Companies closely monitor what start-ups do. In France, many investment funds have been created by companies in recent years. This Corporate Venture Capital (CVC) completes the landscape of traditional VC funds with a different positioning because CVCs often invest in a start-up with the goal of having a deep partnership eventually. BCG and RaiseLab published a study* in early June 2022 on large companies ’investments in start-ups.
The study indicates a tenfold increase in direct investment by French companies in start-ups since 2012, although the growth of these investments has slowed since 2016. 480 operations were financed by CVCs in 2021 compared to 46 in 2012. Proof of this enthusiasm: 70% of the 40 French CVC funds were created in the last decade and they represent 30% of venture capital in France in 2021.
The average portfolio of a CVC includes 13 start-ups and will conduct 7.5 transactions per year in 2021 (compared to 2 start-ups and 3.5 transactions per year in 2016). BCG has been recording a certain stability since 2018 in terms of average number of investments. CVCs remain particularly interested in series A fundraising as 43% of investments were made on this occasion, 30% in seed, 23% in series B and 3% in series C and more.
A complementary form of investment
“Large companies are playing an increasingly important role in structuring the entrepreneurial ecosystemsaid Lionel Aré, senior associate director at BCG, in a press release. The positioning and expectations of the latter are different from traditional investors. Beyond the logic of financing, corporate investment in start-ups also meets the goals of accelerating change and partnering with the industry. ”
BCG defines three investment models for CVC: pure shareholding without partnership, pure partnership without investment, the explorer model of equity participation within the framework of a partnership. In general, large groups have different expectations from traditional funds. Commercial synergies are the main expectation of this collaboration before return on investment and innovation. Only 4% placed this participation as a possible pre-acquisition.
If large group investments in start-ups are significant in the French landscape, only a third (35%) are successes and a third (36%) are failures. “The question is not so much to know the number of successes or failures but their magnitude, delays Constance Maillard de la Morandais, ‘New Businesses’ project manager at Accor. For us, in general, our successes are more than recovery for our failures. “
For BCG, it is necessary to clearly define the CVC upstream investment strategy, to set up selection criteria for start-ups, to define the contours of integrating the start-up into the group and how it include day to day to optimize collaboration. “The goal for us is to define the professions of tomorrow and secure the start-ups with which we work to enable them to thrive, explained Julien Bourcerie, director of open-innovation and Corporate Venture at Bouygues Construction, in a press release. What we see is that when the acquisition or the minority investment in a start-up is only the work of the prince, for temporary reasons, it is “frustrating in the long run.”
Collaborative follow-up is also important, as is the CVC’s ability to adapt to the priorities set by the group. “Well executed, these mergers should allow significant value creation for the group as well as for the startup”, Lionel Aré slipped. An approach that sometimes finds itself between three incompatible goals: portfolio value generation, commercial synergies, exploration (innovation). So it needs to be clear about the CVC strategy and the goals of the start-up integration.
*Methodology: The study focuses on partial capital mergers of large firms into a startup. This includes minority and majority equity investments, but not acquisitions. Interviews were conducted with approximately thirty corporate interlocutors-representing more than 250 investments (Corporate Venture Capital, M&A, Businesses, Innovation Department) and seven founders of start-ups. The data came from the Crunchbase & Dealroom database or from the internal databases of the CVCs and Corporates in question.