In the first quarter of 2019, GCV Analytics tracked a record 789 funding rounds involving corporate venturers, a 23% increase over the 644 recorded in the first quarter of 2018.
Despite veteran corporate investors, such as internet and technology conglomerate Alphabet, telecommunications firm SoftBank, enterprise software provider Salesforce and internet company Tencent, continuing to remain active in the space, the uptake in investment is being fuelled by an increase in first-time CVC investors.
In Q1 2017, first-time investors accounted for 12% (65) of the corporate-backed deals tracked by GCV. However, in the first quarter of this year 143 deals (20%) were made by first-time investors.
According to data from Global Corporate Venturing, a total of 1,626 corporates completed an investment in 2018. Out the that total, approximately a third (544) of were making their first deals.
This year is on track to potentially surpass last year’s total. More than 1,031 corporates have already completed a deal so far in 2019, with more than 270 of those by a first-time investor, just over a quarter of this year’s deal total so far.
The data shows a trend of newcomers making a move into venturing, whether that is through a specific venturing unit or fund, or just through capital off the balance sheet.
Russia-based steel, energy and mining company Severstal is one of them, having announced the launch of a corporate venture fund, Severstal Ventures, in May last year.
The fund was awarded Global Corporate Venturing’s new entrant of the year award for 2018, beating Alliance Ventures, a vehicle set up by carmakers Renault, Nissan and Mitsubishi; a corporate venturing unit established by energy management business Schneider Electric; a fund formed by oil, gas and chemicals supplier Sinopec; and an incubator and venture capital fund formed by cryptocurrency exchange Binance.
George Gogolev, previously director of corporate innovation and technology transfer at state-owned fund of funds Russian Venture Company, was bought in to support the creation of Severstal’s CVC unit as head of disruptive innovation.
The vehicle’s primary area of focus is bulk materials and materials for the construction, energy and automotive industries, though it also looks at coatings and production technologies with a special focus on large-scale 3D steel printing for construction.
Gogolev said the rise in corporate investments and first-time investors in the space was a reaction to innovation in technology. He added: “Generally, it is down to speed and change. The speed in which the change in technology has increased and the speed in which traditional corporates are dying out and being replaced by new and upcoming companies.
“The management and shareholders of large corporations understand that so that is a big macro factor they have to address. They are doing that through open innovation and in the last wave of corporate venturing they finally figured out they have a strategic purpose to serve, which isn’t strictly financial.”
He also believes the success of traditional VCs and the returns in that segment is causing corporates to sit up and take notice.
In April 2019, UK-based events and publishing group Informa also launched a corporate venturing fund to focus on seed and series A stage startups operating in the knowledge and information economy. The fund, Inform Ventures, is operating out of offices in London and New York under the leadership of managing partners Richard Stanton and Max Gabriel.
Stanton said the move from first-time CVCs was being fuelled by the need to keep up with disruption and the pressure of making sure you are being “innovative as a core practice”.
He added: “Part of that is solving the issue internally, no question about that. However, I think an additional part of that is making investments to keep your hands on the pulse of the industry and being able to leverage those tools internally.
“Corporates are also reacting to the fact that VCs have done extremely well making these investments without having a frontline view of the use cases.”
In addition to Severstal and Informa, Global Corporate Venturing has tracked the establishment of more than 62 other CVC funds or units since the beginning of 2018, emerging from a range of different industries and geographies.
Equipment producer Bose has committed to provide up to $50m for a corporate venturing unit called Bose Ventures, which is designed to fund startups developing augmented reality technology. Ireland-based security product manufacturer Allegion has also formed a $50m vehicle to invest in complementary technologies.
Conglomerate BayWa Group launched BayWa RE Energy Ventures to back energy-related technologies, while the Heritage Group (THG), a diversified US-based holding company, has created HG Ventures to make strategic investments in early and growth-stage companies in THG’s core sectors of infrastructure, materials, energy and environmental services.
In the healthcare space, provider Cigna launched a $250m vehicle to access innovative technology that can improve the effectiveness and efficiency of its services, while financial services firms Commercial Investment Bank (CIB) and Barclays have followed suit by establishing dedicated investment units.
Utility National Grid has also officially launched National Grid Partners (NGP) to invest in companies developing technologies that can support the transformation to an energy distribution network more heavily based on renewable energy.
While these corporates and others have established funds or dedicated units as part of their strategy, others have simply invested off their balance sheet without an established unit in place.
Property management firms Greentown Service Group and Galaxy Holdings made their first investments by contributing to a $157m series C1 round for China-based online property portal Uoko.
Property manager Invitation Homes also completed its first investment by backing a $325m series E round for US-based online real estate marketplace Opendoor.
In the financial services space, boutique advisory firm Blacksoil Group chipped into a round for online lending marketplace Rubique Technologies, consulting firm Rice Warner took part in a $11.3m series A round for digital mortgage marketplace Athena Financial and marketing and e-commerce services provider The Native reportedly paid $9.1m for a 15% stake in US-based online auctioneer Paddle8.
Vehicle refuelling and retail technology producer ORT Technologies, wireless technology producer Incon, carmaker BAIC and holiday resort operator Resorts World also made their first deals, investing in Velox, Variant Pharmaceuticals, RoboSense and TabSquare respectively.
Unit or one-by-one?
With the rise in corporate investments being fuelled by those making their first moves into space, does establishing an investment team, unit or fund have benefits over investing in one-off deals?
Severstal has so far made limited partner commitments to two funds, which has helped establish a pipeline of deals and assess opportunities in the sector. The firm’s first investment has been caught up in regulatory constraints, though it is expected to be completed shortly.
Gogolev explained the reasoning behind establishing a dedicated unit as opposed to just investing in one-off deals. He said: “The unit was created as part of a new growth strategy and focusing on growth from innovation.
“There are basically three types of innovation; product innovation, process innovation and new business model innovation. We created the venture fund to understand the future in order to be better prepared. Our main investment thesis is looking at real disruption within those three areas.”
Having established Informa Ventures, Stanton explained the benefits a dedicated unit has. The idea of the fund was born out of the need to target a universe of companies that are unlocking or solving problems that Informa believes exists in the industry, all lining up against a core set of hypotheses that the corporate has laid out with its divisions.
“We treat our process no different than that of an established set-aside fund. We do internal reporting, we have monthly investment committee meetings, we hold diligence sessions weekly. We are dedicated to looking at the data and trends that are associated with passed and funded deals and share that information quarterly with each other and our divisional leadership.”
While Informa acts as an off-balance sheet investor, internally they are a team of professionals focused on making strategic investments, Stanton said.
“What I would say is when something has a name, has a brand and has a team of people associated with it, it becomes much more real. If you are doing that as a one off or an ad-hoc strategy, you will not have the same dedication to following that sort of rigour and process. I think that’s a huge advantage for us as a committed investor.”
