Corporations’ increasing appetite for VC and the evolution of corporate strategic investment

For a long time, the perception has been that strategic acquirers can and will pay more to lock down the right target. Because their major motivations reach beyond financial return, corporations may have a higher tolerance for higher prices. The idea is that there is greater value to entities that may be able to uniquely leverage specific technologies, analytics capabilities and so on. In other words, the opportunity for long-term growth and competitive advantage for a company can significantly alter how a target’s true value is determined. However, corporations’ increased interest in venture capital and nearer-term financial returns as well as continued corporate development activity is challenging the existing paradigm around corporations, strategic investment and partnership.

Changing perceptions of strategic activity and investment

In the past, strategic motivations such as capturing IP and establishing a firmer competitive footing were major guiding factors for corporations’ target selection (hence the term “strategic acquirer”). It’s also not uncommon for corporations to acquire a company primarily for key individuals, an exceptional management team or a talented workforce, often referred to as an “acqui-hire”. Though corporations have traditionally emphasized M&A, corporate venture capital teams are challenging perceptions of what strategic involvement means.

While corporate development teams remain focused on fewer, but more actionable opportunities that are closer to their business, CVCs search far and wide for more opportunities in adjacent areas. Beyond the different types of opportunities that both groups look for, CVCs tend to be highly motivated by financial return (with strategic relevance remaining a significant driver). High levels of domain expertise further help corporations make the most of acquisitions as well as investments.

CVC activity and corporations’ increasing appetites for VC

Though M&A activity remains high overall, corporate venture capital arms are increasingly investing larger amounts, helping to increase valuations overall. Even compared to the general, steady growth that companies with corporate backing have enjoyed throughout the last decade, things have picked up. For 2018, the median pre-valuation of early-stage startups with corporate backing sits at $32.3 million, a 29.0% increase from 2017 valuations and 30.0% valuation premium over startups that received financing without CVC involvement. 

Recent uptick in CVC spending

Valuations of investment rounds with CVC participation are continuing to go up and up, especially for later-stage deals—illustrating corporations’ willingness to invest. For instance, median deal size for deals with CVC participation (including Series funding) jumped mightily within one year, going from $10.5 million in 2017 to $15.0 million so far in 2018 (through Q3). In fact, valuations for late-stage companies are also currently sitting at unprecedented levels. The current median for CVC-backed rounds in 2018 is $140.0 million, which is a significant 2.5 times greater than the median for startups with no corporate backing. CVCs and corporate development teams operate very differently, but this helps to illustrate the changing attitudes towards VC. 

In addition to the high prices that corporate development teams are willing to spend on acquisitions for long-term strategic vision, CVCs are also increasingly willing to invest in companies for financial return and partnership. This increased activity helps display an ongoing change in how corporations are considering when and where to invest and when to acquire.