The pace of innovation around the world continues to increase – and one of its drivers is corporate venture capital. Corporate venture capital (CVC), the investment of corporate funds in startups, has risen to its highest levels in history, with corporations currently providing approximately 30 percent of startup capital and CVC participating in nearly 20 percent of financings.
With this as a backdrop, two world-renowned experts in CVC – Dr. Max von Zedtwitz, director of the GLORAD Center for Global R&D and Innovation, and Dr. Martin Haemmig, a professor at leading academic institutions around the world – provided data-driven insights on CVC and global innovation at an event held in February 2018, at DLA Piper's Silicon Valley office. Speakers also included DLA Piper partners Louis Lehot, co-chair of the firm's US Emerging Growth and Venture Capital practice, and Mark Radcliffe, chair of the firm's Corporate Venture Capital practice.
"We're seeing explosive growth in corporate venture capital as companies seek to leverage investments to propel innovation," Radcliffe said. "In this day and age, companies across all industries know technology is crucial to their success: they can't rest on their laurels – it's innovate and evolve or fall behind. Companies have tremendous incentive to get involved in the innovation ecosystem."
Silicon Valley innovation goes global
Von Zedtwitz discussed global and corporate R&D trends, beginning his remarks by noting that "Silicon Valley is a special place" and is now home to "some 300 R&D centers" from all over the world, some with 20 people, others with up to 2,000.
Silicon Valley isn't alone – as R&D hubs have taken root across the United States. In other countries, R&D is typically more focused in certain geographies and cities, but R&D hubs in the US are often built around specific industries (eg, automotive in Detroit). About a quarter of all R&D centers in the world are in the US, with access to local technology, and local markets serving as the primary drivers, von Zedtwitz said.
Those two reasons likely account for 80 to 90 percent of all justification for deciding where to locate – with the pursuit of customers and tax incentives and the need to respond to strategic pressure acting as the other drivers. Von Zedtwitz also noted that companies based in Silicon Valley loom large when it comes to R&D around the world, to the point where if the region were its own country, it would be the fifth-largest source of global R&D.
"It's far more than what we would have expected," von Zedtwitz said. "That's a good thing [because they don't] only look at what's happening inside the valley. Silicon Valley companies go global."
Where is the money and where is it being spent?
Haemmig began his presentation by identifying the biggest needs for startups, which, not surprisingly, is funding. That need was followed in order by market access, technical knowledge and expertise, business know-how, and access to facilities and talent. Corporate venture capitalists agreed to a point – though funding was much lower on the list of what they most value.
A sign of CVC's growing prominence, said Haemmig, is that 256 new CVC programs or teams were established around the world this decade. Russia, the Middle East and Africa saw low growth, but the US has added approximately 20 new teams per year. At the same time, he continued, CVC now comprises about 20 percent of all corporate-backed funding initiatives and CVC represents about that much of the total VC deals in North America and Europe. Haemmig noted a key shift around 2009 when "for the first time, the growth was against the industry cycle, hence an increased strategic intent."
Haemmig then analyzed CVC's growth. CVC investors were part of the syndicates in between 65 percent and 70 percent of the venture capital invested globally in 2017. Lehot asked Haemmig whether that indicated that the key to successful venture funding was "to have a corporate in the syndicate."
"It's dramatically increased, yes," Haemmig responded. "Many of them are shifting to earlier-stage. Seed funding, which was barely done five, six, seven, eight years ago by any of the corporates is kicking in all over."
Haemmig pivoted to global CVC investment by sector and geography. About half of the 2,320 deals in 2017 were conducted in the US. The top three sectors for investment, comprising about half of deals, were healthcare, information technology and financial services. Those sectors were also among the most popular in developed markets like Europe. In the developing markets of China and India, consumer, IT, services and media were most popular – and both countries are experiencing notable growth.
"The data shows a significant increase in CVC investment in China and India – during which time investment remained relatively steady in the US," Lehot said. "There is a lesson there."
Haemmig also showed how the US and Europe compare with China and India, regarding the breakdown of foreign and domestic CVC deals. In the US, most investments were from domestic sources, while in Europe, foreign investment has increased in recent years. In China, in-country investments have increased, but that has not yet happened in India. "They're still five, six years behind China," Haemmig said.
The full video presentation can be accessed here. Lehot, noting how quickly things are changing when it comes to global innovation and CVC, said one takeaway is that "there is no one size fits all."
"What happens in Silicon Valley can not necessarily be repeated everywhere else – and why would it," Lehot said. "In Q4 2017, twice the amount of investment dollars from venture capital firms went into San Francisco startups as compared to Silicon Valley startups. New York also surpassed Silicon Valley specifically as a destination for investment dollars. The global landscape is evolving at an ever-increasing pace. We all have to be prepared and nimble."