How is the role of CVCs changing as we enter a new decade?
James: Roll the clock back 10 years: the overall venture capital industry was investing about $60 billion per year, according to Pitchbook. Fast forward a decade: the entire 2010s saw about $1.37 trillion invested in venture capital. That’s more than all of the prior decades’ venture capital combined as corporations and other more strategic investors have helped the industry scale up in their support to entrepreneurs.
As we enter the new decade of 2020, it will be interesting to see whether we’re going to plateau – and if so, how long for? Maybe we’re going to see a drop. The one thing that we can be sure of is corporates’ belief that they have to be involved in CVC in some shape or form.
Jonathan: The CVC market has come of age. If you go back 10-15 years, a lot of corporations had a bad reputation when it came to venture capital. We’ve grown up as a sector in terms of knowing how to behave and, in particular, knowing how to act like a traditional VC.
But we offer founders more than finance and often that gives us the edge. There’s an increasing number of deals and outcomes that validate corporate venturing as an important tool in the private equity market.
How are corporates changing their approach to venturing?
Jonathan: For me, every company active in corporate venturing has a slightly different rationale. It comes down to two or three different reasons. How are we going to make the core business safer, faster and more profitable? And how do we ensure that the business transitions as our own market is transforming?
For Centrica, it’s both. The energy market is undergoing a major transition so we’re considering how to master this change. The disruption in our sector is driven by more nimble, agile companies, and these are the ones that we, as investors, are attracted to.
We want to push boundaries and make sure we’re ahead of our competition. This means considering new geographic markets and sectors that we’ve been unable to tap into before. A few years ago, we invested in Driivz, an Israeli company that provides charging software for electric vehicles. We’re not a software company but we were looking for tech solutions to strengthen our mobility proposition.
Another example is our investment in Greencom Networks. We know that emissions from heating homes in Europe accounts for a significant percentage. If we’re going to decarbonise the home, we need technology that will help control the energy consuming devices in the home, including EVs, batteries and heat pumps. Connecting and managing this is what Greencom does. We realised that their offering overlaps with our Connected Home Business. The natural synergy of the two organisations can help deliver real impact for our customers and for the environment.
James: Centrica is definitely at the cutting edge of what it means to do venturing well. Lots of CVCs are strategically looking at tech investments because of its ubiquitous impact on industry and the potential that new tech holds.
They’re looking for entrepreneurs and start-ups with innovations that directly meet the changing needs of consumers. But they’re also considering how they bring this offering into their own business and the impact it could have internally; whether collaborating with an external start-up could speed up internal innovation; whether M&A is a better tool that can add value.
Who’s winning from corporate venturing? And where and whom is corporate venturing failing?
Jonathan: If you want to know who is succeeding first, you need to define what success means for you and your team. Measuring or quantifying the strategic benefits is something that corporate ventures have been wrestling with for quite a while.
For me, I get really excited when the team uses our work to open the eyes of the wider business to the art of the possible. The role of the corporate venturer is to get big organisations to embrace the idea that small companies – made up of even 10-20 people – don’t just offer a new product or service. They can completely transform your corporate mindset and culture.
When you combine the steadfast belief that entrepreneurs and founders have in something with expertise, investment and a large customer base, you can bring a new, compelling customer proposition to market, regardless of sector. And that’s where the magic happens. I would love to be able to say that happens every time, but it doesn’t.
The nature of what we do is risk capital. All the hypotheses we have or founders have about a market don’t always come off, but it happens with enough frequency that we continue to do it.
In terms of who we’re failing, there’s a huge lack of diversity within the sector and I’m not just talking about gender. I would love to see more founders from different socio-economic backgrounds.
As corporates, we tend to do a lot of early stage investment and I don’t think we are necessarily the best investors in terms of providing the real support that a founder needs when they’re starting out on their journey. We don’t want to smother them but it’s a balance that we’re not always great at achieving.
James: Entrepreneurs are looking for five things: capital, customers, product development, hiring a good team and eventually some sort of exit.
Good corporates can help with pretty much all of those things if they are structured in the right way. Yes, you don’t want to stifle a start-up, but equally you don’t want to just provide capital. They can get that from anywhere. So, the challenge remains: how do you offer the value that entrepreneurs are seeking whilst still deriving benefit for the parent corporation?
This is where CVCs have the edge over traditional VCs. Experience within the industry as well as institutional knowledge is key. From an entrepreneur’s point of view, it’s the longevity on the deliverance on those five needs that’s invaluable. Having someone in a funding round once who then can’t add much value beyond that isn’t great. The ongoing collaboration with a corporate and its business units is what is so important to driving success.
Above: Tudor (second right) at the mobility panel with (from left) Matt Ridley of IAG, Talia Rafaeli of Porsche Ventures, Roi Bar-Kat of Intel Capital and Tony Cannestra of Denso
Is co-investment as beneficial as finding the best start-ups before your competitors do?
Jonathan: If you asked me that question five years ago, I would have said something completely different to what I now believe.
We don’t want ownership or control over a portfolio company that’s going to limit its growth. And no lawyer or founder is going to allow you such control that the start-up wouldn’t be able to do business with your competitors.
When you see new sectors emerging in a market, of course the major players are interested in investing in these areas. Co-investment is reassuring because you’re not only getting your founders point of view but your peers’ perspectives and expertise. It’s this cross-party collaboration that can accelerate growth and benefit all stakeholders.
James: According to GCV data, about three-quarters of funding rounds led by a CVC have another corporation involved. If you think about that from an entrepreneur’s point of view, they think a corporation can help, but they don’t necessarily only want one of them involved. Having a mix of investors is helpful.
Approximately 50% of CVCs have co-invested with at least two other corporations. Start-ups need to leverage this opportunity. The more organisations and people you work with, often the better the outcome. I think it’s beneficial for everyone.
How closely does corporate venturing align with macro political goals?
Jonathan: All corporates have a social responsibility. We’re an energy company so climate is extremely pertinent to us. We’re on a road to net zero and this directly impacts our investment strategy. Achieving true decarbonisation requires a diverse range of people and thinking. We’re looking to invest in entrepreneurs in a way that empowers them to do more in this space without having to relinquish too much of their company. Whilst the double bottom line is important, it doesn’t lie at the heart of our investment strategy.
James: If you mapped out the United National Sustainable Development Goals and overlaid them with CVC flows, you’d see clear alignment. Whether you look at sustainable cities or gender equality, investment is flowing in the right direction. We’re seeing a high rise in impact investing or investing ‘for good’.
The Israeli market is a good case study of the positive socioeconomic impact of corporate venturing. Israel stands out globally when it comes to its innovative capacity, entrepreneurship and skilled workforce. This has drawn corporates to the market. Israel is now market leading when it comes to areas like cybersecurity and the electrification of transport. The triple helix of government, corporates and universities coming together has delivered real value for Israeli people. It’s cases like this that make events like GCV Israel so exciting.
We love bringing together the right people in global investment hotspots – from Singapore to California – to strengthen corporate venturing ecosystems and the benefits it delivers to markets, businesses and the everyday lives of people across the world.
Originally published by Jonathan Tudor via Linkedin
