Thank you to the 275 respondents for helping Global Corporate Venturing and our academic partners, Paul Gompers, Harvard University and National Bureau of Economic Research, Will Gornall, University of British Columbia, Steven Kaplan, University of Chicago Booth School of Business and National Bureau of Economic Research, and Ilya Strebulaev, Stanford University Graduate School of Business and National Bureau of Economic Research, learn more about corporate venture capital.
We wanted to learn best practices in corporate venture capital (CVC), market corporate venture capital to policy makers and the public, and guide academic research. This survey, carried out over six weeks at the end of October, was a follow-up to the academics’ largest-yet survey of institutional venture capital earlier in the year and so allows an unprecedented view across two parts of the wider innovation capital ecosystem.
Of the 235 active CVCs that responded, the majority had just one parent and were broadly spread by sector. The CVCs said they often had multiple goals, such as developing new business, supporting existing businesses as well as often having financial objectives. For those with multiple goals, about half said developing new business was their most important objective, followed by those tasked with supporting existing businesses.
However, a quarter said financial returns were their priority, which fitted with the broad numbers who invested off the balance sheet, such as through dedicated funds where it can be easier to track returns and attribute performance fees.
But fewer than a quarter of CVCs received no incentives for their performance, with those that did receive such bonuses gaining them primarily for having at least some strategic delivery.
The majority of CVCs, regardless of strategic or financial goals, focused on specific industries to develop their investing advantages. And rather than target later-stage deals to try and show synergies with the parent, the majority of those focused on development at the portfolio company said they were looking at a seed or early-stage.
Fit with parent company was still the most important factor for about a third of CVCs when deciding whether to invest, even above management team. When judging managers, however, their perceived ability, entrepreneurial experience and industry experience were the top criteria.
Management team was the primary characteristic behind both success and failure, above technology or business.
The academics said the average CVC unit was set up in 2007, reflecting both the largest number formed since 2010 (94) as well as the handful tracing their history back before 1990.
However, the size and scale of corporate venturing commitments has dwarfed historical allocations to the average VC fund given companies are trying to compete with the top tier. Twenty-four CVCs are investing at least $100m per year, which would put this subset on average investing nearly $7bn per year at the mid-point of their ranges and the equivalent of a $1.5bn fund size invested over a five-year period.
By comparison, from 1995 to 2008, the average US venture capital fund size increased 3.5 times from around $100m to $350m, according to Daniel Blomquist, a principal at VC firm Creandum in a paper presented last year to Kauffman Fellows. This was nearly four times the average size of European VC funds – at final closing – of €61m in the 2007 to 2012 period ($80.5m at 2012 exchange rates) and when the median fund size only amounted to €27m, according to trade body Invest Europe.
Put another way, almost every CVC has been investing more per year than an average European VC fund closed in 2012 and investing over a standard five-year period.
And they have been successful in finding the best deals, with 31 CVCs saying they were currently an investor in a so-called unicorn – a company valued at more than $1bn – and more than three-quarters delivering at least 10% annual rates of return per year and at least their money back. However, these figures included unrealised investments and almost all CVCs said unicorns were overvalued, which could affect these returns, and fewer than half said they hit the median 20% internal rate of return IRR. However, most groups adjusted their target IRR depending on perceived other factors.
Allied to the experience of CVCs, the amount of capital deployed by groups has been significant, with 15 investing at least $1bn since their formation. This is almost the same number as top-tier VCs, given US trade body the National Venture Capital Association (NVCA) estimates 60% of money now raised in funds was being secured by the top 16 firms. Still, CVCs are trying to help the VC ecosystem in more ways than just buying portfolio companies and syndicating deals, with more than half committing to a VC fund.
And, while the number of active VCs has shrunk – with 211 US firms conducting at least five deals a year now compared with 1,000 or more in 2000, according to the NVCA – so corporate venturing has increased. At least 143 having five or more deals a year, according to Global Corporate Venturing Analytics.
The average number of days to close a deal by CVCs was 95 days, with a fifth usually taking under 60 days.
With CVCs being relatively more active, they are leading more deals. However, corporate venturing units are relatively lean, with about half of respondents working in teams with up to three investment partners. But as the CVC industry professionalises, so it has attracted investment executives from outside the parent corporation with only half having at least 60% of their team from the parent.
CVC units were broadly split in how they decided on deals, with a quarter requiring consensus with members of the investment committee having a veto power to block a decision. At the other end the spectrum, nearly a quarter of the 164 respondents said the final decision was left to the head of the unit.
This CVC head most commonly reports to the CEO or head of innovation, such as chief innovation officer, although it is likely most of the CVCs with a stricter financial focus could report to the chief financial officer.
And, while parent corporations retain usually close oversight on deals made, with more than half needing the head office to authorise investments or have committees including C-suite executives decide, CVCs are increasingly influential in impacting a company’s strategy.
Seventy percent of CVCS said they either were their corporation’s corporate development team or they helped the mergers and acquisitions team identify or buy venture-backed portfolio companies. About 10% of the 1,160 exited companies had been sold to the CVCs’ parents, with about 40% failing. Taking “parent acquisition” as a proportion of M&A exits (52% in total), the 20% figure was in line with GCV’s M&A analysis in December.
Given CVCs’ often multiple goals, the average week was a busy one, with more than 48 hours worked, about half on finding deals and managing portfolio companies. The average CVC was on three boards and engaged with portfolio companies at least once a month in the first half year.
Part of this help involved directing most portfolio companies to the parent’s business units for potential commercial deals together.
And given the 100 potential investments the median CVC considered in a year, they said they and colleagues spent on average 132 hours on each deal. Of this, part goes on checking references, with almost all taking at least three as of due diligence and an average of about seven. For this effort, CVCs usually targeted taking up to 30% of a portfolio company’s equity.
Deal flow and selection were together the most factors behind a CVC’s value creation and about three-quarters said they tried to forecast the financials of portfolio companies.
