Why the Golden Age of Corporate Venture Capital is yet to come – despite COVID-19

By Serge Reh (Corporate Innovation, PwC Germany), Topi Jarvinen (Innovation & Entrepreneurship, PwC Finland) and Florien Noell (Innovation & Corporate Development Leader, PwC Germany)

People are living and working in an era dominated by new ideas. A moment in time when rapid changes in society – including shifts catalysed by the pandemic – are bringing forth innovations at a rate and scale never seen before. And when global challenges like climate change and inequality are demanding new thinking and approaches.

As our colleagues Blair Sheppard (Global Leader, Strategy & Leadership for the PwC network) and Peter Bartels (Global Entrepreneurial & Private Business Leader, PwC Germany) noted in a recent post, innovative start-ups are leading the way in fighting these multiple crises. But to win the battle they need funding and support. And to gain access to these, they’re increasingly turning to a Corporate Venture Capital (CVC) model.

A win-win funding model with a chequered past…

As the name suggests, CVC units get their capital from large established companies and invest it in young start-ups. Unlike traditional independent VCs, they’re closely linked to their parent company, which usually uses them to invest in ideas relevant to its own business. It’s a win-win: the corporate gets to tap into a rich and diverse flow of innovations – and the start-ups get access to corporate-scale funding, resources and channels.

The CVC concept isn’t new. In fact it’s been around for several decades, during which time it’s been through a number of booms and busts, with the busts often triggered by crises. But the response to the COVID-19 pandemic has been different. And in our view, the stage is now set for CVC to enter its most successful era yet: a period nothing short of a new golden age.

…but a highly resilient present

Why are we so optimistic? Let’s start our explanation with some history. Before COVID-19, the two biggest global crises of the 21st century were the dot.com bubble of 2000 and the Global Financial Crisis (GFC) of 2008/9. Both of these shocks triggered big falls in CVC deals and investments, as corporates cut back on discretionary spending – which at the time was regarded as including CVC.

But fast-forward to the recent COVID-19 pandemic and the CVC landscape looks very different. As the graph shows, far from declining in the face of the disruption from the pandemic, global CVC investment reached its highest ever value in 2020, with deal volumes just slightly below their 2019 peak. This resilience is in stark contrast to previous crises.

A maturing marketplace – with new dynamics

What’s so different this time? Many things. For one, corporates have learned a key lesson from previous crises: that cutting back on CVC shows a lack of commitment that destroys market trust. Entrepreneurs and start-ups that have seen a corporate withdraw from CVC in the past, will be wary of partnering with it today. The result? Once a CVC unit has been wound down, it’s very difficult to scale it back up – so it’s best to keep it going.

A further change is that corporates no longer see investments in innovative start-ups as discretionary. For even the biggest of today’s global businesses, the competitive pressure to innovate is intense. And while previous crises were essentially financial and economic in nature, the disruption from the pandemic has been societal and cultural, ushering in new ways of working, living and collaborating. This has forced corporates to look to the future of their workforces and operations, pushing innovation up the CEO agenda.

Also, with innovation now becoming an imperative for corporates, CVC presents them with a great way to minimise the risks around it. A CVC unit might invest in 25 different start-ups, each with a promising idea and powerful entrepreneurial drive to bring it to commercial viability. If just two of these ideas come to fruition, then the corporate can double-down on those innovations, leverage its early access to build a competitive edge, and more than justify the investment across the portfolio. It would be challenging to run the same 50 innovation projects in parallel internally. So the CVC model offers higher potential at much lower risk.

Growth at global and regional levels

In combination, all of these factors are driving the growing strength and resilience of CVCs. One clear sign of this is CVC’s rising share of all VC deals now being transacted globally. As this graph shows, CVC-backed deals accounted for their highest ever proportion of all global VC transactions – 24% – in 2019 and retained that share in 2020. Significantly, CVCs poured capital into many of 2020's largest VC rounds, including CureVac's €560.0 million round.

A drill-down into what’s happening at a regional level provides further insights. Europe is a hot-spot for CVC, and in 2020 experienced its third consecutive CVC funding record. Within Europe, the leader is the United Kingdom with a 27% share of European CVC-backed deals in 2020, closely followed by Germany with 25%. Looking across the world, other buoyant CVC markets include Israel – with CVC deals totalling US$2.4 billion in 2019 – and, interestingly, Africa, where the total value of VC deals approximately doubled between 2018 and 2019.

Time to buckle in for an exciting ride

The overall message? CVC is becoming an ever more important component of the innovation ecosystem – and is poised to play an even bigger role as corporates try to tap into start-up innovation. It’s noteworthy that the period around the 2008/9 GFC spawned start-ups that became many of today's successful global businesses: just think of Airbnb (2008), Uber (2009), WhatsApp (2009) and Zoom (2011). The wave of crisis-inspired innovators emerging post-pandemic could be even bigger.

Why? With people living, working, being educated and receiving healthcare in new and more digital ways, and the global economy poised to rebound, the demand for innovation is set to be enormous. Meanwhile on the supply side, evolving attitudes to careers and corporate jobs will see more young talent look to establish start-ups to turn their ideas into reality – and they’ll be seeking funding to support the journey.

All of this explains why we think CVC is set for a global age that will eclipse anything in the past.

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Contact us

Florian Nöll

Head of Corporate Development & Innovation, PwC Germany

Tel: +49 160 9059-1673

Serge Reh

Corporate Innovation, PwC Germany

Tel: +49 1512 2136244