In today’s challenging landscape, it is imperative that businesses keep abreast of technological developments while striving to stay ahead of the competition. To achieve this, they are spoilt for choice amid a plethora of strategic options and can pick those that best fit them. Through corporate venturing for example, big companies explore new business opportunities by investing in or creating external start-up ventures.
The goal of corporate venturing is to sharpen an organisation’s competitive edge by generating long-term growth and diversification. Corporate venturing opens large firms to new technologies, products and markets that may not be available within their own organisations. For optimal strategic fit, corporate venturing also requires striking a balance between corporate rigidity and more fluid start-up culture, which may well affect the chances of success. At the end of the day, most if not all CVC funds aspire to achieve strategic objectives along with lucrative financial returns.
Considered as a sub-set of venture capital (VC), corporate venturing can take several forms, including corporate venture capital (CVC), corporate accelerators, partnerships, and incubators. CVC involves a sizeable company investing in a start-up in exchange for equity, with the objective of gaining strategic benefits such as access to new technologies or markets. Corporate accelerators and incubators are programmes that provide resources and support to early-stage start-ups, in return for a stake in these entities. Through such programmes, start-ups can benefit from the expertise, networks and resources of the bigger establishment. The latter, on the other hand, would have the benefit of being privy to innovative ideas and technologies.
As an investment strategy that has been gaining traction, CVC has taken root both globally and locally. Notably, CVC can play a positive role during a downturn, especially amid the current slew of punishing headwinds assailing the world economy. Such trying times offer unique investment opportunities with immense upside potential to forward-thinking corporates.
In 2022, half of the world’s 10 biggest CVC investments were related to energy transition, predominantly in the form of electric cars and their batteries, or the harnessing of solar power – highlighting the continuing trend towards sustainability. On the other hand, the top 10 deals in the non-energy spectrum focused on cybersecurity, gaming and sports, logistics and fintech. That said, the CVC market is still trying to find its footing amid external shocks such as unbridled inflation, interest rate hikes, supply-chain issues, a looming global recession, the ongoing war in Ukraine and a widespread energy crisis.
According to the State of CVC 2022 Report by CB Insights Research, against this turbulent backdrop and declining valuations, global CVC funding diminished 43% y-o-y to USD98.9 billion in 2022 (2021: USD173.8 billion). CVC firms scaled back the size of their investments throughout the year while the number of deals stayed relatively flat. In line with the global trend, CVC investments in the US also shrank 46% to USD51.3 billion in 2022 (2021: USD94.3 billion), although it retained its position as the world leader in CVC funding. Interestingly, however, Europe bucked the trend with 903 CVC deals – a five-year high.
In South-East Asia, most CVC players invest in start-ups as limited partners. Similar to the rest of the world, the prolonged Covid-19 pandemic had accelerated digital adoption among the region’s population. This had, in turn, led to the incorporation of new technologies in myriad spheres. Underpinned by conducive demographics, the landscape is well poised for the growth of VC in general, and CVC in particular.