BrazilDutch corporate venturing and start-ups scene needs to accelerate
The Dutch corporate venture capital market has grown strongly in recent years, however, a new report finds that the country’s ecosystem still lags significantly behind many other mature markets. To become more competitive, all parties involved – corporates, the startup landscape but also the Dutch government – will have to embrace a shared responsibility to advance financial muscle and venturing maturity.
The total deal value of transactions supported by corporate venture capital (CVC) rose to €1.15 billion last year. This represents a double-up on 2016’s deal value, and a tenfold increase on the level in 2013, according to a study by Deloitte in collaboration with StartupDelta, titled, ‘The next chapter for Corporate Venture Capital in the Netherlands’.
In 2010 there were eight corporate venture capital funds active in the Netherlands; today that number has risen to over twenty. Companies that have established venturing practices include ABN Amro, Achmea, Aegon, Alliander, DSM, Eneco, ING, KPN, Merck, Nutreco, NXP, Philips, Rabobank, Randstad, Shell and Talpa.
So why are large companies investing a growing pile of capital into start-ups? This is mainly due to the importance of continuous (technological) progress. Buying up innovative start-ups is a pragmatic way to bring in innovation capabilities and thereby stay ahead of disruption. In 2018, the focus within the Netherlands’ corporate venture capital market was concentrated around three main areas – software, digital and cybersecurity.
As Pieter Wolters, Managing Director of DSM Ventures, explains; “Startups bring value to corporates because they operate at higher speed, with full determination for a single purpose and a tremendously entrepreneurial spirit — things that are not naturally part of the culture in large global corporates. Vice versa, with their global resources, networks and knowledge, corporates like DSM can help startups accelerate their journeys from great ideas to sustainable successful businesses.”
In the past five years, the Dutch start-up ecosystem has matured, boosted by a growing list of incubators, accelerators and government support initiatives. At the same time, the venture capital market itself is also booming and many corporates are responding to this trend. According to KPMG, a total of $255 billion was pumped into start-ups last year globally, an increase of more than 40% compared to the previous year. Whereas corporate venturing accounted for around 10% of this five years ago, the share of corporate venturing now stands at between 15% and 20% in the more mature Western markets.
The Netherlands is not surprisingly riding the wave of international developments. According to the researchers, across six European regions – including the Netherlands – corporates invested more than €8.3 billion in start-ups in 2018, double the amount spent in 2015. Economic giants the UK and Germany are Europe’s largest markets for corporate investments in startups, with Israel (an important tech start-up hub included in the analysis for its proximity to Europe) following in third place.
Analysis of the Netherlands’ spending flows shows that most of the funding goes to foreign startups: 78% of all investments in 2018 related to cross-border deals. Moreover, the growth of corporate venture capital investments in Dutch companies has come to a standstill. In 2013, the Dutch corporate venture capital funds examined completed 21 local investments, with the number remaining virtually unchanged at 22 in 2018. This is in stark contrast to the international investments made by Dutch corporate funds: 19 in 2013, and 76 last year – a CAGR of 32%.
Scale-ups?
One area of concern highlighted is that, on average, venture capital investments by Dutch corporates tend to be small. Proportionally less funding goes to scale-ups or late-stage startups, firms that can build on a proven business model. “The share of scale-up investments by corporates is lower in our country than in the rest of Europe, the US and Asia,” says Daan Witteveen, a partner at Deloitte.
Dutch corporate venture capital funds focus primarily on early stage start-ups. More than 80% of the Dutch funds surveyed indicate that they are investing in this group. In addition, compared to the UK, Scandinavia, Germany and Israel, there is significantly less participation in late-stage investment rounds. As a result, the median transaction size in Dutch start-ups by corporates is at €4.7 million significantly lower than the European median of €11.8 million.
While the difference naturally is in part a consequence of the relatively small Dutch market, culture also plays a role. The US is by far the largest venture capital market, and according to Patrick de Zeeuw, the chief executive of accelerator programme Startupbootcamp, this is not just the result of sheer size but also has to do with the investment climate and culture: “It's common for US funds to be managed by entrepreneurs. This affects risk aversion and the services they can provide to their startups.”
Deloitte partner Witteveen indicates that the current Dutch gap comes with a price tag. “As a result, the country is foregoing opportunities to build the companies of the future.” Nils Beers, a director at StartupDelta, adds: “Scale-ups are needed to keep the Netherlands competitive in the future. Corporate venture capital plays a major role in scaling up start-up companies to scale-ups. It is not only an effective way for young companies to attract venture capital, it also offers corporates an opportunity to enter into business innovative partnerships.”
Becoming more competitive
To keep the Netherlands competitive at an international scale – both at the corporate level and in the startup scene – Witteveen advocates larger investments in scale-ups. His call is backed by Wolters, who when put forward the question “does the Netherlands have enough opportunities to invest in mature ventures?” answered “the availability of in particular later-stage startups is small. At least that's true for the areas that DSM focuses on.”
Geert van de Wouw, Vice President at Shell Ventures, advises to not follow the most obvious route. “We must not try to become the next Silicon Valley, that is just not realistic. Instead, we need to rely more on our own unique selling points: our strong scientific roots and state-of-the-art infrastructure. Building on these pillars, the Netherlands can become a leading market to test and scale new technologies and business models.”
Lara Koole, Principal at Philips Healthcare Technology Ventures, points at the impact the government can make. “The government also has a role to play in stimulating innovation and funding. There are plenty of examples of other countries where governments help mobilise significant late-stage funding. Our government has an opportunity to do the same. Especially for smaller companies, active as venture investors, it could lower the barrier for investments enormously. ”
According to Thijs Gitmans, Fund Manager at Mainport Innovation Fund, start-ups from Dutch soil should at the same time be bolder in their ambitions. “The startups that prove to be successful have to look across the border for larger funding rounds and an international network.”
Witteveen concludes by saying that corporate venture capital should not just be seen as a means of M&A, nor as a means of innovation. It is in his eyes key to blend the two together, and tie the approach closely to corporate strategy. “Corporate venturing activities should be integrated within the strategy, making sure that investments are aligned and can directly contribute to the transformation of the company.”
Venture capital deals are one element of merger & acquisition activity. According to a Bain & Company analysis, global M&A deal value spiked to $3.4 trillion last year, buoyed by private equity growth.
