Corporations have developed fully fledged venture capital arms that are actively looking for startups with the potential to become unicorns with global clout, putting up USD 14 billion in funding in the second quarter of 2018 alone. Although the local market for corporate venture capital (CVC) is still in its nascent stage, players say that the startup ecosystem is beginning to become more interesting to such complex investors.
The concept of CVC has been present for a long time in mature markets such as the US, and in recent years multinationals have also started to get more involved in the Romanian startup ecosystem. Large companies are either buying stakes in promising local startups or backing accelerator programs in which dozens of entrepreneurs are working to secure critical funding rounds, while also learning the ropes of running a business.
Room to grow
Compared to regular venture capital funding, a CVC investment should help a startup get access to the resources of the investing company, which is very well-positioned in the industry. Meanwhile, large corporates can invest in startups to meet their own goals, by getting faster access to innovation and technology.
“It will continue to grow. The evolution has been felt strongly in the past two years and we forecast that 2019 will remain in acceleration mode,” Mircea Vadan, coordinator of Grow Pad, the corporate acceleration program of Spherik Acclerator, told BR, of the development of the Romanian CVC market.
Corporate venture capitalists are also remunerated differently from traditional VC investors. Their pay includes a variety of cash, carried interest and corporate stock from their parent company, according to a report published by Pitchbook.
“Usually, corporate venture funds are structured by large corporations as global initiatives, rather than local ones. This is why we do not expect to see a lot of CVC activity in Romania. In many cases such initiatives reach Romania only as an offshoot of international activities of such corporate ventures being set up at the headquarters by multinational corporations with branch offices in Romania, but they are not focused on Romania,” Marius Ghenea, partner at 3TS Capital, the private equity and venture capital firm, told BR.
Ghenea says that we might see more CVC activity coming from large Romanian companies or corporations. He mentioned Banca Transilvania, which has already started to investment in fintechs, and e-commerce giant eMAG, which is looking at promising companies from its sector. “However, the universe is relatively limited in Romania, from this perspective.”
Globally, CVC investment activity rose by 18 percent in 2017 year-on-year, in terms of capital invested, to USD 31.2 billion, according to CB Insights. The number of deals was up 19 percent to 1,791. Some of the most active investors were the VC arms of US search giant Google and chip makers Intel and Qualcomm. Among the top 20 CVCs are Asia-based investors Samsung Ventures, Bertelsmann Asia Investments, and Mitsui & Co. Global Investment. They are joined by healthcare investors Novartis Venture Fund, Johnson & Johnson Innovation, SR One, Alexandria Venture Investments, Roche Venture Fund, Pfizer Venture Investments, and Novo Ventures.
“CVCs are very important for the startup ecosystem, as they can provide not only money to a startup, but also generate business via multiple ways: their own customer base, credibility and knowledge, especially when it comes to scaling,” Cosmin Ochisor, partner at GapMinder Venture Partners, told BR.
Turning to Romania, he says that the bulk of activity coming from the corporate side is at the border between “public image focused and educational programs”.
CVC set to change gear in Romania
But in the past two to three years there has been a shift towards traditional CVC activity, especially in the banking and telecom fields. More visible activities are seen around acceleration and partnership programs, which translate into investments of up to EUR 100,000 for startups, says the partner.
“Although this is very beneficial for the startup ecosystem, as such firms can benefit from the expertise of a bank (for example) when building a fintech product, I would like to see traditional CVC activities, which means investments in later stages, supporting the growth stage, where also the knowledge and network of an enterprise can bring more value onto the table,” added Ochisor. He suggested that, going forward, multinational firms could bring their own VC arms onto the Romanian market and invest in startups that initially get funded by typical VC players.
VC investment activity topped USD 70 billion across 3,108 deals in the second quarter, which represented a new record, according to a report by KPMG, the professional services firm. The CVC participation surpassed 20 percent of the total figure. In Europe, investment activity amounted to USD 5.6 billion in 631 deals, while the CVC participation got close to 25 percent. Moving to the US, CVC investment activity exceeded USD 14 billion in the second quarter. In Asia, CVC participation was involved in 30 percent of deals that totaled USD 35.9 billion. Some of the hottest industries for investors were artificial intelligence, e-commerce, autotech, cybersecurity and biotech. China-based deals dominated global investment in the second quarter of the year.
KPMG experts point out that the overall European venture capital environment is still characterized by late-stage-focused funds, as various challenges remain in the early stages.
“Although early-stage fundraising will experience bouts of bullishness, that market within Europe continues to face systemic hurdles more owing to the very nature of early-stage VC than anything else, as well as interplay between EU agencies or national governments as to specific roles,” said KPMG experts.