2018 felt like CVCs were in almost every deal. So what do the numbers say?
[Below graphs are based on Pitchbook data. Early tracking of data, before 2008, is not that reliable. After that, not every transaction is reported accurately. But the data is reasonably good at showing trends. I’ll try and point out some problems along the way]
CVCs Participate in More Deals Than Before.
While the number of reported number of venture capital rounds in 2018 declined -2.4% globally versus 2017, the reported number of rounds with CVC participation increased by 7.0% over the same period.
The number of reported CVCs participating in venture capital rounds is slowly creeping up, but lower than I would have expected from my anecdotal evidence of my deal-flow and portfolio companies — which says something about the type of deals I like, I guess.
CVCs Shift Focus to Later Stages.
I looked at the reported rounds of venture capital funding (versus other sources such as grants, but including venture debt). I wanted to get away from stock Series names A, B, C, etc. Instead, I looked at CVCs coming in as the first or second venture money (early stage), or in the third to fifth round of venture financing (expansion and growth stage), or in the sixth round of venture financing or later (pre-IPO, late-stage partnership, etc.).
You might have noticed my careful choice of “reported” here: Not all participation in early stages might get reported. Startups might not want to disclose very early-stage strategic partners. Or they might be worried about negative signaling. Or the CVC might be worried about negative signaling. As a result, the actual number of early-stage deals with CVC participation could be higher.
However, when diving deeper into the data, one interesting fact emerged: CVCs don’t let go of their investments. While institutional investors cut their losses early, and many startups cannot find follow-on funding, CVCs keep funding a higher percentage of their initial investments, often with larger checks. That can be a good thing or a bad thing, depending on the case, and not necessarily something systemically wrong.
CVC Activity In Europe Declines (and grows in Asia and the Middle East).
Most notably, the reported number of European venture capital deals with CVC participation in 2018 declined -11.9%, while all other regions are showing significant increase in reported CVC activity. Compared with 2017, U.S. and Canada see +5.8% more deals, Asia +17.4%, the Middle East +57%. The rest of the world saw a reported 41 venture capital deals with CVC participation in 2018, up +70.8% from the 24 deals reported in 2017.
Compared to overall CVC activity, the trend of growing European engagement with CVCs since 2015 got reversed. Activities in the U.S. and Canada stayed somewhat stable.
Number of CVC Groups Somewhat Stable.
It is hard to tell from the PitchBook data if the reported numbers are complete, or at least stable enough. That seems the case for 2014 and later, but the jump in reported CVC groups per year from 2013 to 2014 seems unusual.
Not all CVCs are operating from a dedicated fund vehicle. A lot of them are investing off the balance sheet, or from a Strategic Partnership P&L. But it is interesting to see that the reported number of new funds raised and investing declined from 27 in 2016 to 22 in 2017 and only 14 in 2018. There might be funds that got raised in late 2018 and did not participate yet in any venture capital rounds. But the decline from 22 to 14 is stark enough to send a message.
CVCs Still Commit Considerable Resources.
The reported 435 CVC groups participated in a total of 1764 deals. 22% report to have only one or two investment professionals. 31% report to have three to five investment professionals, and over 35% have more than six investment professionals (56 groups, or 13%, do not report the number of investment professionals). These are considerable resources.
Few CVC groups are reporting their Assets Under Management (“AUM”). So that might not be too helpful.
First-Time CVC Funds are Quite Active.
Of all reported 2018 venture capital deals with CVC participation, 16.9% of groups reported that they are investing from a first-time fund. Most of these funds were committed in the 2013 to 2016 time frame. Given that many CVCs do not invest from a fund vehicle, or do not report the status of their program, this high number is quite surprising. CVCs are still tapping with considerable force into the innovation potential of startup investing.