Photos: © CB Insights, © Fiege Group, © Seven Ventures, © Evonik Venture Capital.
In recent years, more and more large German companies are setting up subsidiaries that invest in start-ups. They expect quick access to innovation and, ideally, high returns on farms.
At first, the founders of Google did everything themselves, then they recruited the brightest tech minds en masse to develop their search engine into what would soon become the world’s leading search engine. Every day, numerous high-potential employees at the headquarters in Silicon Valley work on improvements, new services, extended business models and new products. The whole world watched with interest what innovations could come up with and which would spread quickly everywhere. But after a short time, Mountain View wasn’t fast enough and didn’t find enough talent anymore, the industry says. Former employees entered the business with their own ideas and developed promising products; many young people started their own businesses for the same purpose directly from nearby Stanford University. People in charge of Google faced a choice whether to take part in the technology race or simply buy new companies. They chose the second option. Just a few years after its founding, for example, they took over Where2 and used their expertise to develop their Google Maps functionality. They took over Keyhole and turned it into Google Earth. In 2009, they founded their own venture capital arm, Google Ventures. It is one of the largest in the world.
The disruption is often the driving factor
Of course, Google is not an isolated case. However, it points to the development that can be observed in almost all industries and in almost all areas of the world as the Internet, smartphones and digitalisation develop: New technologies are fast and often disruptive, meaning they are implementing well-established business models. Many large multinationals, but also an increasing number of midsize companies from America to Europe to Asia, are faced with the same questions that Google executives have had to ask themselves: can we keep up with this pace with our own research and development – and how much would that be? cost? What would happen if we didn’t get involved in all of this? The numbers show that more and more companies are opting for the slogan “If you can’t beat them, buy them” look beyond your own nose. They are no longer only interested in companies that already offer something that you could use yourself. Companies are increasingly establishing their own venture capital subsidiaries, which invest in large numbers of start-ups with fairly open results. If the investment is successful, but you can’t use it on your own, you still have a good return, so the calculation goes.
2021 was a new record year
The idea of corporate venture capital (CVC) is not new; it has existed for decades, especially in the US, and has had its ups and downs there, mostly in line with classical venture capital. But in recent years it has grown rapidly around the world precisely because of the increasing pace of technological development. The industry website CB Insights presents some figures in its CVC study for 2014–2019. The increase in CVC investments in Germany during this period was 1,500%. In 2019 alone, CVC invested $ 7.5 billion in European start-ups. Finally, in 2021, investment activity broke all records, with CVC-backed funding increasing 142% year-on-year worldwide to a record $ 169.3 billion. Internationally, Germany is considered a particularly active location for the CVC business – not least because of its strong domestic industry. The Federal Association of German Private Equity Companies (BVK) estimates that there are currently approximately 115 CVC companies. In addition to large companies, primarily DAX corporations, most of which have been in the market for a long time, more and more venture capital investment arms from small and medium-sized companies are being added.
Also interesting for medium-sized companies
The Fiege family business is such a medium-sized company. The group, whose core business is contract logistics, i.e. stationary logistics, not transport logistics, has been operating in the CVC industry for about five years. Not very structured at first: Individual investments were made in promising start-ups without having a budget for them. However, last year, the company’s management institutionalized this business by creating its own venture capital fund, which is endowed with an average double-digit amount. Since then, F-Log Ventures has been investing in companies that are at an early stage of development. The emphasis is on technologies such as big data, artificial intelligence and software. The condition is, however, that all participation should be related to logistics, i.e. Logtechs are. “A lot is happening in the logistics industry.
New business models are emerging, new technologies are changing processes. We have big in many areass potential, ”says managing director Felix Fiege, explaining the growing interest in the CVC business. The relationship with logistics is important to him for two reasons. “Thanks to our industry knowledge, we can judge very well which ideas have the potential and what the market is for,” says Fiege. The second reason is supporting your own business. Like everyone else in the industry, Fiege is staffless. Automation solutions can bring you relief. In addition to these strategic aspects, however, there is always a goal of achieving a good return on investment.
Together with classic venture capitalists
Industry knowledge makes CVCs one of the many traditional venture capitalists
a desirable co-investor, especially as they often take over minority stakes in start-ups. This is also the case with the CVC branch of the ProSiebenSat.1 Media broadcasting group. SevenVentures invests in both early-stage companies and more mature, growing companies – usually not with money, but with scope. Advertising time is made available to companies in the portfolio in exchange for shares. “Our portfolio companies were able to continue brand building during the Corona and did not have to save on the advertising budget, to protect their liquidity, ”says SevenVentures CEO Florian Hirschberger. SevenVentures is also looking to come back, but like many CVCs, they are also very interested in developing start-ups over the long term. Strategic Goals and Financial Return – These two motives drive the majority of CVCs. However, they often differ in a strategic approach. “Some invest in start-ups to prepare for their takeover, run a kind of pre-M&A strategy– says Markus Solibieda from the BVK board. Another reason is to invest in innovation so that you can use it later in your business. “You see it quite often when it comes to digitization,” says Solibieda. Many companies also perceive their investment activities through the prism of the early radar function. You quickly notice when young companies engage in something that may attack their own business model. You can only take countermeasures if you know it.
The pressure for reviews is increasing
“Thanks to our venture capital activity, we not only invest financially, we also see much of what will happen in the future. It is very interesting for us from a strategic point of view. “
confirms Dr. Jens Busse, Investment Director at Evonik Venture Capital. The venture capital arm of the chemical company has been in business for ten years and is now in the third generation of funds. Its main purpose is not to acquire a portfolio company, but to exit. “If we want to buy, we have to develop a fair bidding process, otherwise it will not be interesting for our co-investors,” says Busse. Nevertheless: The times to buy a company are better than they have been in the years, because start-up valuations are lower today than they used to be. There are several reasons. One of the most important will probably be the interest rate return in the US, which the ECB will probably follow step by step. She has already announced the first rate hike for July. This reduces the amount of money that investors spend on venture funds due to a lack of alternatives. As a result, funds have become more reluctant to invest, which in turn lowers the purchase prices. “Partially falling multipliers will lead to more targeted investments again,” says Hirschberger of SevenVentures. According to his observations, the extent to which valuations are under pressure depends not only on company-specific factors, but also largely on the industry in question. While start-ups still get a lot of money in the area of sustainable development, corrections in other areas are much more noticeable. Overall, however, there is still not much anxiety in the market. The current situation is mostly seen as a healthy correction. In the face of the current uncertainty caused by the return of interest rates, inflation, the war in Ukraine and a host of other factors, no one really dares to say what will happen next.
After a record-breaking 2021, CVC’s business remained high in the first quarter. However, experts predict that business activity will weaken as the year goes on. Will the CVC business now repeat what we recently experienced at the beginning of the millennium when the dotcom bubble burst? At that time, many companies gave up their investment weapons, which they founded in euphoria Neuer Markt. Hardly anyone on stage believes that it will happen again. On the one hand, this is because the CVC business is now firmly established in Germany and there are many more CVCs than 20 years ago. On the other hand, there are also many more start-ups that innovate in many different industries that no one wants to do without. In addition, the network of contacts between companies and start-ups has increased. Nevertheless: in the event of an economic downturn, companies primarily think about keeping themselves and their employees afloat, right? Busse of Evonik Ventures sees it this way: “When things get tough, we obviously need to look after our own employees, but we also need to look after our start-up employees. We see it holistically. “