out on top with 23% of respondents, followed by “acquiring technology or new product capabilities”, at 20%, then, with 17% of respondents, executives said they would be using M&A to pick up innovative startups. Acquiring talent was cited by 15% of respondents.
Alphabet, the parent conglomerate of the Google search engine, is the heaviest acquirer of portfolio companies from its corporate venture unit GV, formerly Google Ventures, with six acquisitions in the past three years, according to GCV Analytics.
US-listed chip-maker Intel has had four in this period, while peer Qualcomm has bought three of its portfolio, the same number as China-listed retailer Alibaba.
For most acquirers of portfolio companies, however, their CVC units remain a source of only a minority of deals, while the parent corporation is usually also only a minority purchaser of CVC holdings.
Last year, 22 of Intel Capital’s portfolio went public or were sold in M&A deals, the company said at the 17th annual Intel Capital Global Summit in San Diego, California.
In late October, Wendell Brooks, president of corporate venturing unit Intel Capital, told the CEOs of more than 300 portfolio companies at its global summit that he had decided to shrink Intel Capital’s portfolio from 400-plus companies to a range of 250 to 300 over the next five to six years in a bid to reduce quantity and increase quality, especially in regard to the total amounts invested in each company.
This might encourage more of Intel Capital’s holdings to be sold to its parent, but given CVCs remain minority investors it is unlikely to influence either parent or entrepreneur unduly. However, as Intel Capital’s deals become more strategic, the potential for these types of parent acqisitions increases.
As well as being president of Intel Capital, Brooks is also head of M&A for Intel. This year’s deals for Intel include last month’s acquisition of Voke, a developer of virtual reality viewing technology for sports events, months after leading a $12.6m round for the company.
Alphabet has acquired at least 63 companies since the start of 2014, according to its Wikipedia page, indicating less than a 10th were sourced from its corporate venturing unit, even including its purchases of GV-backed Skybox, Urban Engines, Appurify and Nest among others.
However, with multiple CVCs having more than 100 portfolio companies, including GV, Intel Capital, Alibaba and Qualcomm, there is also an increased focus on private equity-style roll-ups of portfolio companies, often with buyout firm support.
In mid-2013, Google – before its creation of the Alphabet holding company – was setting up a second corporate venturing unit, Google Capital, this year renamed CapitalG, particularly to target larger, later-stage deals than those preferred by its GV unit.
Don Harrison, Google’s vice-president of corporate development, who replaced David Lawee as mergers and acquisitions head when Lawee was setting up Google Capital, said at the Bloomberg Next Big Thing conference in June 2013, as well as being in the “exploratory” phase for Google Capital, Google was looking at alliances with private equity firms to help it structure deals.
Buyout firms can assist an acquirer by providing needed financing or advice on how a target could be restructured or carved up after a deal closes. While Google may invest cash to get a return on the investment, it may also take part in a deal to acquire an asset, Harrison said.
At the same Bloomberg summit, Kenneth Hao, managing partner at technology-focused buyout firm -Silver Lake, said he was “excited companies like Google are showing proactive interest in private equity”.
Data provider PitchBook, itself a corporate venture-backed company acquired by parent corporation Morningstar, said 64% of all US buyout activity in the first nine months of this year had been add-ons – the highest such proportion it had tracked.
But this interest can also be in applying private equity-style insights internally. William Taranto, head of US-based pharmaceutical group Merck’s $500m Global Health Innovation Fund, in 2014 added a $700m private equity fund. For his GCV Powerlist 2016 award, Taranto said: “We are focused on using our growth equity firm to create ecosystems around oncology and infectious disease.”
He added: “We are very proud to have acquired and merged Preventice Solutions and eCardio, then bringing in Boston Scientific as our partner.”
After a merger with eCardio and a spin-out after acquisition, Joe Volpe, general manager of Merck’s $700m fund and a GCV Rising Star 2016, said the Preventice asset deal paid Merck back more than 80% of what was invested and left it still owning about 48% of the asset with significant value.
For this deal and the remote patient-monitoring thesis that underpinned it, Volpe won his second divisional award at Merck. This thesis was one of three ecosystem strategies he devised and put into effect with the others in healthcare information technology and physician-patient engagement anchored by the Physicians Interactive platform. And Taranto at GCV’s Shift conference in partnership with US trade body the National Venture Capital Association said it was looking at more such deals for next year.
Other groups have moved even further in this direction. Drugs group Shire acquired peer Baxalta this year after its demerger from Baxter. As revealed by GlobalCorporateVenturing.com last month, Shire effectively shut down Baxalta Ventures, a $200m fund – its leaders, Geeta Vemuri and Marta New, both left.
Shire’s spokesperson said: “We are continuing to support the legacy Baxalta Ventures portfolio, including honouring our existing commitments, and have designated representatives from Shire to serve on the board of directors for portfolio companies as appropriate. We remain interested in investing in innovation at various stages of development. For example, from a deal perspective, as always, we remain interested in transactions in which we gain access to innovative products and technologies that fit our strategy.
“While such transactions may include equity consideration as a component, we have made the strategic decision that we will not make additional venture financing or other equity investments that are not associated with product or other strategic rights, including both new rounds for current portfolio companies beyond our existing commitments and new investments.”
Graeme Martin, president and CEO of Takeda Ventures, the CVC unit of the Japan-based drugs developer, in response to questions by Michael Brigl for a Boston Consulting Group report – Corporate Venturing Strategies in Lifesciences –said: “There are fundamentally two types of CVC out there. First, ecosystem builders, for example, SR One, Roche [and] JJDC, where the purpose of any investment made is to continually push the boundaries of therapeutic innovation rather than derive specific strategic insight or positioning.
“Second, strategics, for example, Takeda, Abbvie, [and] Merck Ventures. Many of them are taking a position of supporting internal strategic goals by investing within the R&D core areas of focus as well as investing into adjacencies that continue to inform strategy.
“These groups will not invest in areas considered unrelated to current and future potential areas of commercial focus. Within this basket there is a mixed philosophy for measuring performance against either purely financial returns or strategic value derived.”
Corporate venturing deals, however, are becoming more complex and, through limited partner and strategic agreements with venture capital firms, more opaque, effectively muddying the waters of what it means to be a CVC-backed entrepreneur.
Mark Wilson, director of collaboration management in Europe for the platform science and technology division of Glaxo-SmithKline Pharmaceuticals (GSK), which has started offering its proprietary drug delivery technologies to external clients, said: “In addition to the number of incubator-style outreach and university-based operations that the large pharmaceutical companies have established in recent years, I believe that a major trend is the emergence of fund structures that mix some elements of traditional financial VC structures with pharmaceutical R&D input and decision-making involvement, and that are different to traditional corporate VC models, at least in this sector.”
Last year, Bruce Booth, a partner at biotech-focused VC firm Atlas Venture, wrote in a blog post – External innovation: force multiplier for R&D – that changes might be occurring in the relationship between pharmaceutical and biotechnology companies and independent life sciences funds.
He said: “These CSP [corporate strategic partner] relationships are part of a macro trend in the life sciences ecosystem – larger corporate entities creating tighter relationships with venture firms as both direct equity partners in deals and as LPs and strategic partners.
“Today, over 75% of our deals have corporate venture groups as co-investment partners. This number was below 5% a decade ago. The list of relationships is significant and growing – Index linked up with both Johnson & Johnson (J&J) and GSK; Flagship with Merck; Healthcare and TVM with Lilly on their dedicated mirror funds; MPM with Novartis and J&J; Longwood, Hatteras, Sanderling are in GSK’s venture portfolio.
“Each of these strategic LP commitments has their own expectations and agreement structures. It remains to be seen which models will work best, but our belief is that the truly open-market strategic-proximity model envisioned here with our CSPs will be one of the more mutually beneficial and productive approaches.”
But VC-corporate relationships are continuously changing. One healthcare corporate venturing head said in his “cynical eye”, many of the new VC-CSP relationships were driven by “the desire of VCs to secure easy access to capital and exits all in one bundle” and because “pharma believes that VC firms can do something magical that is beyond the pharmaco’s ability”, adding: “I think this will change, with smart pharmas developing their own talent and external networks to do deals at a much more reasonable cost of capital.”
But with “software eating the world”, as predicted by venture capitalist Marc Andreessen at the start of the decade, technology has been the busiest sector for M&A this year, as it was in 2015, and at the second-fastest pace since 2000, according to data seen by news provider Wall Street Journal.
More corporations setting up corporate venturing units – GCV tracks more than 1,600 of them – means a wider range of sectors are increasingly active acquiring technology companies.
Newswire Bloomberg reported Accel Partners, the VC firm behind startups like Dropbox, Slack and Facebook, had summoned its portfolio companies to a meeting at a San Francisco museum and advised them to show less “disdain for established, non-technology companies that startups traditionally try to disrupt because, based on recent experience, a company like that might end up your acquirer”.
Bloomberg said from 2011 to 2014 technology companies were the largest buyers of venture-backed startups, according to PitchBook data. The peak was in 2014, when tech companies spent $47bn buying venture-backed companies, compared with $21.8bn spent by non-tech companies.
Last year, tech companies cut their spending on venture-backed startups to $18.3bn, while non-tech companies spent $17.6bn on venture-backed acquisitions. This year, by September 30, non-tech companies had paid $25.3bn for venture-backed businesses, compared with just $10.7bn by tech companies.
Since then, industrial group General Electric has agreed to acquire its GE Ventures portfolio companies Bit Stew for $153m and ServiceMax for $915m as part of its shift towards tech, and crops company Monsanto, through its Climate Corporation subsidiary, bought VitalFields for an undisclosed sum, giving an exit to sister unit Monsanto Growth Ventures (MGV).
Climate Corp itself was acquired by Monsanto after being identified by MGV, whose head John Hamer said: “The VitalFields exit is an important one in validating our strategy.”
And while any exit can be considered important, being able to walk the tightrope of selling a portfolio company to a parent company might be one of a corporate venturer’s more testing skills.
At the Shift conference in New York in October, Urs Cete, head of BDMI, one of Germany-based publisher Bertelsmann’s corporate venturing units, said when it sold portfolio company StyleHaul to another division, RTL, in late 2014 it had taken on external legal counsel to help make sure it had good advice. Cete said some in Bertelsmann might have been surprised it had taken on the expense, but it was part of its fiduciary duty and also showed entrepreneurs that its interest was in making sure the best terms were reached.
And in a service-orientated industry, where venture investors are increasingly trying to appeal to entrepreneurs as offering the greatest help beyond cash support, this approach of trying to put the portfolio company first seems the most sensible.
