English mathematician and philosopher Sir Alfred North Whitehead has observed that “civilisation advances by extending the number of important operations which we can perform without thinking about them”. And as the new year dawns for those on the Gregorian calendar, it is worth looking at the trends shaping the industry.
While there are plenty of technology changes under way, the biggest shifts are the ones to business models, which then usually finds the technology to fit its paradigm rather than the other way round. First, using the superforecaster theory to improve predictions, we can check back on the three main issues identified in this editorial last year after I noted the end of the golden age for corporate venturing in December 2016’s editorial:
Sadly “a panglossian degree of optimism” in the macro environment – Trump’s billionaire-only policies, Russian pressure on Europe and China’s crackdown under President Xi – only continued last year with tax reform in the US benefiting the already-haves, Russian president Vladimir Putin gaining confidence in his assault on the European project and neighbours, and Time headlining the 26th annual congress as “Xi Jinping Is China’s most powerful leader since Mao Zedong”.
The second big theme was things “shaping up to be the first mass market age in venture capital”. With the further emancipation of options for entrepreneurs through initial coin offerings, which exploded last summer, there is increased attention on what they want rather than what investors want. Entrepreneurs’ needs remain constant – cash, customers, product development, hiring and exit routes. Achieving these remains the challenge and corporate venturers have stepped up their identification of competitive advantages in this space.
This leads to the third issue: “From a cottage industry of VCs following ‘pattern recognition’ to select former colleagues, fellow university alumni and sons of friends, the newer breed of venture investor has emerged with the brand, marketing and support-beyond-money that entrepreneurs want, offered by units that can hire experienced and mixed teams.”
There has been admirable discussion on diversity in investment teams and portfolio companies. Intel Capital has reached 20% in female-led portfolio companies while it is now hard to find all-male corporate venturing units outside the legacy lifestyle groups modelled on their college peers at independent venture capital firms. Glance at those listed in Global Corporate Venturing’s Rising Stars 2018 – out at the end of the month at the Global Corporate Venturing & Innovation Summit in California – primarily nominated by industry leaders, and it is clear where the direction of travel in this area is heading.
So, what could be new issues to be aware of in 2018? Cracks widening in the global economy is one. This will create opportunities for those with cash to pick up assets. Looking at Yale endowment’s holdings, it is salient that David Swensen is now holding a higher proportion in zero-beta – uncorrelated to markets – assets than he did before the global financial crisis started from 2007.
Finding and tying up sources of longer-term capital that can be called down is probably the biggest strategic factor this year. It is no surprise the smarter groups, such as Tencent and Intel, have been tapping public markets or trade sales for portfolio companies where possible.
The incredible valuations and funding for successful entrepreneurial companies has meant the venture industry is finally joining its more professional siblings in private equity. For context, 25 years ago, in 1992, after the savings and loans and Drexel Burnham crises crushed leveraged buyouts, private equity firms raised $20.8bn. In 2016, after an overhaul of practices, talent and methods, private equity firms raised $347bn and had $2.5 trillion in assets under management, according to data provider Preqin.
Corporate venturing’s rise this decade with its first near-$100bn fund raised by SoftBank last year and involvement in venture deals worth more than $100bn indicates what can be achieved.
The third area for strategic corporate venturing leaders is the collaboration potential between universities and governments. A large part of money for the SoftBank Vision Fund came from Middle Eastern sovereign wealth funds, while university leaders, such as Christine Gulbranson at University of California, have identified ways to tap corporate partnerships more strategically. SoftBank’s success in dealmaking – its portfolio company Alibaba passed $500bn in market capitalisation for the first time last year – and then raising capital has shone a light on what can be done in structures.
And this is the final change to be seen in greater depth and light this year. Technology is finally changing corporate venturing itself. Artificial intelligence (AI), when the inputs are unbiased, is helping identify a longer tail of opportunities, and the smarter groups, such as Didi Chuxing, SoftBank, Merck and others, are working out how to combine these into bigger assets to capture the next S-curves of disruptive possibilities. Unsurprisingly, therefore, AI seemed to be the top pick by those responding to our annual survey in partnership with Insead and Stanford business schools. For the full selection of predictions, selections as well as the annual data, see the World of Corporate Venturing 2018 supplement when it is out at the Global Corporate Venturing & Innovation Summit at the end of the month, but a selection of leaders’ quotes is included in this issue.