Last year GCV Analytics tracked 2,775 deals worth an estimated $180.17bn of total capital raised (see more in our annual review, the World of Corporate Venturing 2019, to be published at the Global Corporate Venturing & Innovation Summit at the end of the month).
While the number of deals was a notable increase on a year-on-year basis (14%) compared with the 2,427 transactions reported in 2017, the total value of corporate-backed VC rounds grew by 55%, reaching another record high. The number of deals has risen by 60% since 2014’s 1,732, while total value has almost quadrupled. A simple reason – the number of corporate venturers per given year has more than doubled, from 702 in 2014 to 1,591 in 2018, but the experienced, such as SoftBank, Tencent and Naspers, are doing even more.
This means that of all VC activity, corporate venturing’s share by volume has increased from 8% in 2014 to 18% in 2018, using data provider PitchBook’s numbers for the overall venture capital market.
The percentage of money coming from corporates is harder to measure given the opaque nature of private markets. However, the entire VC market amounted to $255bn of deals last year, of which corporations where involved in $180bn, so it is likely a higher proportion of the capital is coming from CVCs considering their deeper pockets.
One deal this month sums up the change. Singapore-based on-demand ride service Grab has increased the potential size of a series H round, already backed by several corporate investors, to $5bn.
The company has been raising money for this round since June, when it received $1bn from Toyota, adding $1bn in August from other investors, including Ping An Capital. The Mirae Asset–Naver Asia Growth Fund also backed the second close, after Booking Holdings invested $200m in October before Hyundai and Kia Motors provided $250m weeks later as Grab revealed the round included Microsoft, Citi Ventures and Goldman Sachs Investment Partners.
The company raised a further $50m from Kasikornbank the same week and secured a $150m commitment from Yamaha Motor last month to take the round to $2.85bn. Grab said it had planned to close the round at $3bn before the end of the year but the SoftBank Vision Fund is apparently interested in investing up to $1.5bn in the round, encouraging Grab to increase its size. It had previously raised a total of $3.7bn in funding.
For context, a $5bn round, let alone the estimated $8.7bn total it would then have, would put Grab just outside the top 10 largest IPOs on US stock exchanges, the world’s deepest and most liquid markets, according to financial publisher Kiplinger.
A total of 191 companies went public in the US last year, raising $46.8bn. That was up from 2017’s 160 IPOs and $35.5bn of proceeds but just a fraction of the private market’s appetite. Add the similar amount estimated to have been raised on Europe’s stock markets – it was $29.4bn in the first nine months – and China’s exchanges – the most active by IPO volumes, with about $58.4bn raised last year in Hong Kong, Shanghai and Shenzhen, and the global public markets come to about two-thirds of the CVC-backed total and half of the overall venture market.
The flow of capital to private markets might be fickle but there is an underlying reason – strategic investment brings added value to portfolio companies that can help boost their performance. Better governance and leverage over listed peers is a long-held rationale behind private equity-backed portfolio companies’ growth and performance but less clearly observed in the syndicated support of growth companies.
But with greater focus on an entrepreneur’s five primary needs – capital, customers, product development, hiring and an exit – if an investor can offer more than capital, they portfolio company benefits. With passive investors dominating public markets, active managers broadly limited to deciding which companies to buy and sell, and some activist hedge funds focused on financial structures, break-ups and mergers, actually helping with a company’s core business can deliver lucrative growth and a commensurate rise in shareholder value.
We are now seeing some successful corporate investors in the private markets trying to bring the model to the public ones. In a post at the end of October, Kasim Kutay, CEO of Novo Holdings, a $50bn Denmark-based investor in public and private life sciences companies, described its Principal Investments activities, and, in particular, its “lighthouse” strategy.
He said: “The Principal Investments team of Novo Holdings focuses on investing in larger or well-established life sciences companies. An investment typically exceeds $300m, and we aim to take positions of at least 10% in a company along with board representation.
“For the lighthouses in our portfolio, such as Chr Hansen and ConvaTec, and indeed for all our public holdings, we practise engaged ownership to optimally generate attractive long-term returns. The underlying philosophy is that, as highly-active life sciences investors, we deliver added value to our portfolio companies, regardless of how well run they are.
“The engaged ownership approach rests on two key tenets. First is representation on the board and second is our life sciences value-add. We bring ideas and suggestions to a board and management team. We can also raise an agenda through the board. We leverage knowledge in ever-widening circles to deliver as much value as we can.”
Or take China-based media and internet company Tencent, whose portfolio companies have raised billions of dollars in IPO proceeds in the past few years but which has held on to the equity even as the value of its own holdings have climbed into the tens of billions of dollars. This follows a similar strategy used by its own corporate venturing backer, Naspers, as it reflects the added value long-term partners can bring.
The question for the rest of the investment market is: will they catch up or do they risk oblivion?
