Throughout October and November 2017, GCV Analytics conducted its annual survey on the state of corporate venturing. The study was conducted in cooperation with Stanford University and Insead Business School. Faculty members and students of these academic institutions will have access to the results of the survey and publish academic papers based on them. Our joint effort was generously sponsored and supported by General Electric and Fenwick & West.
A total of 60 respondents took part in the survey this year. The response rate was slightly lower than in previous years due to the considerable additional length of the survey. However, we received contributions from corporate venturers in each of the 10 sectors we track, thus maintaining the overall representative nature of the data.
The survey questionnaire consisted of 44 questions encompassing various aspects of corporate venturing. The response rate per question depended on participants’ willingness to disclose information about their unit and investments.
Survey respondents and the venturing units they represent are kept strictly anonymous in this graphical summary of survey results, which are illustrated here only in a statistically aggregated fashion.
More than half the respondents – 55% – say their investment priorities consist of a mix of financial and strategic return considerations. Slightly more than a third (35%) say they focus mainly on strategic returns, and only 10% say they prioritise financial returns. These results are in line with the nature of corporate venturing and consistent with results from previous surveys.
Strategically-oriented venturing units seek to invest in promising emerging businesses based on a mix of criteria, whether theme-based (83%), looking for investees in line with business verticals (67%) or investing in a specific company to test a hypothesis (57%).
Structure
Most corporate venturers (77%) say they invest money in emerging businesses from the corporate balance sheet. Only 23% say they have a separate legal structure, akin to a traditional venture capital firm, with general and limited partners. Indeed, it is a fact that many corporations participate in venture capital rounds through their corporate development, strategy or mergers and acquisitions (M&A) departments.
Only a fifth of corporates (26%) say they have a capital pool fully committed by their parent and significant autonomy at the same time, while 74% say they have a separate fund but the capital is wholly-owned by the corporate parent.
These structures are reflected in the investment decision-making process. In 57% of cases, strategic and financial priorities are set jointly by the venturing unit and corporate C-level executives. In 21% of cases, only corporate executives make those decisions.
This is also evident in the reporting structure. Heads of venturing units most often report to the chief technology officer (23%), the chief executive officer (19%), the head of strategy (19%) or the chief innovation officer (18%), among others.
Thus, the presence of executives within venturing units is limited – in 75% of them there are five or fewer executives – in 41% there are two at most.
Strategic orientation
Given the clear presence of strategic considerations in the majority of corporate venturing units, it is important to shed light on what those considerations are.
When asked to select a statement best describing their investment focus, 29% of corporate venturers claim to be building an ecosystem for the parent company’s products and services, 26% say they back companies that can help the corporate parent enter new markets, 24% claim to be seeking new products and services for their parents. Only 16% say they are scouting for companies to add value to the corporate by increasing operating efficiencies, and just 5% claim to be purely financially oriented.
However, when asked to define “important strategic return” in an open-ended question, respondents give answers that are more nuanced. While striking partnerships with new businesses, entering new markets and innovating products or services are often mentioned – by 11% of respondents in each case – the most frequent answers concerned general strategic considerations (15%) – growth, industry disruption and so on – and ultimately generating more revenue for the corporate parent (21%).
When respondents rate the importance of a set of value drivers to their venturing unit, they give the highest scores on the scale – 4 and 5 – to technology innovation, defined as using the market for research and development (R&D), business model innovation (exploring and testing new business models) and market sensing (gathering intelligence through the startup ecosystem). Other value drivers such as bringing entrepreneurial thinking into the corporate parent, immediate financial returns from the startups and using venturing unit activities for public relations and attracting talent are given much lower scores.
Expectations and portfolio structure
Bearing in mind the preponderance of strategic considerations, however they may be defined, it is interesting to examine the time horizon of corporate venturing investors and their expectations concerning when investments will deliver value.
In the short run – up to two years – most investors (78%) expect up to 30% of their investments to deliver value. For the medium term – three to five years – about half expect 40% to 50% of their commitments to deliver value. Most corporate venturers expect between 20% and 50% of commitments to deliver value within six to 10 years by.
Such expectations, weighted heavily on the medium and long term, are corollary to the typical portfolio structures of corporate venturers broken down by stages.
Most surveyed investors claim to hold one or two seed-stage companies in their portfolio, where the average ticket size tends to be up to $1m for 93% of investors and the targeted shareholding for many is between 6% and 15%.
In the case of businesses at series A stage, we see greater exposure by corporate investors, which tend to hold anything up to 20 such companies in their portfolio. In 71% of cases, the average ticket size ranges between $2m and $5m. More than half of corporate venturers (54%) seek to hold stakes of 6% to 15% stakes in such enterprises, and 29% aim for an even larger stake.
For enterprises at series B stage, the situation is similar. Most corporates claim to hold up to 10 such companies in their portfolio, where the average ticket size in 64% of cases is between $2m and $5m, and in 28% of cases between $6m and $10m. Almost two-thirds of respondents (62%) say they aim to hold a stake of between 6% and 15% in such enterprises.
For later-stage enterprises – series C and beyond – most corporates tend to hold fewer than 10 in their portfolio. The average ticket size of enterprises, however, at this level of fundraising is not necessarily higher – 58% claim to write cheques of between $2m and $5m, while 30% have committed anywhere between $6m and $20m. Targeted stakes are fairly similar to those of enterprises at series B stage.
Expectations about the actual returns, as stated in open-ended questions, enable us to make interesting and consistent observations. When asked about their required internal rate of return (IRR – a measure of performance), 42% of corporates claim not to have any requirement, 22% say they require from 11% to 20% and another 20% or respondents say they need 21% to 30%.
The large number of corporates that do not formally require or expect a return may be attributed to the heavier weight they give to other strategic considerations – those of a more qualitative nature. Responses regarding required cash-on-cash multiple or gross multiple, also collected through an open-ended question, are consistent with stated IRR expectations.
Capital deployment
Among the most interesting facets of any investment business is how much capital it has at its disposal and how that capital is being deployed. The fund size of most corporate venturing arms (63%) tends to range from under $50 to $300m, while nearly a fifth claim to have between $301m and $500m in their coffers. A relatively small number of venturing arms have more than $500m.
The key to understanding patterns of capital deployment among corporates is that most of their investment vehicles are relatively new. Almost two-thirds of our respondents (63%) manage venturing arms that have been founded in this decade, while 26% of units were started in the 2000s.
Save for some old and well-established units, corporate venturing is still a young investment phenomenon. This is why most respondents claim to have backed anywhere from zero to 50 rounds but rarely above 50.
Most corporates have invested somewhat modest amounts of capital through their history – 44% claim to have deployed only up to $50m, while 25% – between $100 and $300m.
However, there are exceptions or outliers in the data, particularly China-based units that deploy billions of dollars of capital on an annual basis, despite being relatively young.
Given these patterns and capital availability, it is no surprise that most corporate units (71%) aim to invest only $50m a year at most.
These realities may also help explain why corporates are not often the lead investors in rounds raised by their portfolio companies. More than half (55%) say they have acted as lead investor in fewer than a quarter of the rounds they have backed, 26% of units have led about half of their rounds, and only about a fifth have led in more than half their rounds.
For corporate venturers, an alternative to direct investment is taking limited partnership (LP) stakes in established venture capital funds. According to our survey, nearly half of corporates with a venturing strategy take such stakes (48%). Most corporates with such stakes will typically hold no more than 10, while 42% say they have none. Many heads of corporate venturing units interviewed by Global Corporate Venturing over the years have said they use LP stakes for a variety of reasons – as a way to diversity the overall portfolio, as a way to invest in verticals they do not know well, or simply as a tool for learning about venturing.
Relations with portfolio companies
Unlike other venture capitalists, corporate venturers are in a unique position to help investees in a range of ways. The most common, according to our survey, involve taking observer seats (90%), providing access to partnerships and supplier or consumer networks (88%), offering access to R&D or technical expertise (78%), taking board seats (66%) and helping with marketing and public relations (55%). There appears to be a preference for observer seats over boards seats. Nearly half (45%) claim to take a board seat in fewer than a quarter of their portfolio companies, 39% say they have taken such seats in more than half the startups in their portfolio.
Issues of information sharing and confidentiality that emerge in such situations are also dealt with differently from firm to firm. Most have some formal structure in place (58%).
More than half of corporates (51%) claim some form of partnering is an integral part of the decision to invest in fewer than 25% of cases, while 37% say this is the case in over half their deals.
Collaboration deals often follow later in a portfolio company’s association with an investing parent, though survey responses suggest that venturing units have differing strategies in this regard, some more than others seeing portfolio company partnerships as a means of deriving value from their investments.
But acquisition is often seen as a natural process in securing value from a portfolio company. Two-thirds of venturing units also function as acquisition scouts for their parent and many investments involve conditions seeking to give the parent preference in portfolio company sales
However, in 47% of cases the corporate parent has never acquired a portfolio company, and in another 40% it has bought only between one and five such companies. Venturing arms, therefore, do not necessarily act as extensions of corporate M&A divisions.
Metrics, performance and investment teams
investment funds are judged on their performance, and this naturally applies to corporate venturing funds. When comparing a portfolio’s worth with net asset value by multiple, most corporate investors (71%) claim to stand between 100% and 200%, while 65% of IRRs range between 6% and 20%.
A variety of metrics are used by corporate venturers to monitor their own performance. The most common are hurdle rate or IRR (73%), cash-on-cash multiple (69%), multiple of sales or earnings (40%) and net present value (38%).
The critical factors that determine the success of a corporate venturing unit, according to respondents, extend beyond the performance of investments. The most highly rated factors had more to do with people than with financial results – the quality of the investment team, followed by the ecosystem network and the retention of investment team members. These factors were given higher priority than the time for companies to perform. It is, thus, no exaggeration to claim that corporate venturing is widely perceived by its practioners as, first and foremost, a people-driven and people-centred business.
In nearly half of corporate venture capital firms (49%), teams tend to have an average age of between 40 and 50, and in nearly half (47%) an average age of between 30 and 40. Corporate venturing seems to be a place for more experienced professionals.
The overwhelming majority of units (71%) are populated either exclusively or mainly by men. Only 26% have a fairly even gender split. This disparity is one of the challenges the corporate venturing community has yet to address effectively.
Open-ended responses on measuring value drivers
The following tables include anonymised verbatim answers from survey respondents.
