The global venture capital market didn’t reach its 2021 peak in a year. It will also take a good amount of time to unwind from last year’s excesses.
That fact is clear in new corporate venture capital (CVC) data collected by business intelligence concern CB Insights. Per the company’s latest report on the topic, CVC activity was strong in the first quarter, albeit with some weak spots that we suspect developed as the first quarter rolled through its final month.
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Given recent trends that we’ve observed in the larger venture capital market, expecting CVC to reverse course and charge back toward records feels unlikely; more declines seem to be a reasonable expectation.
That CVC is in retreat as venture capital overall decelerates is not a surprise. CVC figures were a component of venture’s rise, and as they were coupled on the way up, seeing them decline at the same time is hardly bewildering.
The somewhat modest declines in CVC that we’ll observe shortly are important for reasons other than simply tracking available investment flow for startups. Recall that TechCrunch explored the concept of historically elevated levels of CVC investment potentially converting into notable startup M&A volume this year. That corporate venture capital was not in rapid decline in Q1 2022 gives extra weight to the concept, as there are now even more potential investment deals to convert into acqui-hires as the year progresses.
Let’s get our hands around the changing pace of CVC activity and then whittle down our focus to geographic trends to see where things are hotter and cooler. (Hint: Europe and China are outliers, in opposite directions.) We’ll close with a recap of the M&A argument and chat about which CVC may be the most overexposed to changing venture conditions.
Slowing from records
Even before the larger venture capital slowdown that we saw in late Q4 2021 into and through Q1 2022, there were signs that corporate venture investing had reached something of a peak. For example, CB Insights data indicates that the dollar value of CVC-participated deals peaked in Q3 2021. It then fell in the following two quarters, from $47.8 billion in Q3 to $45.8 billion in Q4, to just $37.0 billion in Q1 2022.
That said, the data is not entirely uniform. While dollar volume has been in decline from CVCs for two quarters, deal volume — the number of transactions, not their monetary worth — has ticked up in the last two quarters. So the amount invested by corporates has been in an increasingly steep decline, but the number of deals has yet to see any material decline — at least through March of this year.
In our look at the larger VC market’s first quarter, our headline noted that “the global venture capital market slowed in Q1 — but not as much as you might have expected,” meaning that we are echoing that coverage today, just with a smaller, subordinate dataset.
With venture capital in general, it appeared that the later weeks of Q1 were worse than the first, and that we’re on pace to see activity slow more in Q2. We expect the same from CVC activity. But as we said, we didn’t reach the peak quickly. Therefore, we don’t anticipate a crash to come in the above numbers, so long as corporations remain cash rich and afraid of being disrupted.
That said, no market is equal, and the CVC market is no exception. While we are seeing aggregates move in somewhat slow motion, the slowdown in CVC activity that you might have anticipated given the value annihilation in the stock market is showing up more sharply in some regions than others. Indeed, some parts of the world are still seeing their CVC totals accelerate.
A contrasted picture around the globe
As we mentioned, China was an outlier in Q1 and not in a good way. CVC-backed funding to China-based companies declined by 64% quarter on quarter, from $5.3 billion to $1.9 billion in the first three months of the year. That was also its lowest level since Q2 2020. The decline is relative: When it comes to deal volume, Q1 2022’s tally was superior to Q1 2021, with 122 deals. But it was clearly inferior to the numbers of deals registered in Q3 and Q4 of last year — respectively 225 and 167.
China’s fate had a noticeable impact on the overall figures for Asia. CVC-backed funding into the region fell by more than 20% quarter on quarter, adding up to $8.8 billion for Q1 2022. This was despite the fact that India had “its strongest Q1 in history,” according to CB Insights, which reports that CVC-backed funding to the country reached $1.9 billion in the first three months of 2022.
CVC-backed funding also declined in the U.S. compared to the last quarter of 2021, in similar portions as in Asia. There were 450 such deals in Q1, amounting to $19.7 billion, a 22% quarter-on-quarter decrease in funding.
Similarly, CVC-backed funding was collectively down in what CB Insights groups under the LatAm and Caribbean category. But at $500 million, the region’s CVC is a fraction of the overall figure.
On the other hand, Europe is one of the main places where corporate venture capital is being deployed, and it didn’t drop in Q1 2022. It reached $6.5 billion, up 14% from Q4 2021. The increase is even more impressive year on year and in certain places: In the U.K., CVC-backed funding increased by 42% year on year to a quarterly record of $2.4 billion.
However, perhaps this increase in CVC funding into Europe doesn’t say much about the corporate appetite for the region. Instead, it might well be related to a more general trend: that European startups managed to elude the global VC funding slowdown in Q1. Similarly, CVC funding was up 27% quarter on quarter in Africa, a continent without signs of venture capital slowdown in the first three months of 2022.
Odds, ends
Another way in which corporate venture arms might be acting similarly to their VC peers is the temptation to go earlier, and/or to write smaller checks. In the U.S. especially, mega-rounds accounted for their smallest share of CVC-backed deals (8%) and funding (51%) since 2020, CB Insights noted.
The evolution of mega-rounds backed by corporates isn’t uniform; for instance, such deals increased in Europe.
But we still think the U.S. decline in mega-rounds is significant. We are tempted to tie it to another figure that caught our attention: A 24% decline in the average CVC-backed deal size. According to CB Insights, it was the first time since 2019 that this average declined. The median CVC-backed deal size shrank, too.
Meanwhile, early-stage deal share was up, accounting for 58% of all CVC-backed deals in Q1 2022, compared to 54% in 2020 and 2021. Another sign that corporate venture arms are moving earlier along the startup value chain? Perhaps. And there may be more acquisition fodder in the next few months.
So which corporate investor might have the most risk to its current portfolio? Without access to heavily guarded inside information, it’s hard to say. But CB Insights does note that Coinbase Ventures was the most active CVC fund in the first quarter. And in the second quarter, a massive crypto correction touched down, shaking the decentralized economy and raising fears of contagion.
Coinbase was not alone in helping crypto money flow more freely in the first quarter, but it may have something akin to a unique level of exposure among CVCs. Let’s see how it accounts for those bets in later earnings calls. Considering its difficult Q1 results even before the so-called crypto crash, it will be worth tracking, and perhaps meaningful for the broader CVC category.
For now, CVC is in decline, but a slow one. There is a very large balloon to bleed, after all.
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