2014 Corporate Venture Investment Trends

By John Taylor, NVCA Head of Research and Jessica Straus, NVCA Manager of Communications

While some corporate venture groups have been making investments for more than three decades, during the last twelve months alone, we have witnessed the continued evolution of the corporate venture landscape. Qualcomm created a new Robotics Accelerator in partnership with TechStars, and Coca-Cola started the Founders Network to foster collaboration with entrepreneurs from across the globe even before they launch their companies. In addition to these new incubation models, we’re seeing the expansion of corporate venture activity. In 2014, corporate venture capitalists invested a total of $5.4 billion — the highest level of investment since 2000.

With more corporate venture capital investment levels on the rise and more corporate groups being created, the National Venture Capital Association’s research team ramped up its focus on corporate venture capital data about two years ago. In January, NVCA released corporate venture investing data for 2014. We interviewed John Taylor, Head of Research for NVCA, to dive deeper into the trends in corporate venture investing that emerged last year and to explore what the future might hold for corporate venture capital investors.

In 2014 corporate venture groups invested a total of $5.4 billion in 775 deals out of $48.9 billion of total venture capital investment.  Corporate VCs were involved in 17.8% of all venture capital deals. What landscape shifts within the past 10 years led to this leap in investment activity?

If you go back to 2000, when corporate venture groups invested $15.1 billion into 1,948 deals, it’s important to note that a majority of the corporate venture dollars were invested late in the game. In the last half of 2000 and 2001, public markets fell dramatically and the number of VC-backed companies postponed their IPOs as a result. Unfortunately, many new corporate investors came in just as the market began to decline.

What we have now is very different. First, there are technology platforms that simply weren’t available during the bubble. Mobile technology is a prime example. Even some of the business models that were tried in 2000 are coming back now because there is the technology to support it. Beyond traditional venture capital investors, there is increased interest from corporate VCs, mutual funds, and hedge funds who feel it’s a good financial opportunity to invest in private companies. In 2014, we saw a dramatic increase in the number of dollars invested, from $30 billion to $40 billion and even with that, CVC dollars increased by a greater percentage.

Traditional venture capitalists have flocked to early stage and expansion deals, moving away from seed stage investments. Several players are filling in the gap at the earliest stages, including angels and crowdfunding. Are corporate venture capital groups among the investors participating in seed stage investments?

We do know that unlike the investment trends we saw 15 years ago, corporate venture groups are not backing away from getting involved at the seed and early stages. The idea that corporate venture groups only hop in at the expansion stage — those days are over. Engagement at the seed and early stage is robust from the CVCs.

It’s important to keep in mind that while a lot of startups with teams of two have raised venture funding, no company that small goes public. Corporate venture investors, who now often come from a traditional venture background, know the innovation landscape, how to contribute on a board and how to marshal the corporate resources to contribute to growth. In the period when a startup grows from a two-person team to a public company, both corporate and traditional VCs provide value to the portfolio company in three key ways – capital for growth, expertise and their rolodex.

In terms of sectors, where was the biggest delta between traditional and corporate VCs? To which industries did corporate venture groups gravitate toward, that traditional VCs did not?

Companies in Software, Computers and Peripherals, Semiconductors and Biotechnology industries were the sectors with the highest level of corporate venture capital participation. Corporate venture groups have always been very active in biotechnology. Over one in every five deals in biotech has a corporate investor.

As with traditional venture capital investments in 2014, Software deals received the largest share of corporate venture investment. Corporate venture groups invested $2.5 billion into Software deals, which represented 47% of all corporate venture deals. Software is historically a very investable sector in venture.  With companies like Uber classified as a software business, you see high percentages of investment in the sector.

Clean tech investing requires specialized expertise and Corporate investors have known this for years.  Although Clean tech investing is way down overall, we are seeing a rise in the participation of corporate VCs in clean tech deals, as many traditional VCs have come and gone from investing in this space. For 2014 corporate VCs invested $256 million into 35 clean tech deals, which is an increase from 2013 when $279 million was invested into 29 deals. Even though the total number of deals and dollars has been falling for a few years, in 2012 corporate venture capital accounted for 12.7% of the total clean tech deals. In 2014 18.5% of clean tech deals have corporate venture dollars, making it very clear that corporate VCs are engaging more in the sector as a share of the number of deals.

Looking back to 1995, 7.4% of all VC deals had CVC involvement, investing an average amount of $4.23 million per deal. What kind of investing strategies have evolved over the past 20 years? Are CVCs more focused on strategic value than returns?

Over time corporate venture investment has accelerated, corporate R&D has not. The corporations are simply doing less R&D and supplanting it with venture. What is new is that as we see an emerging generation of managers at these corporations. There is a recognition that no matter how careful a corporate culture is in focusing on disruptive innovation, it’s very hard to develop something internally that will disrupt existing lines of business. So it makes sense that corporations would look outside of their corporate walls and look toward new companies that could drive the bottom line.

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