Much has been made in recent times of corporate backed venture capital (VC) plugging an ‘innovation gap’ left by an aversion of more traditional VC firms to invest in early-stage and high-risk companies. Newly available venture financing data from EvaluatePharma confirm the increasing importance of corporate VCs and places their role in perspective.
Of the 246 private financing deals struck last year, a quarter involved at least one corporate VC, the highest proportion in the last five years. The data also confirm a slight preference for earlier stage investing compared to their traditional counterparts and an increasing trend for corporate VCs to hunt in packs, which they claim gives a company a head start in life and potentially a more lucrative exit (see tables below). But despite having incredibly wealthy parents, corporate VCs still invest relatively small amounts - if a serious injection of cash is required, private companies need to turn to more traditional sources (VC funding for human therapeutics remains depressed, April 20, 2011).
The table below shows the trend towards an increasing involvement of corporate VCs in the five years between 2006 and 2010, although the change has perhaps not been as dramatic as some would have you believe.
In 2006 for example, before the credit crunch years of 2007-2008, at least one corporate VC was involved in 21% of all private financing deals, not far off the 24% recorded last year.
|Venture Capital Deals 2006 - 2010|
|Year||Total VC Investment ($bn)||Financing deal count||Deals involving at least one Corporate VC||% Corporate VC involvement||Deals involving multiple Corporate VCs||% Multiple Corporate VC involvement||Of Corporate VC deals, what % involved multiple Corporate VCs|
The data also highlight the extent to which corporate VCs retrenched just like their traditional peers, during the height of the credit crunch, only investing in 17% and 16% of deals in 2007 and 2008, respectively. Claims that corporate VC stepped in to fill a void during these cash-strapped times have perhaps been overdone.
Hunting in packs
What the data also shows is the extent to which corporate VCs seem happy to invest alongside each other, with over a quarter of all corporate backed deals in the last five years involving more than one corporate partner; in 2009 more than one-third of corporate deals involved multiple partners.
Indeed, a sneak preview of private financing deals in the first quarter of this year suggest this trend is continuing – 45% of corporate VC-backed deals involved more than one corporate investor.
Perhaps borne out of necessity, private companies seem increasingly comfortable with having multiple corporate-backed partners offering finance and advice, despite the obvious potential conflicts of interest.
Indeed, the general shift in attitude towards accepting corporate VC finance in the last few years is highlighted by the increasing involvement of multiple corporate partners, a trend that these firms claim should increase the return on investment.
When it comes to exit, a trade sale remains by far the most realistic option, and speaking at last week’s BioTrinity conference, Deborah Harland, a partner at GlaxoSmithKline’s venture arm, SR One, highlighted a report from HBM Partners which indicated that the more corporate backers, the better.
According to the HBM report, of the 120 M&A deals for VC-backed companies between 2005 and 2009, a significantly greater proportion of exits were classified as ‘winners’ if the company had a corporate VC backer. A ‘winner’ is a deal which returns at least two times the amount originally invested by its shareholders.
Taken a step further, the HBM data also suggest that having multiple corporate VCs on board results in even greater returns – having more than one corporate in a syndicate means the chances of getting back at least two times your money back increase from about 50% to 75%.
Of course money is not the only offering that corporate VCs bring to the table. Given the operational backgrounds of many of the partners at these firms, they are keen to stress the importance of understanding how big pharma works and what they look for in an asset.
Roel Bulthius, head of Merck Serono Ventures, says that with big pharma the most likely purchaser of a company or key asset, having a corporate investor on board is increasingly important.
“Companies are going to benefit from a discussion early on with groups that represent pharma companies, because we can give you an input as to whether the assets you’re developing are going to be attractive to future partners."
Whether this ultimately will help more companies achieve a sales remains to be seen. Another recent report from HBM revealed that corporate VC involvement in trade sales has dropped dramatically in the last two years.
In 2010, just 10% of trade sales of private companies in the US, Canada and Europe last year involved a corporate investor. That ratio in 2009 was 21% and over the previous four years averaged at around 38%, suggesting that having a corporate backer may not be quite as important as some corporate VCs claim.
Plugging an innovation gap?
As to the thesis that corporate VCs are plugging a gap in early stage investment, the data in the tables below point to a slight trend in favour of this hypothesis, although it is far from clear cut.
Over the last five years, 50% of corporate VCs deals have been placed on series A or B financing rounds, compared to 46% for more traditional investors. In 2010, most corporate deals (31%) were made at series B, compared to the majority of traditional VC deals (26%) at series C.
|Corporate VCs - % of deals split by year and financing round|
|Series A (incl seed capital)||29%||21%||20%||33%||18%||25%|
|Traditional VCs - % of deals split by year and financing round|
|Series A (incl seed capital)||23%||25%||22%||28%||24%||24%|
Gwen Melincoff, senior vice president of business development at Shire Strategic Investment, reiterates the claim that corporates are meeting an important need in early stage investments and that “more traditional VCs have moved to later stage investments because of where they are in the lifetime of their funds.”
“We are doing a lot more A and B rounds than traditional VCs are doing,” says Ms Melincoff, a claim only marginally supported by these statistics.
Indeed, Kaasim Mahmood, partner at Advent Venture Partners, goes a step further and believes there is little evidence to support this thesis of corporate VC filling an early stage void. While acknowledging the importance of corporates to the sector, Mr Mahmood says he rarely sees investment proposals where a corporate VC is already an investor in the company.
Mr Mahmood maintains that Advent has not moved to later stage investments and that the vast majority of Advent’s investments from its previous fund was directed at seed and series A.
Big bucks requires traditional sources
Although corporate VC is certainly becoming increasingly important and influential, when it comes to raising serious amounts of money, companies clearly need to seek our more traditional investors, including private equity firms.
Of the top ten individual deals struck over the last five years, none involved a corporate VC (VC funding for human therapeutics remains depressed, April 20, 2011). Indeed, you have to go outside the top 25 financing deals for an investment round which included a corporate VC - Novartis Venture Funds was a co-investor in Omeros' $63m series E fundraising in 2007.
The tables below also emphasise the extent to which corporate VCs play a relatively minor role overall in terms of the number of deals struck. Only Novartis Venture Funds with 60 deals over the last five years would feature in the list of most active traditional VC firms.
Nevertheless, corporate VCs are certainly fulfilling an important role and when it comes to seeking investment, they are telling private companies the more corporate VC involvement the better.
|Top 10 Most Active Corporate VC Funds: 2006 - 2011 (YTD)||Number of financing deals|
|1||Novartis Venture Funds||60|
|4||Johnson & Johnson Development Corporation||22|
|7||Roche Venture Fund||17|
|8||Astellas Venture Management||14|
|9||Biogen Idec New Ventures||10|
|10||Pfizer Venture Investments||8|
|Sum of top 10 funds||227|
|Top 10 Most Active Traditional VC Funds: 2006 - 2011 (YTD)||Number of financing deals|
|6||New Enterprise Associates||43|
|Sum of top 10 funds||485|