Last year, the introduction to the World of Corporate Venturing 2017 started:
It is hard not to look at commitments made to a near-$100bn venture fund organised by a Japan-based conglomerate SoftBank with an expectation that last year [2016] was a high point in private capital markets and innovation capital. But SoftBank’s fund might not be the signal of peak venture that it first appears for two reasons that became clearer over the past year – supply of capital is changing from purely financially-focused principals to those with often more strategic reasons, and opportunities to invest are broadening.
That SoftBank alone was involved in about a fifth of US venture deals by value in the third quarter indicates the impact it has had. Entrepreneurs are asking for 10 times what they might have sought earlier, and using the money to develop their own corporate venturing strategies by investing in and acquiring peers in other sectors and geographies.
Media group Tencent and SoftBank’s funding of China-based ride-hailing company Didi Chuxing will be perhaps a defining case study of this new world order. It has effectively defeated US peer Uber in China and turned the tables on its erstwhile partner outside North America to be valued more highly and have a more effective partnership model. This has put the group at the head of the GCV Rising Stars 2018 in the persons of strategy chief Stephen Zhu and his boss Jean Liu – both in the top 25 of last year’s GCV Powerlist. (see Zhu’s profile in the separate GCV Rising Stars 2018 supplement).
What Didi, Tencent and the others realise is that, as Arjun Sethi puts it, “a moat [a durable competitive advantage] today is simply a temporary buffer that helps a company get ahead of the next innovation cycle”.
That is why Tencent effectively reinvests all its profits in corporate venturing, as Jeffrey Li, managing partner at Tencent Investment, said at the inaugural GCV Asia Congress in October.
The growth in the importance of intangibles upends economic theory. Arnold King in his blog said: “Business competition does not consist of building bigger production facilities. It consists of trying to come up with the best strategies for capturing the value of ideas, including the value of spillovers and synergies that come from other people’s ideas.
“Economic textbooks continue to treat incomes as returns to factors of production, notably labour and capital. Meanwhile, in the real world, incomes at the highest levels are the outcome of management strategy, in mobilising internal talent and in exploiting the opportunities to use synergy, spillovers, and scalability in the external environment.
“As intangible factors increase in importance, strategy matters more and resource endowments matter less.”
As presented in our GCV Symposium keynote in London last May, the leading corporations are joining up their innovation toolsets, with venturing an increasing proportion of the capital allocation and, more importantly, top talent.
Corporations are increasingly shaping and driving the venture ecosystem. As my colleague, Kaloyan Andonov, found, “in 2017, GCV Analytics tracked 2,320 deals worth an estimated $109.23bn of total capital raised.
“While the deal count registered a somewhat minor increase on a year-to-year basis (6%) versus the 2,173 transactions of 2016, the total value of corporate-backed VC rounds reached a new all-time high, surpassing the $100bn mark.
“What also grew was the number of active corporate venturers. Since 2011, when our publication started, we have tracked more than 2,234 distinct corporate investors, according to our definition – any corporate investor, with or without a specialised CVC unit, which has participated in at least one venturing round for a given period of time.
“We also observed that the number of active corporate venturers grew drastically by 70%, particularly over the past four years, from 678 in 2014 to 1,153 in 2017.”
The new large CVC-backed funds are primarily set up in Asia and will shape the opportunities backed and what new champions emerge. The role of innovation in driving relative outperformance is indicated by this third consecutive year of more than $100bn invested in venture-backed companies. This is both because financial returns for investors seem to be better in this part of the economic cycle but also because the opportunities to impact the world through technology seems only to be growing and creating commensurate political reactions.
High valuations and a change in the global economy from up to down will put the unprepared at risk if capital is uncommitted by corporate parents, but will offer better-priced assets for the brave. David Swensen, chief investment officer at Yale endowment, recently said he was holding more assets (32.5%) in zero beta – non-market-correlated assets – more than in the days before the global financial crisis.
In partnership with Stanford and Insead business schools, the annual GCV Leadership Society survey of industry leaders identified the main concerns and opportunities they have as well as the structural and organisation make-up of the community.
Artificial intelligence (AI), genomics, communications, energy, blockchain, robots, sensors, and a host of other transformative changes are under way.
Now we appear to be, relative to previous generations’ expectations, on the cusp of singularity, and with technology impacting three big drivers of human evolution – health, living longer and better; transport and communications, with each other as well as computers and robots; and energy, with solar pricing below coal and other fossil fuels without subsidies.
The January issue of Global Corporate Venturing this month looks at the business model changes affecting corporate venturing through AI impacting deal sourcing and monitoring to partnerships with universities and governments and professionalisation of personnel.
The venture industry is democratising with the rise of angels and initial coin offerings (ICOs), and the formation of cheaper startups changes dynamics for what types of business need venture capital. Gust has 500,000 funders and 70,000 investors. AngelList has a jobs board, Republic for crowdfunding, partnership with CoinList for ICOs and Producthunt for customers and development.
Last month, SingularityNet, a US-based decentralised marketplace for AI, said its ICO raised $36m in just 60 seconds. AI is hot because of the promise of general AI as well as deep or machine learning based on datasets.
As Brian Arthur, an external professor at the Santa Fe Institute and a visiting researcher at the System Sciences Lab at Xerox’s Palo Alto Research Centre, wrote for management consultant McKinsey: “The virtual economy is not just an internet of things, it is a source of intelligent action – intelligence external to human workers.
“This shift from internal to external intelligence is important. When the printing revolution arrived in the 15th and 16th centuries it took information housed internally in manuscripts in monasteries and made it available publicly. Information suddenly became external. It ceased to be the property of the church and now could be accessed, pondered, shared and built upon by lay readers, singly or in unison. The result was an explosion of knowledge, of past texts, theological ideas and astronomical theories. Scholars agree these greatly accelerated the Renaissance, the Reformation, and the coming of science. Printing, argues commentator Douglas Robertson, created our modern world.
“Now we have a second shift from internal to external, that of intelligence, and because intelligence is not just information but something more powerful – the use of information – there is no reason to think this shift will be less powerful than the first one. We do not yet know its consequences, but there is no upper limit to intelligence and thus to the new structures it will bring in the future.”
However, the way we have worked in the innovation ecosystem is perfectly suited to a world that no longer exists. Going round the corner of the village to Stanford or Berkeley and hiring your roommate and investing in your friends will only get you so far.
The entrepreneurs’ customers and products and capital and staff and even the buyers of her whole startup can come from anywhere and the diversity is important to that success. And what we realised from the annual GCV survey and inviting portfolio companies to events was that you – the corporate venturers – are the so-far hidden wiring that connects it all.
There is a shift from innovation village capital (IVC), with local investors, small deals, VCs always in the lead, just offering capital and maybe some advice and terms skewed against founders and employees. Fewer than three out of every 10 VC firm are international in scope, according to PitchBook data.
And if their selection is weak, given 75% of venture-backed startups fail, according to a Harvard Business School study by Shikhar Ghosh, then the occasional home-run exits allied with downside protection through liquidation preferences, with double-dipping into option pools and retained shares, and minimum valuations, all mean VCs do better on average than founders and employees.
So if villages are not the answer, what is? Perhaps city-scale venture capital, where international, mixed syndicates can meet the entrepreneur’s needs of capital, customers, talent, product development and, eventually, an exit on aligned terms.
The last part might be the hardest given the current downside protection in seemingly all unicorns – companies worth at least $1bn. But the enormous bonuses and options given to CEOs of the average incumbent listed company means the penny will drop for entrepreneurs, too.
And diversity will matter. Sir Ronald Cohen, founder of UK trade body the British Private Equity and Venture Capital Association and Apax Partners, Bridges Ventures, Social Finance, Big Society Capital and chairman of the Global Steering Group for Impact Investment and the Portland Trust, said, in advising on our next theme – Standing on the shoulders of giants: going beyond capital – for the GCV Symposium in London on May 22-23, the 21st century shift in mindset is one from looking simply at risk and reward to finding the appropriate blend of risk, return and impact.
If investing is intentionality with measurement of impact, then the slightly disparate worlds of traditional venture investing and impact investing will start to combine. This creates opportunities for new regions and investment models.
About half of corporate venturers are already doing deals outside their home countries, and a look at the exciting technology being spun out of academia through our Global University Venturing title indicates that the triple helix of government, corporation and university is present in many of the syndicates formed in the past few years.
As our sister publication Global Government Venturing has reported, countries are “stepping into venture”, to repeat a phrase by Peter Diamandis at Abundance Insider. The SoftBank Vision Fund, after all, is backed by Saudi Arabia and the United Arab Emirates.
But finding these parties and building trust to share deals is a challenge. The GCV Leadership Society has been working towards a world of, in angel investor Gil Dibner’s words, systems of network intelligence – in which a system of intelligence creates incremental value by sharing intelligence across customers.
Perhaps one example from last year indicates the potential. The moon landings have been called the greatest technological feat of the 20th century, with 4.4% of US gross domestic product spent annually at its peak in the mid-1960s on developing the technology and capability to land someone on the moon as part of a political rivalry between the US and the Russian-led Union of Soviet Socialist Republics.
Fifty years on and it can seem the rivalry is more Elon Musk versus Jeff Bezos, which perhaps reflects more on the changing balance of inequality in the near-50 years since the first lunar landings – they have the money to be as impactful as governments. But it also reflects on the technological impact that allows individuals to be effectively on a par with the military-industrial complexes of previous generations.
And no individual is an island developing his or her idea in a vacuum. Last month, Japan-based iSpace raised $90.2m in its series A round, the largest amount in the global commercial space sector and one of the largest A rounds in the country’s history. The money came from some of the country’s biggest businesses, including Japan Airlines, KDDI, Konica Minolta, Suzuki Motor, Shimizu, Dentsu and TV network Tokyo Broadcasting System, government-backed Innovation Network Corporation of Japan and Development Bank of Japan, and VC firm Real Tech Fund.
iSpace is planning two missions that involve orbiting and landing on the Moon by 2020 and operates in Japan, Luxembourg and the US. It was the sole Japanese team participating in the Google Lunar XPrize.
This project came out of research by Kazuya Yoshida, professor of aerospace engineering at Tohoku University, who is still chief technology officer and director at iSpace.
This type of deal is perhaps the future of CVC.