The rush to invest in exponentially growing Internet and digital media startups has “sucked the oxygen out” of the room for patent-rich startups, and one of the results is that corporate venture investors are having a “field day”, according to Go4Venture in its latest research note. The notion that certain investor groups are operating with very little competition, finding opportunities and areas that are underserved prompted DealMarket Digest to talk to three experts in Europe to find out more.
The current market for technology investment is much improved for both entrepreneurs and investors in Europe. “There’s optimism and willingness in the market conducive to funding companies. There are good opportunities in hardware and next generation semiconductor in France and the UK, but they are starved for investment. It leaves lots of room for corporate venture capital players,” said Jean-Michel Deligny, founder and Managing Director, Go4Venture Advisers in London.
Where VCs give up…
Cleantech, energy, medical and industrial technologies are other areas that are out of favor but attractive to corporate venture groups, according to Toby Lewis, Editor of Global Corporate Venturing. There are not too many investors that are willing to endure a 10 year stretch and that it is what it sometimes takes in these areas of technology.
Because they are investing strategically, corporate venture groups invest in what is valuable in their industries. “They are niche investors and they have been supporting these segments during a time when a lot of the financial VCs gave up on the more capital intensive businesses. They’ve definitely picked up the slack caused by the departure of financial investors,” Lewis told DealMarket Digest.
Corporate venturing from seed to later rounds
“It’s true that corporate venturers have been very active in what I call the physical sciences in the past few years. There are certainly more of them, and there’s a relative shortage of VCs willing to invest,” said Paul Morris, an Investment Director with UK Trade and Investment and who also set up Dow Chemical’s European venture unit back in the nineties and led it until 2013. The number of corporate venture capital groups doubled in the past five years. There are about 1,200 such groups globally now. They fund technologies and teams that might provide their company access to innovations, new markets or new geographies and customers or downstream ecosystems. “A lot have the expertise, talent and capacity, to do the whole range of dealmaking from seed to leading later rounds,” said Morris.
That being said, nobody is very happy about the dearth of VCs for anything other than scalable Internet ventures. In the early stage and IP-rich ventures, both types of investors are required in the syndicate. “The corporate VC can provide strategic support in addition to capital, but startups need the value-add that they bring. VCs are often speedier, experts in due diligence, good at structuring the organization, talent management and general hand-holding.”
Making a difference to the corporate business, first
Deligny agreed, “Corporate venturers may be enjoying greater access and at earlier stages, but in practice they usually prefer to commit to later stage plays, which are probably less risky and more likely to make a difference to the corporate’s business quicker.”
With venture capital fundraising improving in general, and in Europe too, Morris expects an improvement in the market dynamic. Lewis also expects more interest from VCs. “It is a valuation thing, making the IP-rich segment relatively more attractive but financial VCs are also seeing the opportunities,” he said. Indeed, there are opportunities. For example, Vivendi’s corporate venturing team made USD 404 million when it sold its 13% stake in US-based headset-maker Beats to Apple last year. (See Corporate Venturing’s Winning Ways for other notable examples.)
Corporate Venturing’s Winning Ways
– IDG Capital Partners and Qualcomm Ventures are credited being instrumental to smartphone-maker Xaomi in the early stage. It just raised a USD 1.1 billion in late 2014.
– In May, EMC acquired venture-backed Virtustream for USD 1.2 billion in cash. Intel Capital providing capital through the investment period. SAP Ventures was closely involved too, according to Forbes.
– EMC’s own venture unit did well with flash array startup, XtremIO. It invested in its Series A round back in 2009, helping it with know-how and partnerships, contributing to a run-rate that was so impressive that the venture group’s parent acquired it in 2012 in an all cash deal. EMC’s head of ventures said publicly that by 2014 the acquisition was generating a USD 1.2 billion dollar annual run-rate.
– Merck Global Health Innovation Fund activity contributed to what’s now the Digital Health segment its moving to larger deals with private equity and other strategic partners, according to Lewis.
– In May, Softbank acquired the founder’s stake in Aldebaran Robotics. It had already bought an 80% share in 2012 (paying USD 100 million, according to a report in the FT. Aldebaran Robotics’ Series C round was entirely targeted at corporate investors because the company wanted a business partner as well as funding, according to Deligny.