AAA Cautious rise in Q3

Cautious rise in Q3

After the shock of the covid-19 pandemic and an almost worldwide lockdown during the second quarter of 2020, the world has slowly and cautiously started to open up. Even though the number of reported cases is still growing and a vaccine or an effective cure may be far from ready, it is evident that the economy cannot be halted for much longer, as the economic consequences of the pandemic are already appearing in official statistics.

Investment activity levels for the third quarter are in line with broader macroeconomic developments. GCV Analytics tracked 844 funding rounds involving corporate venturers, a slight 3% decline from the 863 rounds recorded in Q3 last year. The total investment dollars stood at $32.69bn, up 11% from the $29.7bn during Q3 2019. Compared with the previous quarter, there was a slight increase in the deal count, going up 1% from 832. Estimated total investment – which stood at $32.99bn – went up by 22% from $27.02bn.

The US hosted the largest number of funding rounds (318), while Japan came in second with 134 deals, and China third with 88 deals.

The leading investors by number of deals were internet conglomerate Alphabet, telecoms firm SoftBank and internet company Tencent. The list of corporate venturers involved in the largest deals by size was also headed by Alphabet, along with e-commerce and consumer electronics firm Amazon and automotive manufacturer SAIC Motors.

The relative proportions of small (less than $10m), medium ($11m–$99m) and large (more than $100m) size deals have remained stable. From the first to the third, the three types have remained roughly in line with previous years.

Most of the corporate investors taking minority stakes this quarter were investors that had done at least one previous deal (76%). Nearly one in every four (23%) corporates was disclosing its first minority stake deal. There appears to be a trend of newcomers comprising roughly a fifth to a fourth of all corporate investors.

Analysis

The lockdown measures across the globe and the looming economic downturn benefited some emerging businesses while threatening the existence of others. Many corporate venturers who participated in our GCV Digital Forums reported they had first looked to recapitalise existing portfolio companies and then exploring new investment opportunities.

A recent survey conducted by Touchdown Ventures and shared by Scott Lenet at the last GCV Digital Forum suggests that CVC may be turning more conservative after the pandemic. According to the survey, 52% of CVCs are expecting to make fewer new investments and 48% to deploy less capital than before the lockdown.

While traditional VCs reported an overall favourable sentiment towards corporates, approximately two-thirds reported having issues with CVCs not acting “as expected” and 20% even reported having a “negative” experience with CVCs during the pandemic.

Do the data suggest a retrenchment on part of corporates? The answer is complex. If we look at 1,813 corporates that made at least one deal in 2019 and compare them with 75% of their deal count last year (to mimic three quarters), we see 1,035 (57%) of them had not reported any deals by the end of Q3 2020. Another 296 (16%) have invested less than 75% of their 2019 deal count. Another 288 (16%) have made more than 75% of last year’s deals but made fewer deals than in all of 2019. Only 193 investors (11%) have already invested in more deals during the first three quarters of this year than in all of 2019. At first glance, these data appear to corroborate the conclusions of the Touchdown Ventures’ survey.

However, there are a few caveats. The 2019 investors that have not reported any deals this year appear to have been the least active ones in 2019, so they may have been occasional investors taking minority stakes, as their average number of deals in 2019 was just one.

Investors that have participated in more than 75% of last year’s deals but still fewer than in all of 2019 had been involved, on average, in about four deals in 2019.

In contrast, those who have already done more deals so far this year were involved in fewer deals in 2019 – three on average. Therefore, they have had more dry powder to deploy during 2020.

The investors who were most active in 2019, with an average of eight deals, have done fewer deals than 75% of their 2019 figure. This finding also makes sense in terms of availability of capital.

Deals

Emerging enterprises from the health, IT and fintech sectors proved the most attractive for corporate venturers, accounting for more than 95 deals each. The top funding rounds by size, however, were raised mostly by companies from the transport sector.

The most active corporate investors, in turn, came from the financial services, IT, health and business services sectors.

Most of the funding from the biggest rounds reported in the first quarter went to emerging enterprises from the transport, financial services and life sciences sectors. Three of the top 10 rounds stood above $1bn.

Alphabet invested $4.5bn in Jio Platforms, the digital services spinoff of diversified India-based conglomerate Reliance Industries. Google, part of Alphabet, took a 7.7% stake in Jio and announced it was planning to collaborate with the latter on the development of technology including an entry-level smartphone.

Jio operates a mobile network and broadband service, as well as about a dozen proprietary apps offering music, film and television streaming, cloud storage and chat.

US-based electric truck developer Rivian completed a $2.5bn financing round that featured Amazon. Rivian is working on a plug-in electric truck called the R1T and an electric sports utility vehicle known as the R1S that will use a flexible skateboard chassis it has developed.

The company struck a partnership agreement with existing investor Amazon in September 2019 to jointly create an electric delivery van and manufacture 100,000 of the vehicles for the online shopping group to use.

MissFresh, the China-based online supermarket backed by Tencent and consumer electronics producer Lenovo, completed a $495m financing round. China International Capital Corporation led the round. The transaction valued the company at more than $3bn.

MissFresh operates an e-commerce platform that delivers groceries to customers in as little as an hour, sourcing items from more than 1,500 small warehouse scattered across China.

WM Motor, a China-based electric carmaker backed by internet companies Baidu and Tencent and metals trader China Minmetals, raised RMB10bn ($1.47bn) in a series D round co-led by SAIC Motor. Shanghai Automotive Industry, the parent company of SAIC Motor, had reportedly invested $73.1m.

WM Motor sells smart electric vehicles with features such as autonomous driving and connected electronics systems. It also markets a mobile app called GetnGo to pay for vehicle charging.

US-based mobile bank operator Chime completed a $485m series F round backed by Access Technology Ventures, an investment vehicle for diversified conglomerate Access Industries.

Founded in 2013, Chime is a “challenger” bank that offers financial services through a mobile app and does not operate any physical branches. Customers have access to a current account, debit card, overdrafts and features such as receiving their salary early.

Exits

GCV Analytics tracked 109 corporate-related exits during the third quarter of 2020, including 63 acquisitions, 39 initial public offerings (IPOs), one merger and six other transactions.

The total estimated amount of exited capital in Q3 2020 was $27.64bn, more than three times over the $8.15bn in Q3 2019 and considerably higher than the figure from the second quarter of this year ($13.1bn).

However, the top three reported exits in Q3 2020, with a total dollar value of more than $13bn, somewhat skew the picture. Five of the top 10 reported exits stood above the $1bn mark.

The surge in exits can be attributed to the fact that the business model of some startups has been given a boost by the pandemic which has, in turn, made exits more viable, whether in the form of mergers and acquisitions or via IPOs.

Top exiting corporates this quarter included SoftBank, Alphabet and cloud enterprise software provider Salesforce.

US-based medical diagnostics technology Grail agreed to an $8bn acquisition by genomics technology producer Illumina. Grail will receive $3.5bn in cash and another $4.5bn in stock. Spun off from Illumina in 2015, Grail is working on technology that combines gene sequencing with population-level clinical studies to detect cancer at an earlier stage.

Data analysis software provider Snowflake went public on the New York Stock Exchange. The US-based company issued 28 million shares at $120 each, above the $100 to $110 range it had set, after having lifted it from $75 to $85 a share. Salesforce subsidiary Salesforce Ventures and investment holding company Berkshire Hathaway provided $250m each to Snowflake via a private placement that took place at the same time. Founded in 2012, Snowflake has developed a cloud software platform which enables users to unify large amounts of data that are siloed, combine them with new data and analyse them in a variety of ways.

KE Holdings, the China-based online estate agent also known as Beike, went public in a $2.12bn IPO in which Tencent invested $160m. The offering consisted of 106 million American depositary shares (ADSs), each equating to three ordinary shares, issued on the New York Stock Exchange priced at $20.00 each. The price stood above the $17 to $19 range the company had set earlier, valuing it at about $22.6bn. KE Holdings was formed in 2001 as real estate brokerage Lianjia before adding Beike as an online and offline platform that manages real estate transactions. The combined platform provides access to 260 real estate brokerage brands and had 39 million monthly active users.

Xpeng, the China-based electric vehicle manufacturer backed by corporates Alibaba, UCar, Xiaomi, Duowan and Foxconn, went public in an IPO sized at approximately $1.5bn. The offering consisted of 99.7 million ADSs, each equating to two common shares, issued on the New York Stock Exchange and priced at $15 each.

The company had originally planned to issue 85 million ADSs priced between $11 and $13 each. The IPO price gave it a market capitalisation of about $21.3bn. Xpeng produces smart EVs that use its proprietary autonomous driving technology and in-car operating system. It has released a sports utility vehicle and sports sedan model.

Li Auto, a China-based electric vehicle producer backed by corporates Meituan Dianping, Shougang, Bytedance, InTime, Taiping, Ping An and Leo Group, priced its shares at $11.50 to raise $1.1bn in its IPO. The company issued 95 million ADSs, representing 190 million ordinary shares. The company listed on the Nasdaq Global Select Market.  In addition to the IPO, mobile services portal Meituan Dianping and digital media company Bytedance committed to purchasing $330m and $30m in a concurrent private placement. Founded as Chehejia and also known as CHJ Automotive and Lixiang, Li Auto produces smart sports utility EVs.

Funds

Corporate venturers supported 89 fundraising initiatives in the third quarter, up from the 64 during the same period in 2019 and in 2018. The estimated total capital, $23.98bn, was roughly 33% higher than last year’s Q3 figure of $18.03bn. The initiatives included 59 announced, open and closed VC funds with corporate limited partners, 12 new corporate venturing units and nine accelerators, among others.

Alphabet plans to invest $10bn in India over the next five to seven years through a vehicle called Google for India Digitization Fund. The fund’s capital will be deployed not only through equity investments in India-based companies, but also in partnerships and investment in operations, infrastructure and the technology ecosystem. Alphabet intends to target digital technologies that can be beneficial for India in particular. Its fields of interest include artificial intelligence products in areas like education, health and agriculture as well as language diversification and companies looking to boost their own digitisation.

Brazil-based investment management and advisory firm XP committed R$8bn ($1.5bn) from its own balance sheet to a corporate venturing subsidiary called XP Ventures. The unit has not set parameters regarding the size of its investments or the stage at which it will provide funding, but it will make strategic investments and consider business development deals with prospective portfolio companies. Founded in 2001, XP runs an online financial product portal offering access to more than 600 investment products including hedge funds, pension plans and bonds, in addition to providing guidance across a number of investor classes.

China-based consumer electronics manufacturer Konka Group has formed a RMB10bn ($1.45bn) industry fund in partnership with the municipal government of the city of Yancheng. Konka is providing 40% of the capital for the fund, preliminarily dubbed Konka Yancheng Electronic Information Industry Investment Fund, while Yancheng is putting up 59.9%. The other 0.1% will come from an unspecified limited partner. The fund is planned to debut with an allocation of RMB3bn and will target investments in developers of semiconductor, AI and internet-of-things technology as well as advanced machinery and materials. Founded in 1980, Konka produces televisions, audio equipment, tablets, power banks and home appliances in addition to LCD-based screens, signs and video walls.

China-based diversified conglomerate Bloomage International Group anchored a culture and sports-focused fund with a RMB10bn ($1.43bn) target for its close. Alan Asset Management Company, an investment firm formed in 2016 by financial services firm Hana Financial Group’s Hana Bank and Hana Financial Investment subsidiaries with women’s apparel brand Lancy, is also a cornerstone investor. Bloomage was founded in 1989 and operates in two main business areas: culture and sports, and cosmetics and healthcare. The company’s asset portfolio includes sports stadiums such as Wukesong Arena (also known as Cadillac Centre), where the 2008 Summer Olympics basketball games took place and where ice hockey will be hosted at the 2022 Winter Olympics.

Saudi Arabia-based oil and gas supplier Saudi Aramco’s has formed a $1bn corporate venturing fund. Prosperity 7 Ventures, named after the first well that discovered oil in the Saudi Arabian desert, has a large focus on China (split about half and half with the US) under the overall direction of unit head Aysar Tayeb. Joe Chang is managing director and senior leader in China. The fund is meant to help Aramco diversify over the longer-term from oil and gas into technologies such as artificial intelligence, 5G, industrial automation, robotics, the cloud, data and analytics, the internet of things and blockchain services, complementing Saudi Aramco Energy Ventures (SAEV), the corporate venturing unit now led by Mahdi Aladel after Majid Mufti’s departure.

Aramco’s global corporate venturing initiatives now manage about $1.8bn across Prosperity 7 Ventures, SAEV, the Middle East-focused Wa’ed Ventures and its participation in the $1bn OGCI Climate Investments alliance.

Switzerland-based investment fund Antimicrobial Resistance (AMR) Action Fund launched with almost $1bn in capital from biopharmaceutical companies to invest in developers of new antibiotics. AMR Action Fund is intended to operate as a partnership between 23 biopharmaceutical companies with the aim of bringing two to four new antibiotics to market by 2030.

Pfizer, Merck & Co and Johnson & Johnson each pledged $100m in capital for the initiative. Boehringer Ingelheim is providing $50m and Daiichi Sankyo and Shiniogi are putting up $20m each. Novo Nordisk, Leo Pharma, Lundbeck and Novo Nordisk Foundation are combining to invest about $76m. Novartis, Almirall, Bayer, Roche, Amgen, GlaxoSmithKline, Eli Lilly, Merck Group, Takeda, Eisei, Chugai, Menarini, Teva and UCB are also backing the fund. The initiative is being launched as increased AMR among viruses and bacteria is reducing the effectiveness of existing antibiotics. Some 700,000 patients die from AMR each year, a figure expected to rise to up to 10 million by 2050.

B Capital Group, the US-based venture capital firm affiliated with consulting firm Boston Consulting Group closed its second fund at $820m. Founded in 2014, B Capital targets growth-stage deals and pursues a portfolio management strategy that involves connecting its companies to corporates which can help them scale, through a network provided by BCG. The firm invests between $10m and $60m per round, at series B to D stage, and its areas of interest include enterprise software as well as financial, healthcare, consumer, transportation and logistics technology.

Japan-based carmaker Toyota added an $800m global growth-stage investment fund called Woven Capital to its early-stage, artificial intelligence-focused corporate venture capital unit. Toyota Research Institute – Advanced Development (Tri-Ad) was launched in March 2018 to oversee the formation of Toyota’s Woven City as an incubator for smart city design, connected mobility, and robotics technology from Toyota and its partners.

The unit will begin expanding and transitioning its operations into a holding company dubbed Woven Planet Holdings, two operating companies – Woven Core and Woven Alpha – and Woven Capital itself, in January 2021.

Aerospace technology manufacturers Airbus, Safran, Thales and Dassault Aviation have contributed to the €630m ($739m) initial close of France-based venture capital fund Ace Aero Partenaires. The vehicle had an original ceiling of $590m and is expected to hold a final close at $1.2bn. Dassault Aviation contributed $15.3m to the initial close, investing alongside the French government, unnamed contractors and fund manager Tikehau Capital. Ace Aero Partenaires will invest in civil aviation technology developers and midcap enterprises badly hit by the economic crisis resulting from the covid-19 pandemic.

Indonesia-backed, government-owned telecoms firm Telkom Indonesia provided $500m for a technology investment fund to be run by its corporate venturing subsidiary, MDI Ventures. MDI Ventures was originally founded in 2014 and officially launched two years later with $100m in capital to be deployed over a four-year period.

The unit invests in digital advertising and payment technology, cloud computing and big data, mobile apps and e-commerce, the internet of things and technologies that can influence the future of communications, offering access to Telkom companies along with capital.

The new fund will provide $5m to $30m for late-stage companies located in Indonesia. They will get the chance to collaborate with and other state-owned enterprises (SOEs), which will get the chance to leverage their technologies to build a digital ecosystem.

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