The scale of money going in to support front-end innovation in the US is what first catches your eye.
According to analysis by Gerald Brady, at Silicon Valley Bank, in a webinar hosted by DLA Piper last week, it is more than $475bn as just the “first dollar into innovation to create a patent or a first company”.
For a sense of scale, at $475bn it would be bigger than Argentina’s economy – a top 10 country 100 years ago – but a touch smaller than Norway’s, as measured by gross domestic product from the World Bank’s latest figures.
The largest part of this US figure, which excludes things like intellectual property licensing, mergers and acquisitions and friends and family money, is corporate research and development (R&D).
At $280bn, corporates spend more than 60 times on their in-house R&D than they do through their corporate venturing units, which SVB estimates at $4.4bn. This is despite Brady saying a dollar spent on corporate venturing brings three times the number of patents as the same dollar invested in R&D.
Brady noted the other factors impacting corporate innovation and their desire to work with entrepreneurs – both inside and and outside the organisation – were the speed of change and the reduced cost and time to market for start-ups helping lead to an explosion in activity, as well as corporate chief executives starting to look how to grow their earnings per share through boosting revenues rather than cutting costs.
That other corporations are actively trying to expand across borders and sectors through their venturing activities and global competition is heating up puts an extra pressure on incumbents to develop their innovation strategies – an important theme of our Symposium on May 21-22.
Given that entrepreneurs in life sciences that have corporations in their syndicate have a 40% exit premium to their peers without strategic backing and you have a recipe for enormous supply and demand push towards an increase in corporate venturing activity.
Brady noted that while venture capital (VC) – as provided by independent firms with purely financial aims – used to be synonymous with innovation capital a decade ago, now this has changed.
In a wide-ranging discussion, he noted the rapid growth of crowd funding, on platforms such as Kickstarter and CircleUp, from effectively zero to $2.8bn last year; angel investors providing $22.5bn; the US government spending $125bn on R&D (primarily by the Department of Defense); and universities gaining $25bn from contracted R&D, excluding their own venturing funds to support faculty and students’ entrepreneurial ideas.
Brady in a series of charts showed how the VC industry had evolved over the past two decades from a spike around the millennium towards far fewer active firms now.
While the official trade body figures highlights around 400 to 450 VC firms investing about $25bn per year, Brady said SVB’s analysis showed only 172 of them did at least two deals last year, while data from Flag published by news provider Fortune last week identified only 86 VCs doing at least four new deals per year and investing at least $4m.
The concentration has been driven by SVB’s analysis that 20 firms raised two-thirds of all the dollars committed to VC funds last year. Many of these firms, such as NEA’s $2.6bn XIV fund raised last year or Accel Partners that raised $2.7bn between 2008 and 2011 for multiple funds, effectively cover different stages from seed to growth equity as well as multiple sectors and regions.
On top of the later-stage venture/growth equity specialists, such as Institutional Venture Partners’s $1bn XIV fund closed in June last year, it means nearly a quarter of the VC money by amount is going to later stage, and increasing in the past six months, according to US trade body NVCA (http://nvcaccess.nvca.org). After Brady’s presentation, some argued this later-stage VC investment should perhaps be excluded from the true “innovation capital”.
This strict definition would also affect the $4.4bn estimate for corporate venturing. But while corporations have typically been seen as later-stage investors, many are filling the earlier-stage gap, even as they make up a larger proportion of the venture industry.
For example, more than 120 back an accelerator or incubator, according to Global Corporate Venturing’s report last year. (Given most entrepreneurial deals are for private companies where allocation of capital is not public, we have yet to estimate the amount of money corporate venturing firms invest each year.)
But extrapolating from the increase in number of units and GCV’s annual survey showing indicated confidence to do more deals, the trend is for an increase in dollars investment by the industry. Data from Global Corporate Venturing (GCV) in the first quarter showed more than 30 corporate venturing units or funds were raised.
GCV tracks more than 120 corporate venturing units with more than a decade’s experience and still broadly doing at least two new deals per year (some, such as Intel Capital, might do far more) and more than 200 launches since 2010 where the groups are ramping up their programmes with often greater numbers of new deals.