Corporate venture capital has long taken a backseat to its more traditional VC counterparts in the market, but this appears to be changing. Several recently-issued reports have shown that CVC rates are rising – and the expectations of investors and recipients are changing to keep pace.
A venture capital ‘evolution’
The first such report comes from the 2016 Health Evolution Summit. Having surveyed its Corporate Venture Action Group – with participation from Google Venture, Cerner Ventures, GE Ventures, Johnson & Johnson, Hearst Health Ventures, New York Presbyterian Hospital, among others – HES found that the healthcare market has seen an increase on CVC firm activity, driven primarily by younger firms focusing on dedicated funds, rather than deal-by-deal funding from corporate balance sheets. These early stage companies – all having been formed after 2008 – made up 61 percent of respondents, while 27 percent were formed in the past two years. The average deal size hovered between $2-10 million.
Furthermore, CVC firms are more focused than ever on tying funding to specific technological innovation – emphasizing new medtech initiatives and digital health services.
“CVC firms are more than ever focused on tying funding to innovation.”
“This is an evolution from earlier days in the health care strategic investment world where the primary investment focus was on businesses that were directly in line with the current core business focus: payers invested in payer start-ups, pharmaceutical companies in new molecules,” the report noted.
This tying of VC to innovation shows a sea change in the approach to VC dealings, making CVC more targeted and more closely resembling startup seeding.
“Corporate venture can’t be the dumb money anymore…or else, when it gets tough, we won’t be around to provide the strategic value we promised.” said the report quoting Robert Coppedge, president of Direct Health Solutions at Cambia Health Solutions, an Oregon-based healthcare company.
From the inside to the outside
This growth in CVC is mirrored in another report issued by the National Venture Capital Association, which says that CVC programs made up more than 10 percent of all venture capital investments in the U.S. during 2014 – totaling over $4 billion invested in venture businesses. As with the medical market, the NVCA reports that firms are looking to fund innovation more than seeking safe bet on returns, supplementing research and development and monitoring and engaging with potentially disruptive tech products.
Again, the report points to the rise of external units comprised of dedicated, off-balance sheet funds. As it was with HES, these external units allow for more early stage development investment, creating a venture capital ecosystem of proprietary partner networks or value chains. The NVCA report, however, was reluctant to say whether the increase in external CVC units would continue to outperform internal ones.