Five years after the global financial crisis, the world economy is showing signs of bouncing back this year, pulled along by a recovery in high-income economies, according to the World Bank’s Global Economic Prospects report published two weeks ago.
The outlook is equally benign as we hit the mid-point of the current cycle. The World Bank added there were at least a couple more years of growth in almost all regions.
Given venture capital has been a pro-cyclical industry subject to swings in bargaining power this is now the sweet spot for firms to:
· raise money from their limited partners, including at corporate headquarters, university administrators and endowments, governments and others;
· put in place the governance structures that will see them through the inevitable downturn; and
· do the deals that are expected to deliver strong returns by the portfolio companies capitalising on the benign economic conditions.
The global growth in the overall venture industry broadly continues (even if a number independent VC firms in the US struggle) as countries, corporations, universities and all parts of society recognise the power of supporting entrepreneurs to drive innovation and financial returns.
Toby Lewis, editor of Global Corporate Venturing, in his annual review webinar [add link], sponsored by software provider Relevant, said: “2014 promises to be the year corporate venturing comes of age. The large influx of corporates into venture capital our company has been tracking since 2010 should see many of these organisations become mature entities within their parent corporations. We expect exit activity to rise as units seek to demonstrate returns, while the continued appearance of new groups and established groups upping the ante should also mean investment activity is robust. The marked trend from our reader’s perspective responding to our 2014 Outlook review, is that digital is impacting all sectors, with the rising importance of the internet of things and wearable devices expected to turbo charge the digital revolution much like the emergence of smartphones has done during the last seven years.”
Work by London Business School academic Gary Dushnitsky, in part summarised in our report to the UK government, found: “Companies with corporate venturing units outperform peers in similar fields judged by patenting output and using a market-to-book value ratio.”
Unsurprisingly, therefore, other institutions, including universities, are following the venturing approach laid out by the best corporate venturing units, aided by research in their own fields.
As Gregg Bayes-Brown, editor of Global University Venturing, put it: “A Brookings report found that 84% of universities in the US are operating their tech transfer units in the red, with the top 5% of US universities taking in 50% of the licensing income. It goes on to argue that spin-out creation and the following nurturing of them is crucial to greater success in this field.”
Even if the windfalls are shared unequally, the disruption wrought by venture investing is such that turning a blind eye to the signals sent by the entrepreneurs is a strategy for failure.
It is no surprise to read in news provider Fortune about private equity firm KKR’s reported investigation into setting up a growth-equity platform. Tapping into the fast-growing companies offers a potential expansion of KKR’s assets under management but also allows it to join what peers, such as TPG and Carlyle, have recognised: investing in fast-growing, entrepreneurial business brings an understanding of what disruption is coming that might affect other areas of their business, such as which leveraged buyouts might face falling margins and/or negative cashflow to service the debt piles from the start-ups.
This broader analysis underpins the decision this week by a syndicate of 20-year private investment veterans led by a group from 24 Haymarket to sign the growth equity round of the publishing company behind Global Corporate Venturing, Global University Venturing and our nascent third title, Global Government Venturing. The investors predict a strong macro tailwind to the venture intermediary market driven by the usual economic cycle as well as unique factors currently seen.
It is increasingly a globalised world of hyper-competition among the expected nine billion people in the next 40 years. The desire to survive and thrive allied to the exponential improvements in computing power and innovation more broadly are driving change.
This will bring pressure on incumbents in all fields with the only defensible strategy to create or join a network of smart people who understand the trends and are shaping what the world will become. The only criteria for access to this club is personal ties, such as through working together on profitable start-ups, such as Skype and PayPal, and to bring money, access to deals and help find profitable exits, all of which the best venture intermediaries excel at doing. These intermediaries and their managers, therefore, become this generation’s “very important people” and the smart chief innovation officers and organisation leaders at corporations, universities, governments and elsewhere are already doing all they can to attract and retain the best talent, including gather the insights at this year’s Global Corporate Venturing Symposium – see the agenda – in London on 20-21 May.
In this particular battle, to paraphrase former UK Prime Minister Winston Churchill, we are far from the end of the beginning, let alone the mid-point.