INSIGHTS / Blog

Maija Palmer, Editor, Global Corporate Venturing, shares her insights on how start-ups can successfully navigate the current funding landscape. 

Global Corporate Venturing was founded 12 years ago, back when corporate venturing was a nascent activity. It started as a simple exercise in exploring how many companies undertook corporate venturing activity. Less than 500 did this in 2013. The intervening decade has seen a huge upward trend, with corporates across the globe adopting corporate venturing activity as a way of enhancing their in-house research and development to create innovative new products and services. To give you an idea, over the last decade, 7,500 companies recorded having done some kind of corporate venturing activity. In 2023, we tracked 2,273 corporations that were actively investing.

Following the boom years of 2021/22, overall, 2023 was a difficult year for any investment. Venture Capital deals fell 30%, and corporate venture deals declined by a similar percentage — 27%. But one thing that has been encouraging is that we have not seen corporate venture capital as an asset class retreat completely from the market. Last year, we saw 65 new venture units formed, which is really encouraging. It’s lower than in 2021/22 but hasn’t completely collapsed. There’s a perception that corporates don’t have a lot of stamina for this activity when the going gets tough, but this data shows that it is something that corporates take very seriously and have committed to in the long term.

How does it work in practice?

There are lots of different models of corporate venturing. We categorise them in terms of how independent they are or what their relationship is with the parent corporation, and that’s across a really broad scale. At the very early end of the spectrum, you will have a handful of people who are part of the strategy unit. They’re not defined as a separate corporate venture function, but they do some investment in start-ups, and they invest mostly from the corporate balance sheet. If a deal comes up, they will go and petition the Chief Financial Officer to allow them to invest. More mature corporate venturing functions will be set up more formally and will typically have three or four people, and their job is specifically to go out and scout investment. They will have an annual budget allocation but maybe not a separate fund. Then you get the most formal and ideal set-up, teams with their own dedicated fund. Fund sizes tend to be in the $50 – $100m region. Whilst they have autonomy, they will also work closely with the broader company’s strategy function and business units. We see this as the ideal set-up, as the corporate venturing team can have the most freedom and move a lot quicker to secure deals, acting similarly to a VC. Lots of the corporate venturing units in the US, which tend to be the ones that have been around the longest, have found themselves migrating to this model.

What’s happening now?

2024 is once again proving to be a tough year for investment, and corporate venture funds could be an increasingly attractive option for start-ups. Towards the end of last year, we saw a lot of new units being created, and with that came investment pots. We’re continuing to watch closely to see whether corporate venture capital (CVC) deals increase relative to venture capital, but it’s definitely a good option for start-up investment.

You need to go into it with your eyes open, though. One major positive is that the corporate can give the start-up access to a lot of businesses. You’re not only gaining investment but also being plugged into their distribution channels, which can lead to additional customers. It can work really well, but start-ups need to be aware that corporates can have very different agendas than financial VCs. They are looking at their own corporate advantage, not always exclusively, and they will be very start-up friendly but they have an imperative to do something that benefits their parent corporation. So, you’ve just got to know that that’s part of the mix and make sure that it’s in line with what your goals are as a start-up. Terms are tightening everywhere. Even financial VCs are asking for harder terms and preference shares, and corporates are tightening up not in exactly the same way, but they are asking for more and for special rights, for example, if there’s going to be an exit for the company.

What’s the future?

We launched our annual ‘World of Corporate Venturing’ publication earlier this year. This reports on the number and kinds of deals, the number of active units, and the trends in 2024.

One of those trends we’re seeing is a significant shift of corporates backing seed and early-stage companies. In the early days of corporate venturing, it used to be that they would go quite safe by looking at Series B or C rounds, and that would be where they would put their money. Our report has found that 57% of investors will invest at the seed stage. So, for early-stage companies, don’t discount CVC as one of your potential early investors. Particularly if you’re in the areas of sustainability and energy transition, there’s a real hunger to find the solutions that will help us achieve Net Zero.

The pressures of the climate emergency have led to a general shift of investors wanting to look at deep tech. You have to invest earlier because there just isn’t enough that is available to invest in at the later stage. For example, we’ve seen big industrial and transport companies wrestling with sustainable aviation fuel. You have companies like United Airlines wanting to switch the fleet over to this, but just aren’t viable options; it’s not being produced in a cost-effective way.

To solve that problem, they have to look a lot earlier to find projects being created in an economically viable way, and they really have to get their hands dirty and help build those early projects.

We know that there’s not going to be a lot of big IPOs and exits coming in the next couple of years. So, you might as well invest in something that will take five or six years to come to fruition when the exit window opens, and you can start to cash in on that investment.

This hunger for results is also leading CVCs to invest using what we call a ‘platform’ approach. Platform is an umbrella term for helping start-ups with their business development, which is really positive. The idea that you can make an investment and things will magically happen has been completely debunked, and almost all the bigger units will have a specific person whose role it is to make those connections happen. In fact, 40% of those surveyed in our upcoming report had a business development role within the team. Start-ups can get a lot of value from this if they are smart about how to use that help and the corporates also stand to benefit.

 

There are huge benefits on both sides to corporate venturing. Large corporates gain the input of agile start-ups at the leading edge of technology innovation that will inform their products of the future. Whilst start-ups can access more than just investment including business development and the well-established sales and distribution channels of the corporate. 2024 has so far been an exciting year for corporate venturing. Not everything will work but I look forward in a couple of years to seeing the learning and success stories resulting from the different approaches that are happening on the ground now.

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