Despite the Covid-19 pandemic, 2020 saw a record level of corporate investment in startups. Far from pulling back, corporate VC deals rose 24% from the previous year. But this boom time is unlikely to last. Over the next 18 months, expect to see many corporates withdraw from their non-core investments.
Why? Because people are going to be struggling for cash.
We have witnessed one of the greatest government bailouts in history over the past year. Across Europe (and indeed the world), public funds have been used to support a variety of industries and businesses of all sizes, including large corporates. That meant that any cash flow problems have, in the short-term, been covered.
But government cash can only go so far; at some point it will have to stop. What happens when public funding dries up, but we are all still recovering from the economic effects of Covid? It is a one-two that many businesses will struggle to combat, including major corporates with cash tied up in start-up investments that usually take an average of 10 to 15 years to deliver a return.
There are always conversations, but there’s definitely been an increase as major companies explore their options.
Corporate exits — some more public than others — are likely to become a major trend in 2022 and beyond.
It’s something we’re seeing at TempoCap – as a specialist in secondary investments, we provide a route to liquidity for a variety of sellers, including corporate venture capitals (CVCs). There are always conversations, but there’s definitely been an increase as major companies explore their options.
Of course a crisis doesn’t need to be global for corporates to look at divesting non-core assets – GE Ventures attempted to sell much of its investment portfolio in 2019 when the company faced debt and accounting issues. . This included passing on its entire healthcare portfolio, some 16 companies, to an investment company that specialised in providing liquidity to investors, including corporations.
During the 2008 financial crisis, corporate venture capital investment decreased 32% year-on-year, and 9% year-on-year in 2009.
When the post-Covid exits begin, many of them are likely to be in Europe. In the US and Asia, the most active CVC funds tend to belong to tech companies, such as Alphabet, Softbank, Salesforce, Tencent, Amazon, Intel, Microsoft and Qualcomm, most of whom have had a strong performance through the pandemic. In Europe however, we have a wide variety of businesses, in a number of different sectors, involved in CVC – from fast-moving consumer goods to financial services, automotive to life sciences, pharma and manufacturing.
That greater spread of sectors in European CVCs and the lack of a buoyant IPO market like Nasdaq means exits are likely to be driven by the market conditions of a much wider variety of industries, and not just technology. It is this that could cause a high number of exits, as a whole host of corporates are buffeted by economic downturns.
Shareholders of major European corporates will not care about divesting non-core assets.
The other reason we could well see exits on a major scale is because shareholders of major European corporates by and large will not care. Divesting non-core assets generally does not have an impact on the day-to-day running of the business.
For those that need to find 50, 60, maybe even €100m, exiting non-strategic investments will be a quick way to access cash. Those moves may already be happening as we head out of budget season while still in lockdowns and major restrictions. It would be a brave executive that is now predicting a rebound to the extent that cash flow will be fine without action to ensure liquidity. Selling non-core tech assets ought to be more appealing than cutting operational costs that could have more long-term consequences.
Of course, divesting CVC investments is not always straight forward. There needs to be someone willing to step in, which might be harder at a time of economic uncertainty. One good option can be a management buy-out of the business (such as Holvi’s founders buying back the business from BBVA) but the startup team isn’t always in a position to do this.
Does that mean that CVCs will struggle to find a buyer? Only in the sense that an unattractive asset is always challenging to get rid of – if the business has potential, there are always going to be people interested in investing, particularly if they can get involved outside of traditional funding events. These can sometimes be a bit crowded – it’s one of the reasons we have developed a focus on secondary investments ourselves.
We're not necessarily going to see rock bottom prices.
The most important thing to consider is the context. While CVCs are divesting in a forced sale, it doesn’t necessarily mean we’re going to see rock bottom prices —while shareholders may not care about non-core assets, they’re still going to expect some sort of return, if not a major profit.
At the same time, the market for buyers is going to be fairly specialist. Any corporate exit we get involved in will be priced according to a variety of factors, but ultimately it comes back to the business in question. At TempoCap, we want to work with ambitious, hungry founders with a strong management team, heading up a well-run business with significant growth potential. If those aren’t there, neither we nor any other secondary investment specialist is likely to get involved unless the price is ridiculously low (which in turn will raise questions about the long-term validity of the business).
For the startups and scaleups being sold it may not be a bad deal, however. It can mean a swapping a nervous corporate for a more active new investor. This may not be a bad thing — it could be a way of injecting new capital, ideas and experiences into the organisation.
It’s still a relatively untapped area of the market, and one many, including CVCs, may not be aware of, but it does provide a liquidity solution for large corporates looking to exit. It’s certainly something we’ve seen increasing interest in as the current situation unfolds, and a trend we expect to gain further traction and prominence in the next year or so.