Intel Capital, the corporate venturing unit of the US-listed semiconductor and data company, has started making profit payments again. In a networking reception at Intel’s headquarters last month, Wendell Brooks, president of Intel Capital and new chairman of the GCV Leadership Society, confirmed a report in Private Equity (PE) News that he was reinstating carried interest, a form of profit sharing for investment staff if a company is sold or floated.
Intel did away with carry shortly before he became president of Intel Capital about three years ago, he told PE News. The decision, as well as the changeover from former head Arvind Sodhani to Brooks, helped lead to the departure of a number of senior executives from Intel Capital, including Lisa Lambert, initially to join VC firm Westly Group and now to run National Grid Ventures and Marcos Battisti to be a managing partner at venture capital firm C5 Capital.
Bringing it back, therefore, is expected to help Intel Capital retain its remaining team and continue to attract high-quality personnel. Brooks’s move is also seen as a bellwether for the industry, which has been reluctant to follow its independent VC peers in offering carry. The J Thelander Consulting 2018 survey of compensation found a fifth (16) of 81 corporate venturing respondents benefited from carry ranging from 2% to 18.5%. The majority received a bonus.
Carry, or more usually putting personal equity into successful portfolio companies, has driven phenomenal returns to a handful of VCs. But luck and timing make it an unreliable remuneration practice for many executives and dealmakers. In Europe, carry has often been based on a whole-fund approach, so performance fees are paid only when an entire vintage of deals is exited, which can take decades.
In the US, a more common version of deal-by-deal carry can make it hard to offset failed deals with successful ones and develops a home-run mentality rather than supporting the whole portfolio.
Finding good entrepreneurs with the potential for profitable exit is difficult. Carry can become a distraction in an industry where senior CVC executives can earn about $500,000 in base and bonus payments, but it is lucrative if a deal does break out successfully, so it can help in a hot market for talent.
In essence, carry can be a smaller version of the Wall Street mentality to try to socialise losses and privatise profits. In this light, Intel’s timing for bringing it back is also a sign of how the independent and corporate venturing worlds are moving and reflects the greater integration of the private capital markets with their public market peers.
Probably the most exciting development in the innovation capital ecosystem over the past decade has been the scaling up and professionalisation of the industry, and an openness to newer models to deliver on strategic and financial goals.
Beyond in-house corporate venturing units and independent VCs, a raft of multi-corporate-backed funds and structures, such as Touchdown, Redstone, Emerald and Aster Capital, have been taking off, and others, such as Deutsche Telekom, dream of replicating the huge alternative investment managers, such as Blackstone, KKR and Carlyle Group.
Telstra and Swisscom have found ways of leveraging strategic closeness to support portfolio companies with institutional equity, while Pfizer’s deal last month to create a holding company, Cerevel, for drug candidates using at least $350m of Bain Capital’s money achieves a similar goal one step below. SoftBank has gone further by using government debt to leverage its equity, a risk lowered by preference shares and minimum valuation agreements.
As venture capital funding amounts and valuations reach public market levels then the types of dealmaker start to blur. The heads of Intel Capital, Deutsche Telekom, SoftBank and Verizon Ventures all had top-tier private equity and investment banking backgrounds. The challenge is to continue supporting entrepreneurs who might start feeling more than lost by some of the more rapacious private equity and banking practices. Carry can align interests but preference shares and a host of portfolio management and transaction fees less so.
As assets under management increase then the need for syndication – with all the pitfalls, conflicts and diversity it brings – can decline. Sequoia always wants to take the majority or totality of a round, in the way Bain Capital has provided the money to Cerevel, leaving Pfizer with a quarter of the equity.
But in the words of Intel’s Brooks, CVC can be “better together”. It is this strategy and a focus on his team’s diversity and development rather than bringing back carry that is likely to be his most significant legacy and a well-spring for the industry’s longevity and legitimacy.
Taking slightly less of the ownership in a hot company to let in another CVC might hurt the carry but it is likely to help the portfolio company. Venture is a service profession, a mentality Wall Street lost long ago. While it is doubtful CVCs can do much to change the far-larger public markets there is still time to avoid its often sociopathic influence on corporate venturing by remaining focused on the long-term delivery of excellence to entrepreneurs and those who pay the bills.
