Here’s how the startup investment game used to go: very rich people and organizations (limited partners) would invest in merely rich people (venture capitalists) who, in turn, invested that capital in startups. A successful sale via M&A, or stock offering on public markets, marked the end of the cycle—feeding capital back up the stack.
For the surpassing majority of startups, that’s still how it works. Then again, the surpassing majority of startups aren’t valued at a billion dollars or more. For a certain breed of billion-dollar technology “unicorns,” it’s not enough to simply take investment from VCs; the ‘corns can be VCs as well.
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If you need further proof, see yesterday. Travel and booking market leader Airbnb led a $160 million round for Lyric, a real estate and hospitality startup. Go figure. This recent news isn’t surprising, as Airbnb eyes going public and continues a spree of investments, including Oyo, and acquisitions of travel startups (see more of our coverage on that trend, here).
That’s among the latest deals struck by a still-private tech company, but it’s not an isolated trend. Here, we’ll show which unicorns have made startup investment deals of their own, and what might’ve been the motivation.
What We’re Talking About When We Talk About Unicorns As Investors
Risky startups betting their capital on other risky startups has a certain ring to it. But even within the unicorn sphere (itself an elite group of companies), it’s rare for private tech companies to take equity stakes in other upstarts.
As of mid-April 2019, there are 192 U.S.-based companies on Crunchbase’s unicorn list, of which 33 have made at least one investment in a startup. It’s admittedly a small percentage, but in this piece we’ll break down how that cohort acts, and which unicorns are most active investors.
Our chart below shows how uncommon it is for U.S unicorns to invest in other startups: only 17 percent of current unicorns listed have made the bet.
Although their ranks are thin, the unicorns which do invest tend to target smaller ventures. Of the 143 equity funding rounds in which unicorns invested, roughly 88 percent of those were seed and early-stage deals. (For more about how Crunchbase News defines venture funding stages, check out our Methodology guide.)
We looked at unicorns making investments directly (e.g. Uber’s participating investment in scooter giant Lime’s Series C), indirectly through a company-backed venture capital fund (like workplace chat platform Slack’s Slack Fund), or a combination thereof.
Here’s The Most Active Investors Among the Unicorns
Of the investing unicorns, two stand out as significantly hungrier for other ventures than the rest: Slack and Coinbase. It makes sense that these two companies, both San Francisco based, also have corporate venture funds behind them as extra fuel.
The chart below breaks down the unique companies that U.S. unicorns (and their venture funds, if they have one) have invested in.
Slack made 25 investments since it was founded in 2009, and that number was boosted to 36 through The Slack Fund. Just earlier this month, Slack invested a seed round in Halp, a company that created a conversational ticketing solution to manage IT requests from Slack.
Coinbase itself has made two direct investments, according to Crunchbase data. The crypto company directly backed Abacus and Fuel Games in late 2018. Coinbase Ventures has invested in fifteen other cryptocurrency and blockchain startups.
It’s clear that some unicorns are looking to invest within their ecosystem, and aren’t afraid to throw capital behind self interest.
Now that we know which unicorns have the biggest appetite, let’s see what they act like once they see a company they want to fund.
The rise of corporate venture funds is no new news. It’s a separate body that can scope out the competition, align interests and see what they can get by giving some checks to their smaller startups in the space.
We looked to see if the investing unicorns are also writing the lead checks in other startups. The chart below breaks down the behavior within the 143 investment rounds we saw.
Unicorn startups are pretty split between leading rounds, and just participating in them. A caveat: about half of the rounds had an undisclosed leadership and participation status.
Historically, if a company leads a round it tells us a few things: they have power/influence within the deal, and there is potentially a strategic aspect to the transaction. The fact that unicorns are indifferent in their approach dulls the interplay between the companies a tad.
Why would a startup bother with corporate venturing?
These unicorn venture capitalists have raised tens or hundreds of millions of dollars in risk capital from outside investors, so why turn around only to shell some of it out to even riskier early-stage startups?
Venture-backed startups are under a mandate: grow, and grow quickly. Some unicorns have the luxury of playing in well-defined markets or competing against a large, lumbering incumbent for market share. In these cases, the company with more investor cash is likely to win.
When does it make sense for startups to invest in startups, especially at scale? When it becomes a necessary cost of growth for platform companies. For unicorns, corporate VC is one approach to kick start a market for tech and services that tie into the core platform the company is trying to scale. Consider it a form of ecosystem growth hacking.
Slack Fund is perhaps the most active example of using corporate money to build up the other side of a two-sided market platform companies seek to build. The value of networks (and platforms) grow as they cultivate and aggregate service providers that are willing to play in a unicorn’s walled-garden market, so long as the ‘corn keeps up their end of the bargain by growing user demand for the services they provide.
There are a few takeaways we can highlight from this number-crunch. First, unicorns are using their billion(s) to invest, but not many. So the majority of unicorns are using capital from their investors for in-house work.
Next, and this is for the investors reading along, when writing a check to a unicorn – you’re not only investing assets in one company, but a blend. Gone are the days of just investing in Uber, Airbnb or Slack, now you have their bets along with your own.
Illustration: Li-Anne Dias
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