US venture capitalists (VCs) continue to dominate global early-stage dealdoing. So do US corporates when it comes to investment in innovation. But the rest of the world is closing the gap. For example, in 2021, a record $13.7bn of deals completed where corporate venture capital (CVC) was invested in UK businesses, according to data from my company Global Corporate Venturing (GCV). In 2020, when the pandemic became global, there were $5.1bn such deals – a record at that point. In order to access UK innovation, international VC supported CVC in transactions that were structured in a variety of ways. 

It’s a similar story when it comes to deals backed by UK-based corporate venture investors. Last year, there was a record $14.6bn of such deals, as UK corporates looked to support future growth strategies with innovation. In 2020, there were $5.2bn such deals (2019 was the previous record year with $5.8bn). Last year’s total smashed that amount. 

“The US is significantly ahead, largely because of the heritage of Silicon Valley and deep pools of available capital,” says Sriram Prakash, global lead for M&A insight at Deloitte. “The UK also has its distinct advantages. Certain segments, such as fintech, media tech and consumer tech ecosystems, are thriving. As London is the financial capital of the world, a significant proportion of successful fintech scale-ups are launched from here. The UK has a world-beating media and advertising sector and some of the largest consumer business companies are listed in the FTSE 100; this bodes well for the growth of ecosystems. Corporate venture capital tends to target such centres of excellence, rather than taking a scattergun approach.” 

There’s been a global shift. China-based corporate venturing units taking minority equity stakes in private third parties, directly or as limited partners in VC funds, have been rapidly developing activities.  

Jeffrey Li, managing partner of Chinese multinational technology and entertainment conglomerate Tencent, has said: “The competitive landscape of China’s internet space, especially the very high iteration speed of the market, forced all major players to capture future innovation. In that case, there might be relatively more minority deals [in China] compared with the US market. And the giants might leverage their market resource to speed up the growth of the investee company.” 

As a result, Tencent invests almost all its free cash flow on CVC, according to Li. 

“The corporate venture scene in China and India is also growing rapidly, but they largely invest in their domestic markets,” says Prakash. “In the UK, venture investing is getting more ingrained into corporate culture. Large companies often have standalone corporate venture units, whereas smaller companies have found alternate means, such as investing directly into venture capital funds. However, both large and small companies are chasing similar investment targets.” 

Playing catch-up 

Silicon Valley firms such as Andreessen Horowitz recognise Europe and Asia are catching up with the US. Last year, the VC firm partnered with investors and US software giant Salesforce in a $850m investment in Hopin, a sophisticated online events platform for business users, founded in 2019. The investment valued the business at £7.75bn.  

A decade ago, California was probably 10 times faster in its pace of innovation than anywhere else in the US (and hence the world). Now, China is 10 times faster than Silicon Valley, says Mach49, the London-based growth incubator and specialist consultancy in international corporate venturing. 

So, CVC becomes strategic for economies as well as corporations and individuals, and hence more capital has flown in as returns become clearer. As the Economist reported: “America’s VC funds have seeded firms that are today worth at least $18trn of the total public market. Seven of the world’s 10 largest firms were VC-backed.” 

KPMG’s analysis of PitchBook data, in its latest Venture Pulse Report, found that VC had funded start-ups and scale-ups in the UK to the tune of $35.4bn in 2021 – a record, and more than double the $15.5bn invested in 2020, the previous record year. “Many of the big corporates are feeling a lot of pressure to enhance their core business models – pressure that has grown during the pandemic,” says Tim Dümichen, a KPMG partner and co-head of venture services based in Germany. This has driven an explosion of growth in CVC investment because companies now recognise how important it is to help them respond quickly to the challenges they’re facing in a changed business environment. 

The UK’s advantage when compared with other European nations is built on a strong research and innovation base and changes over the past decade. When David Willetts was minister of state for universities and science between 2010 and 2014, he sought to encourage spin-outs and start-ups.  

The missing link for continuous improvements was the relative paucity of UK domestic CVC and possibly a lack of training and experience, which only comes once that ecosystem is developed.  

British challenge

Last November, the Economist’s Bagehot column said: “The London Stock Exchange increasingly looks like a care home for old-economy companies, rather than a cradle for new-economy ones. Less than 2% of the FTSE 100’s value is accounted by tech firms, compared with 40% of the S&P 500’s.” 

University of Sheffield-led research in July 2020 found that 28% of FTSE 100 companies paid more in dividends and share buybacks than they generated in net income in their most recently available accounting year. Those figures mean that many UK publicly quoted corporations have relatively underinvested in their innovation tools. 

In 2020, CVC managers said that their corporate venturing units collaborated closely with corporate M&A divisions in identifying and buying companies – 24% said CVC was a “critically important” way to enhanced R&D. The amount the UK invests in R&D is 1.74% of GDP, according to a government report last year. That’s still significantly short of the government’s target of 2.4% by 2027. 

Allied to internal R&D are open innovation tools, to which CVC is a big contributor. Open innovation improves links to external entrepreneurs and ideas. So a lack of CVC limits openness to new ideas and is also seen as a drag on R&D and M&A efficiency, according to management consultants BCG. 

“Given the headwinds and uncertainties surrounding rising inflation and economic growth prospects, corporate venturing provides a pathway for many companies to test the waters, learn from ecosystem innovators and adapt their own growth strategies,” says Prakash. “The spectre of ‘economic patriotism’ also looms large and increased regulatory scrutiny is likely to be one of the headwinds for the M&A markets. For instance, in the UK the NSIA legislation allows the government to scrutinise M&A activities that could impact national security. Such scrutiny could prompt some companies to find alternative investment structures, such as corporate venturing or alliance partnerships, and this way they can still have skin in the game without falling foul of regulatory hurdles.” 

Embedding innovation  

BP has increasingly focused on corporate venturing, through BP Ventures, for more than a decade. The unit finds, invests in and works with entrepreneurial third parties in and around its core business. It was less game-changing than strategic. 

The multinational says: “BP Ventures plays a key role in helping the company reinvent itself as an integrated energy company, in line with our new purpose: reimagining energy for people and planet. We’ll do this by investing in a portfolio of high-growth technology businesses that will benefit and extend our core businesses, as well as open up opportunities in digital adjacencies. We’ll also invest in businesses that can help the group reduce carbon in its operations and production.” 

Its shake-up under Bernard Looney, appointed CEO in 2020, has seen greater vigour injected into its open innovation toolset, which includes incubating ideas, taking minority stakes in global start-ups (through BP Ventures) and building majority or control positions in scale-ups (via Launchpad – a BP-backed accelerator programme for energy-sector digitally-led businesses), such as Finite Carbon. 

Having invested more than $500m and partnered with more than 40 start-ups, the CVC unit has helped reimagine energy for the company. 

“Climate and sustainability-related deals are among the fastest growing venture investments areas because of the long-term transformation potential, even though many of the start-ups in this space still have some way to go before becoming a profitable business,” says Deloitte’s Sriram Prakash. “The energy majors are the most active investors in this space because they need to test the waters ahead of making game-changing choices on energy transition that will decide the future of their industry.” 

While the energy majors were at the forefront of corporate venturing, the US giants lagged behind Europe-based businesses in investment in sustainable, innovative businesses. “In the past three or four years, all the majors have launched a version of corporate venturing,” he adds. “There’s been a step change, with the net-zero and ESG commitments. What we’re finding today is companies of all ilks are investing in this space. It’s not just the energy companies trying to invest in a zero-carbon footprint. It’s really opened up and technology is the great enabler.” 

Attack and defence 

Just under half (49) of the current FTSE 100 constituents use corporate CVC as a strategic tool, according to GCV Analytics, with only 28 having a formal unit rather than making ad hoc minority investments in private third parties. 

The impact can be seen more clearly when judged over time. Some 283 prior constituents of the FTSE 100 have fallen out of the index through takeovers, mergers or lack of performance.  

Of those, only Sky had an active CVC unit before its takeover by Comcast, with another 20 having some limited CVC activity since being taken out of the index in an effort to improve performance. 

But for those FTSE 100 companies that grasp the importance of CVC, such as Unilever, RELX, BP and Shell, it can help reposition the corporations and re-energise its stock. Time will tell if more will follow their lead. 

Decisions, decisions 

VCs invest to make money. For a CVC, it’s more strategic – they want to see how a technology or a business develops. At some point, they’ll have to decide if they want to buy, continue to collaborate or invest more. If they decide to buy, that’s when they need to ask some very hard questions.  

“Start-ups are prepared to fail fast, learn and pivot, and often their culture is fundamentally different to the typical corporate environment,” says Prakash. “Aligning cultures is perhaps the most difficult aspect and it helps to have shared objectives. Corporate venture teams need to redefine their role as change agents and cultivate collaboration between the start-ups and their business units.  

“The more sophisticated corporate ventures have flexible investment styles. Sometimes when they simply want to learn about an emerging technology or product for such investments, they leave them independent and closely observe the market evolution dynamics.” 

The ultimate destination of the venture might be as a standalone business outside the corporate. The more sophisticated investor will think about these issues, says Prakash: “It’s not necessarily the first thing on their mind when they start the corporate venture. More importantly, they want to learn as much as possible, to tilt their own core business.” 

Venturing and R&D 

According to the UK parliament report into research and development spending published in September 2021, the total R&D spend in the UK in 2019 was £38.5bn, £577 per head or the equivalent of 1.74% of GDP. In 1985, it was the equivalent of 1.84% of GDP. 

The government has a target for total R&D investment to reach 2.4% of GDP by 2027, which would still be below the OECD average of 2.5% in 2019. R&D expenditure in Germany was the equivalent of 3.2% of GDP in 2019, in the US it was 3.1% and in France it was 2.2%. 

Most funding for UK science and technology companies above £100m comes from international investors. US-based funds represent 40% of all investments between £100m and £250m in UK R&D intensive companies, compared with 27% from UK investors. For investments of more than £250m, 49% of investment comes from the US and 27% comes from Asia, compared with only 11% from UK investors.  

While this means that British companies are sought after by global investors, the lack of domestic growth capital holds back the ability of companies to scale up in the UK. This often leads to them relocating to access global capital more easily. For many, that can mean selling early to overseas firms (and potentially relocating R&D activities) or listing on capital markets elsewhere.  

This comes at a cost to the UK economy as the financial returns, jobs and high-impact R&D created by some of our most successful entrepreneurial teams largely leaves the country.