AAA To venture or not to venture, that is the question

To venture or not to venture, that is the question

As the corporate venturing industry has expanded exponentially over the past decade, more and more large corporations are being forced to ask if this is the right thing to do. Clearly we are in growth mode now, with nearly half the Fortune 100 involved in venturing and the number of corporations active in venturing doubling over the past five years.

Our recently launched GCV Academy provides a regular forum to talk with many people who have recently formed or are considering launching their own unit. It is fascinating to meet these large groups of corporate executives grappling with the questions of why and how they should get involved. The training sessions are under Chatham House rules, which means what is said can be reported only anonymously.

It was interesting to hear one executive, when being told about a potentially highly strategic company an experienced corporate venturing group had backed, blurt out in frustration: “Every part of my brain is saying: why don’t you just buy it?”

The answer was, of course, complex – ranging from how the startup company’s high valuation multiple would make it dilutive to earnings, to entrepreneurs not wanting to sell now, to how difficult it is to integrate a fast-moving early-stage startup into a corporate leviathan.

Yet the exchange brought home how much corporate venturing is about a mindset or ideology. It can work if you and your corporation are willing to buy into the reasons for venturing, but it is likely to be alien to how you have been accustomed to doing things. Given that these things often start with initial enthusiasm due to their novelty value, it is worth trying to be very clear about why you are attempting to be active in venturing and whether this reason squares with the facts.

One of the more interesting long-running conversations on the topic I had in recent years was with the head of a group which had decided to wind down its activities. This person lamented that the group’s financial returns had been good, notching up exits and initial public offerings, yet the parent corporations’ top executives had decided the strategic rationale for these activities had not stacked up. During this exit process, the executive was shocked to learn that academics estimated that parent corporations acquired only 5% of corporate venturing portfolio companies. The management clearly thought taking minority stakes in high-potential companies was not enough if it failed to acquire a decent quantity of them as well.

The truth is many groups are putting together admirable track records. Four in 10 units responding to a survey in our World of Corporate Venturing 2015 supplement have secured a greater than 10% internal rate of return, while seven in 10 have secured more than 5%. Most of the wider venture industry has worse historical returns than 10%, so most corporate groups are clearly competing well with their peers in the financial industry.

Of course, as illustrated above, this might not be enough to justify that what you are doing is worthwhile, and many of these groups have notched up this track record in a rising market over the past five years. The returns often remain on paper and, as is well remembered from the dot.com crash at the turn of the millennium, these paper returns can quickly vanish.

While it is clearly wise for all groups to be considering whether to get involved with venturing, if you decide you should be doing it, make sure it is for the right reasons.

Symposium

It has been gratifying to put together our Global Corporate Venturing Symposium agenda for a second time. Every year this event has been bigger and better, and given advance demand for the June 2-3 London conference this seems almost certain again in 2015 – we hope to see you there. The general theme is whether corporate venturing has hit tipping point, towards wider maturity and acceptance. Strong corporate venturing returns and Fortune 100 involvement in the industry suggest it has. What is your opinion? Is corporate venturing merely going through a cycle, such as the one that hurt many groups in the dot.com period, or has something changed that places it in the mainstream of investment for good?

Bring yourself and your opinions. Register at www.gcvsymposium.com .

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