Corporate Venture Capital (CVC) investment is an increasingly used strategic tool that enables large corporations to make minority investments in startups that will complement and expand their existing products or services. This type of investment can be highly beneficial as it can provide strong financial returns, as well as access to innovation, without the time and heavier expense load of in-house research and development (R&D) projects.
While many would think that an eventual merger, acquisition, or other type of M&A transaction would be the end goal of CVC investment, a recent analysis by PitchBook indicates that despite elevated CVC activity over the past 10 years, it has not resulted in much M&A. According to their data, from 2014 to 2024, CVC has made up more than 46% of total VC deal value and 21% of deal count. However, despite having invested a vast amount of capital, very little of this investment has translated to acquisitions.
To put it into perspective, their data shows that since 2000, below 4% of CVC-backed companies were acquired by an existing CVC investor. So, why aren't more CVCs moving toward acquisitions, especially as their approach typically involves looking for companies who could provide great returns and complement or expand their existing products? The definition of what a strategic return looks like can vary greatly among CVCs. It could be access to new technologies or markets, driving innovation, competitive advantage, a boost to public image, or many other motivating factors. But for only a small fraction of CVCs, a strategic return yields an acquisition.
PitchBook points to several factors that might explain why M&A is not always their "end goal," such as stage preference. CVC investors tend to focus on later-stage investment. This is due in large part to their interest in companies that have reached a more mature stage of product development and pose a lower risk. While some CVCs focus on earlier-stage investment, the asset class as a whole favors later-stage investment. It is simply more difficult and costly to integrate a company in its later stages into a larger corporation. And for those investing in earlier-stage startups, there are, of course, more risks that go along with acquisitions of these companies, as well as a higher risk of failure.
CVCs might also be motivated by a need for flexibility and options. As a minority stakeholder, they can have great insight into a startup's innovation, inner workings, and competitive position with minimal risk. As conditions change, they still have the ability to pivot. That becomes much more difficult once they enter into an acquisition. There is also the issue of investing in complementary businesses versus those that you want to integrate into your corporation. Investing in a startup that is complementary to yours that allows access to new technologies or innovations does not necessarily mean it makes sense to then fully integrate it into your organization.
Additionally, the goals of the startup may not be aligned with CVC M&A. CVCs are targeting later stage startups in larger numbers. At this stage, founders often have their sights set on an IPO as opposed to an acquisition, and even if their goal is to be acquired, there is likely more than one interested party, making the competition fierce. An IPO or sale to another buyer could still allow a CVC to realize some significant returns without going through the acquisition process.
While the goal of a startup might not be an acquisition by its corporate investors, there are some significant benefits that come with corporate investment. A study conducted by Global Corporate Venturing showed that startups that had corporate investors saw their risk of bankruptcy cut in half, as well as an increase in exit multiples in the case of an acquisition or IPO. This is likely due in large part to the additional advantages that can accompany corporate investment as opposed to traditional VC investment. These could include access to invaluable knowledge, facilities, distribution channels, or strategic partnerships. Corporate investment can also help to boost the profile of a startup, enhancing its visibility, providing validation, as well as a greater sense of stability.
There are many reasons why the actual number of acquisitions by CVCs is so low. It truly depends on the motivating factors of the company and what makes the most sense based on their short and long-term goals, as well as those of the startup. However, it is clear that CVC investment can come with incredible benefits for startups, and it is showing no signs of slowing down anytime soon.
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