Corporate venturers make a useful contribution to the venture market in the UK and Ireland. Consider 2016, a boom year for venture investment in technology companies. About £2.77bn ($3.49bn) was invested in 649 deals of over £500,000 by 538 investors.
Despite all the fears about Brexit, year-on-year investment was up 7%, and the number of companies being backed rose by 22%. The chart on the right shows the extraordinary growth in the volume of companies being backed over the past six years.
In the third quarter, £210m was invested in online food delivery company Deliveroo. This monster deal is the biggest single funding Ascendant has recorded since it started monitoring the UK and Irish venture markets in 1997, surpassing the £175m raised by fantasy sports business Fanduel in 2015.
The fourth quarter of 2016 was also exceptional, as we recorded the largest number of UK and Irish tech deals per month for 20 years in October, when 77 companies were financed. The previous high was October 2000 – just before the internet bubble burst – when 67 companies were funded.
So how are CVCs contributing to this growth? In 2016, 108 CVCs invested in 107 tech deals of £500,000 of more – 16% of all tech investments in the UK and Ireland. This has crept up over the past few years in line with market growth, and is a larger percentage than deals involving US and European VCs.
CVCs do favour syndicated larger later-stage deals. The table above shows that CVCs participated in seven of the 10 largest deals in 2016. In fact, a deeper analysis of deal data indicates that on average, deals involving a CVC are typically twice the size of those involving only financial VCs. Corporate venturers do participate in smaller deals – many have or support incubators in the UK and Ireland, such as Telefónica, Google and Cisco – but as the table above shows, their appetite does increase dramatically as deal sizes grow.
Looking at sectors in which corporate venturers are active, we have found that the areas that attract the most interest are highly correlated with those of most VCs investing in the market. In 2016, 42% of CVC deals involved internet and mobile service companies, 38% software businesses and 8% cleantech firms. Fintech is often quoted as a big area for CVCs, but in fact 15% of all corporate venturing deals in 2016 were investments in fintech companies. This is in line with all other VCs.
Another way to assess CVC investment is to look at the appetite for risk. As part of its venture market research, Ascendant tags each deal it records with a relative risk value, which when aggregated allows the calculation of a risk appetite index. This allows us to measure how the appetite for risk varies from quarter to quarter and between different types of investor, sector and region.
While the calculation of the risk appetite index is proprietary, it effectively weighs investors’ willingness to commit capital to companies with varying development or market risks. The chart below highlights CVC risk appetite against the market, US investors and, for contrast, crowdfunding. The black line highlights the risk appetite of the UK and Irish market as a whole. It is interesting to note that this has been very steady over the past 24 months, when the UK has had both a general election and the Brexit referendum.
The chart clearly slows that businesses that have attracted investment from US investors or CVCs have found them more willing to invest greater sums in earlier-stage propositions than the market as a whole. Contrary to popular belief that CVCs have a stronger appetite for risk, the data suggests they are often closer to market norms than US investors.
In summary, the evidence suggests that CVCs are:
• One of the most active groups in UK and Irish venture.
• Active across all the primary market sectors in proportionate ways.
• Committing more capital to later stage deals.
• Have a positive appetite for risk above market norms, but not overly so.
We should applaud this contribution, as it adds not just additional capital but a great deal of market knowledge and technical expertise to investee businesses. Companies thinking of approaching CVCs as potential investors should be encouraged by the level of corporate venturing activity, but should be realistic about their chances of success.
