One of the most interesting questions occupying the minds of academics, industry practioners and companies raising VC rounds is the overall importance of corporate venture capital, the weight of having corporate-backing. An academic study, published in 2014 by Thomas Chemmanur, Elena Loutskina and Xuan Tian, showed that entrepreneurial companies backed up by CVCs are more likely to achieve a successful exit.
Our partners at PitchBook provided data on exits and M&A transactions for companies backed by corporate venturers in Europe and the US, going back to 2006, and on the whole, this data appears to support such a finding. But there is more.
In 2015, about 20% of all VC deals in the US had a corporate investor participating. But the percentage of capital involving corporate participants had increased significantly – roughly 46% of all money raised in US VC deals involved a corporate participant in 2015, up from 26.9% in 2009.
The European VC realm appears to have followed a similar trend. In 2016, the number of Europe-based deals with corporate participants may reach 18% to 19% but it has historically fluctuated between 13% and 15%. From 2006, the percentage of capital invested in VC rounds with corporate participants has fluctuated wildly from 25% to 40%. This suggests that there may be very different driving forces behind CVC-backed deals in Europe compared with the US.
Global data provided by PitchBook suggests that the median pre-money valuation of companies tends to be higher when a corporate investor is involved. In 2015, the median pre-money valuation was €15.1m versus €12.6m with no corporate investors in series A rounds, and €44.0m versus €34.4m with no corporate investors for series B rounds. However, in respect of successful exits, it is convenient to examine further the impact of involving a corporate investor on later stages of financing.
Global Corporate Venturing has been tracking corporate-backed exits around the wolrd since 2011. In recent years, the number of such transactions has significantly increased – from 109 in 2013 to 169 and 168 in 2014 and 2015, respectively. By the end of last month, GCV Analytics had tracked 142 exits this year. So it is reasonable to assume that globally there is an upward trend in the number of corporate-backed exits. Enterprises based in the US alone account for a great number of those exits as well as a considerable portion of the total estimated exited capital. Their European counterparts account for a more modest proportion of either indicator.
In terms of the capital exited and committed, the highest peak globally was registered in 2014, when corporate investors exited an estimated $70.71bn of total capital, based on total transaction size. So far this year the total stands at $30.95bn, already surpassing the total for 2015 – $25.21bn.
Does involving a corporate investor in a series A or B round translate into longer-term benefits for a given company? The PitchBook data seems to indicate so for the exit stage. Over the past 10 years, the median size of a VC-backed exit for US-based companies was always larger for companies that included corporate backing than for those that did not. Moreover, there appears to be a very significant gap between the two figures, which has been growing since 2010.
In 2015, the median exit size for CVC-backed companies in the US stood at €80.6m, while non-CVC-backed amounted to almost half that amount – €42.7m. The same gap in median exit size is notable in European VC rounds as well. Although perhaps not as pronounced as in the US until 2014, last year European VC-backed exits actually registered a much larger gap – the median exit size of a CVC-backed Europe-based company was €48.2m, while companies not backed by corporates were valued at €20.5m – a 135% difference.
The same trends are apparent in the average size of corporate venturing-backed exits when broken down by type. Among US companies, the average size of acquisitions, which account for the majority of exits, has been growing over the past seven years – from €72.9m in 2009 to €172.3m in 2015. The same is true for Europe-based companies where the average acquisition size has grown from €27.0m in 2009 to €110m in 2015.
These developments in Europe and the US are hardly surprising if we look at what is driving them. The majority of VC-backed exits with corporate participants, in the Europe and the US alike, have tended to come from two broad areas in which we have seen a tremendous number of new developments and a tremendous amount of innovation over the past decade – the healthcare and IT fields.
The total amount of exited capital by type backed by corporate VC investors has also grown – for US companies from €4.2bn in 2009 to €22.1bn in 2014, more than a fivefold increase, and went down only slightly to $20.9bn last year. It is noteworthy that those levels for US companies do not seem to have been reached over the first half of this year, although it is not entirely reliable to compare one-year periods with half-year periods at this point. However, it will be interesting to see whether the slowdown observed in 2015 will spiral further through the rest of 2016 and next year, adding a measure of cyclicality, such as the one that seems to appear in the data over the 2007-09 period.
The same trends are true for European companies when we look at total exited capital by type backed by CVCs, albeit the scale is smaller in terms of value. Total exited CVC-backed capital in Europe grew from €400m in 2009 to €5.6bn in 2015 – 14 times – and then dropped to €4.2bn in 2015. However, it must be noted that in 2014 much of the exit capital growth in Europe was driven by large IPOs – €3.4bn – whereas substantially more of it was attributable to large acquisitions during 2015 – €3.2bn versus €2.1bn in 2014.
There have been many large CVC-backed M&A transactions over the past few years. Among US-based companies, corporate-backed mergers and acquisitions of between €500m and €1bn have been historically few and far between until 2013. From then, however, there have been consistently at least three each year – seven in 2015. The same applies to CVC-backed M&A transactions of over €1bn – in total there have been seven during the 2013-15 period.
The European M&A landscape has been more modest in size, though following a similar trend, with only one transaction above the €1bn mark, in 2014, and just three transactions in the €500m-€1bn bracket.
Over the past decade, most of the top acquirers of corporate-backed portfolio companies by number have been IT and technology groups such as IBM, Alphabet (Google), Cisco Systems and Microsoft.
This may make it tempting to conclude that technology giants dominate the field. However, an analysis of some of the largest transactions shows that along with tech companies backed by the corporate venturing units of tech corporations, there have been a number from the broader healthcare and life sciences field, such as Alios Biopharma, Flexus Biosciences and Reliant Pharmaceuticals.
The majority of their backers have been, quite unexpectedly, corporate venturing arms of large pharmaceutical companies. It is therefore reasonable to conclude that the most active CVC investors in Europe and the US in coming years will continue to be corporates in the IT and health sectors.
Reference
Thomas Chemmanur, Elena Loutskina, Xuan Tian. Corporate Venture Capital, Value Creation, and Innovation. Review of Financial Studies 2014. Oxford University Press. https://www2.bc.edu/~chemmanu/paper/Corporate%20Venture%20Capital,%20Value%20Creation,%20and%20Innovation.pdf
