PitchBook seeks the golden mean of corporate venturing

Unlike traditional venture capital firms, corporate venturers are in the unique position to facilitate help, know-how and expertise to their portfolio companies. Because of their knowledge dominion through the talent pool of the corporate parent, it may be argued that corporate venturers are potentially successful investors to keep an eye on within the realm of the riskiest asset that is venture capital.

These are possibilities that have not been studied in much depth, save for a few scholarly papers. However, one recent analyst note – The Golden Mean of Corporate Venture Capital – put together by data provider PitchBook, makes headway by examining if the balancing of strategic and financial goals of corporate venturers could lead to golden exit and loss ratios.

The note’s author Brendan Burke, senior venture capital analyst at PitchBook, reached out to Global Corporate Venturing and to me for some pointers, while preparing the note. It is, therefore, a true pleasure for me to be summarising some of its most interesting findings. Burke co-authored the report with data analyst Darren Klees of PitchBook.

After reviewing the current landscape of corporate venturing in the US and globally, the note cites findings from our latest annual survey of executives of corporate venturers that 44% of CVC funds are over $100m in size. It adds, furthermore, that out of the 80 CVC arms with recorded assets under management (AUM) on the PitchBook platform, the median AUM for US-based CVCs was $175m. The note also cites pertinent examples of CVC arms that have been equipped with significantly larger funds to emphasise that CVC arms are sufficiently capitalised to be “competitive with traditional VCs and capable of leading late-stage rounds.”

However, do corporates really lead many deals? The note sheds more light on the matter through PitchBook’s data. While corporates are normally co-investors – not determining deal prices or sizes – data suggest that the proportion of deals led or funded solely by them ticked up from 2015 to 2017 and stood at 23.1% by the end of 2018.

The report also examines the financial drivers of CVCs, taking as a starting point recent accounting research on the period from 1996 to 2017. The research was aiming to find correlations between the presence of a CVC program and other variables. The strongest correlations found were a positive relationship between CVC activity and R&D as well as an inverse relationship between CVC activity and capital expenditures (capex). PitchBook, in turn, found evidence to both confirm and refute certain claims in that research.

PitchBook’s data indicated that both R&D and capex spending had a positive relationship with CVC activity in 2018. In a sample of 27 publicly traded corporations with CVC arms, average R&D budgets had been on the rise, with 2018 constituting the largest percentage increase since 2010. The PitchBook report supposes that this rise in R&D spending “may have trickled down to increased CVC activity.” At the same time, average capex among the studied group of corporations also went up, failing to provide further evidence on an inverse relationship with CVC activity suggested by the previous study.

More interestingly, PitchBook likens the future of corporate venturing to changes in R&D accounting policy, which “may be a headwind for CVC investment.”  At present, corporations can deduct R&D expenses but will be required to capitalise and amortise them over five years from 2022 onward, as stipulated by the Tax Cuts & Jobs Act (TCJA). The note considers the possibility that “companies may decide to get ahead of the tax penalty in 2022 by heavily investing in R&D in the interim,” which would mean less funds for R&D innovation and thus less funding for CVC programs – something that “could have a cooling effect on the broader VC market.” The other possibility is that corporations simply allocate more funds to their venturing arms, as those normally are off their balance sheets.

The note also focuses on strategic elements of corporate venturers. It combines findings of various surveys, including Global Corporate Venturing’s latest annual survey, on important strategic metrics and goals set for corporate venturing subsidiaries.

In addition to the strategic element of CVCs, the PitchBook note also touches on the question of financial performance of such investors. Citing the latest GCV annual survey results that 61% of CVC respondents reported internal rates of return (IRRs) over 11% and only 5% negative ones, its findings suggest “average CVC returns are similar to independent VCs, which have a 5-year equal-weighted IRR of 12.6% as of 2Q 2018”, according to PitchBook data from other sources.

To elaborate the point, Burke and Klees dedicate a good part of the note trying to dissect the portfolio performance of three of the most reputed CVCs in the US – Intel Capital – venturing arm of semiconductor and chip maker Intel, Salesforce Ventures  – of the cloud enterprise software provider Salesforce and GV – one of the venturing subsidiaries of diversified internet conglomerate Alphabet. The table, which we have reprinted here with permission, summarises the conclusions of this analysis, which is extremely hard to conduct, given disclosure limitations (neither all CVC deals nor all business shutdowns in their portfolio have been disclosed).

Finally, the note also harnesses the power of PitchBook’s data to examine the impact of corporate venturers on their portfolio companies and if they actually provide extra value to them.

To gauge relative performance, the authors of the note analyse portfolio companies seeded in the period 2008- 2012 that raised at least 2 rounds of funding, and find evidence that corporate-backed emerging businesses outperformed the others. Three out of every ten (31.9%) corporate-backed companies provided an exit (acquisition, buyout or IPO) within their first eight fundraising rounds, while only 9.4% declared bankruptcy. In comparison, only 21.3% of the other companies with no corporate backers achieved an exit, while 23.0% went bust.

In sum, the note is a serious attempt to evaluate corporate venturers as a class of investors relying on both previous academic research and sourcing relevant information not only via PitchBook’s own platform but also through other trade publications and industry practitioners.