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Corporate VC firms buck ‘tourist’ reputation with pandemic dealmaking

Corporate venture capital firms are cementing their presence in the startup ecosystem in a year when they could have retreated to the sidelines.

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Corporate venture capital firms are cementing their presence in the startup ecosystem in a year when they could have retreated to the sidelines. So far in 2020, these investors have participated in 25.5% of all US venture capital deals, on pace to match a recent high in 2018, according to PitchBook data.

That activity defies a perception that CVCs are part of a class of tourist investors that tend to back off in difficult economic circumstances. Such was the case following the global financial crisis when CVC investment fell to 16% in 2012, according to PitchBook data.

Non-traditional investor VC deal participation rate

In the first few months after lockdown measures were put in place, venture capital firms of all stripes paused new deal activity to focus on their portfolios and assess the changing landscape.

Nagraj Kashyap, the head of Microsoft’s M12, said the firm was focused on making sure portfolio companies were well-supported and had good runway. The impending tech rebound was far from obvious at the time.

“I was running another big fund, Qualcomm‘s venture fund, in 2009 when we had the last downturn, and that lasted from a private perspective for almost 18 to 24 months,” he said.

But as the stocks of big tech companies bounced back, it became obvious that investor sentiment in the private tech sector had also stabilized.

“When the public markets recovered, it was clear that the technology sectors we were investing in were not really out of favor,” Kashyap said. “There was almost no impact on valuations.”

Since early March, M12 has participated in 25 deals, according to PitchBook data, making it one of the most active CVCs during the period, among other venture arms of tech giants like Alphabet, Salesforce and Intel.

By early summer, public companies were rebounding with tech companies leading the charge. But it was less clear how startups—many of which had announced large layoffs—were faring.

Salesforce Ventures heard from its portfolio companies that the pandemic was creating a tailwind for digital transformation. “It has largely been an accelerant for a broad base of our portfolio companies,” said managing partner Matt Garratt.

The firm’s portfolio also continued to see large exits, including the acquisitions of Optimizely, Vlocity and Conga. Salesforce Ventures was also an investor in Snowflake, which logged one of the software industry’s largest-ever IPOs earlier this month.

Another tailwind for CVC participation is the sheer amount of funds available for investment, said Kashyap. “That’s a big difference between now and 2009.”

In a survey conducted by Touchdown VC in July and August, three-quarters of CVCs said they had access to capital and were making new investments.

Non-traditional VC firms, a category that includes CVCs as well as private equity investors and governments, oversee between $240 billion and $340 billion in capital available for investment, according to an estimate by PitchBook analysts.

CVCs may also have benefited from less competition from traditional VCs during the pandemic, said Joanna Lin, a partner at law firm McDermott Will & Emery.

“I think part of the problems [in the past] for CVC is that they’re really more of the creative partner. If startups want large funds, they could get it elsewhere,” Lin said. “Then COVID hit and it has sort of frozen everyone out of these traditional financing sources.”

In recent years, corporate venture investing has evolved in ways that could make it less cyclical.

For other non-traditional investors, the effect of the global financial crisis proved long-lasting: private equity firms and asset managers, for example, have been slow to return to pre-crisis levels of deal activity. But that wasn’t the case for CVCs, which have become more active and entrenched over the past eight years, according to a recent PitchBook analyst note.

While some corporations continue to approach venture investing opportunistically, others increasingly see it as a core strategy for both financial returns and tie-ups with innovative startups, explained Matthew Gemello, a partner at law firm Orrick.

Among many CVCs, the strategic goals are slowly giving way to a growing emphasis on financial returns, said M12’s Kashyap. As part of that shift, more CVCs have learned to approach investing and working with portfolio companies in the same way that a traditional VC firm would.

"[CVCs are] demonstrating that we’re not looking for special terms. We’re not looking for rights of first refusal. We’re not looking for exclusivity in a business relationship,” said Doug Russell, head of MassMutual Ventures, which raised its third $100 million fund in June.

The approach doesn’t necessarily diminish the strategic opportunities presented by a venture investment. Around half of MassMutual Ventures’ portfolio companies have a business relationship with MassMutual, but those are developed independently of the initial investment.

Leaders of CVC firms say their work offers a way for corporations to both keep a pulse on the startup ecosystem and find inroads to partnerships or future acquisitions.

As the presence and role of corporate venture firms have evolved, the venture capital community has taken notice.

“I think [the perception of CVCs] has improved significantly,” Kashyap said. “They’re no longer viewed as purely tourists.”

Featured image via gruizza/Getty Images

  • james-thorne.jpg
    Written by James Thorne
    James Thorne is a Seattle-based managing editor overseeing PitchBook’s venture capital coverage and data journalism initiatives. He previously reported for GeekWire, Reuters, CNBC and Source Media. A native of Colorado, James graduated from Boston College and received his master’s degree in business journalism from New York University.
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