A relatively new development is the recent growth in corporate venture capital (CVC) spending. Corporates interest in start-ups and, consequently, their involvement in both early and later-stage deals continues to rise. According to data from Pitchbook, CVC in the US accounted for $71bn of the total $135bn in overall venture capital investment – making it the first time CVC has outspent traditional venture capital funds.
Following in the footsteps of their counterparts across the pond, Europe has also witnessed a significant rise in CVC spending, driven by the promise of financial return from investments in high growth tech start-ups, but also strategic, enabling access to innovation that so often occurs outside and on the fringes of major industries, according to Pitchbook.
According to Dealroom, European corporates’ venture capital arms invested around €7.5bn in regional start-ups, representing more than 25 percent of total VC funding, with the most active CVC investors including banks like BBVA and BNP Paribas.
Three years ago, BBVA closed its in-house venture arm (BBVA Ventures), transferring its portfolio into a new fintech focused fund called Propel Venture Partners with offices in the tech hubs of London and San Francisco.
Propel Venture Partners is counts UK-based mobile-only Atom Bank and German banking-as-a-service (BaaS) platform solarisBank among its portfolio of companies.
“Studies and real life start-up examples all over the world have shown that the most important factor for entrepreneurs after access to capital is receiving hands-on advice from experts and accessing a network of contacts and the talent necessary to quickly and successfully execute their ideas,” says Christhi Theiss, venture creation discipline leader at BBVA.
“And the sooner we get involved in the start-up building process, the easier it will be to give them the support they need.”
Venturing out on the fringes
DNB Ventures - the CVC division of Norway’s largest financial services group DNB - was established in 2017 as part of a new strategy to ensure that the bank stays on top of new technologies by working closer with the companies developing them according to Karen Elisabeth Ohm Heskja, investment manager at DNB Ventures. The launch of DNB Ventures is also the first time the bank has taken early-stage minority stakes in fledgling companies, Heskja adds.
Since its inception, DNB Ventures has made just five early-stage investments: Funding Partner, a crowd lending platform, Spiir, a Danish budgeting app, Payr, a digital payments platform, Luca Labs, an automated accounting software provider for small businesses, and Unite Living, a real estate platform. DNB Ventures has spent over €6.5m across its five initial investments, according to Crunchbase.
When asked why DNB Ventures selected these companies over others, Heskja stressed the importance of the people behind the businesses they invest in. Prior to participating in any financing rounds, she also looks closely at how much traction these young companies have had in the market and gauges their ability to attract other investors and employees capable of taking their business to the next level as they move forward in their growth journey.
“Arguably the most important factor when looking to invest in companies at this early stage is what kind of value can we add to the start-up in addition to financial support,” she adds. “Because we are not doing it primarily for financial gain, but for the ability to learn, co-develop and hopefully imbue some of our core principles to the start-ups we invest in.”
CVC: more than just money
CVC offers far more than just money to start-ups, explains Heskja. Other than the injection of fresh funding, start-ups get significant exposure by partnering with larger corporates.
Corporate investors usually work closely with start-ups to help “professionalise” its board of directors, introducing them to their internal and external network. Larger incumbents by their very nature work at scale and often possess sophisticated distribution channels which start-ups can leverage to broaden the reach and awareness of their products. Distribution tends to be costly unless you have a strong network of partners. Start-ups that have a B2C product are often taken by surprise at just how challenging it is to reach customers successfully, particularly in the Nordics where the customer is digitally savvy, demanding and often quite loyal to more established players in the market, says Heskja.
But it is far from a one-sided arrangement.
Typically, start-ups have resources and competencies that larger corporates lack. Due to their size, they are more agile and less incumbered by regulatory constraints, freeing them to innovate.
“Typically, traditional financial institutions like DNB tend to look two to three years ahead for new market opportunities,” Heskja explains. “But the founders and visionaries of these start-ups tend to look five years or more into the future, offering a completely different perspective.
“Merging those two perspectives when looking at the future is probably the most valuable aspects of these partnerships,” she adds. “We are looking short-term, while [start-ups] take a longer-term view which ultimately impacts the way we both develop products.”
Because corporates bring far more than simply financing to early stage tech companies and with CVC spending on the rise around the world, partnerships with larger incumbents is becoming an increasingly attractive proposition for start-ups looking to scale their businesses. Corporate development teams also tend to focus on fewer, more strategic opportunities, leading to far closer and collaborative relationship, according to Pitchbook.