With the pace of innovation speeding up, private equity and venture-backed disruptive companies are spending more time worrying about who is potentially about to copy or disrupt their plans.
This, along with more standard questions about how to raise funds and find and exit deals, was a headline topic among delegates at data and information provider Thomson Reuters’ PartnerConnect conference in New York City last week.
Jonathan Nelson, chief executive at media-focused leveraged buyout firm Providence Equity Partners, said as well as the traditional meeting on a Monday for its deal partners, his firm was holding regular portfolio company days on a Thursday to discuss how they invested in third parties in order to build equity value. Nelson’s peers at private equity firms have used corporate venturing as a tool to support their portfolios, including CVC Capital Partners’ Nine Entertainment and Evonik earlier this year.
For venture-backed companies undergoing rapid growth, the challenge was more about speed of dealmaking and protecting the portfolio through globalisation.
Geoffrey Prentice, a partner at venture capital firm Atomico started by entrepreneur Niklas Zennström, its portfolio company Rovio – maker of the Angry birds game – went from $4m in revenues per quarter at November when investment negotiations began to $25m per quarter by February. Prentice said a good example of the innovation race currently, was social gifting company Wrapp, which has Zennström and business network LinkedIn founder Reid Hoffman on its board after a $5m series A round in January.
Prentice said Wrapp’s model was copied within a week by clones in other countries so its investors helped the portfolio company recruit globally within three weeks.
But such globalisation is expensive, even if quality personnel and dealflow can be sourced from the investment syndicate.
After completing its $40m B round in December, fashion ecommerce provider Fab.com is expected to close another very large round, perhaps as soon as this month, in order to help the US-based business backed by venture capital firm Andreessen Horowitz expand globally.
The company, which is also backed by news provider Washington Post, is less than a year old and has already acquired Germany-based peer Casacanda and ecommerce website FashionStake.
Many of these highly-regarded social commerce companies are run by first-time entrepreneurs. Scott Kupor, chief operating officer at Andreessen Horowitz, said it would back first-time entrepreneurs if the market was big enough to be worth the risk. His firm asked checklist-type of questions about the entrepreneur and team, such as examples of how they have run through walls, even before seeing its pitchbook.
But given the serendipity needed to strike on a good idea, build a company people want to use, find the investors ready to back you and avoid/defeat competitive challenges means it is basically luck whether a business and investment succeeds, a point made by Nobel prize-winner psychologist Daniel Kahneman in his latest book, Thinking, Fast and Slow.
As Darren Herman, managing partner at advertising agency KBS+’s corporate venturing unit, said before his panel, its analysis of the companies backed or acquired were often not the ones with the best product or growth. (My thanks also to the other members of our PartnerConnect panel: Mike Brown at AOL, Marcel Lubben from DSM and Steve Socolof from NVP and incoming chairman of the NVCA’s corporate venturing group later this month.)
But there are ways to be luckier* by looking at areas likely to be in demand – either by geography as investors look at innovation hot-spots, such as Silicon Valley, or by sector.
Alan Patricof, founder of his Greycroft venture capital firm, said in digital media content was becoming increasingly important as distribution became more readily available at fractional cost, and last month backed peer-to-peer payments service Venmo as a result.
The challenge for digital media providers has been in gaining payment for this content – hence why so many VCs have invested in new advertising providers – but with the roll out of mobile and micro-payment services from entrepreneurs (with Kenya a hot spot for innovation as Global Corporate Venturing identified last year) it is likely there will be higher multiples and interest paid to those able to develop information people want to use as it becomes clearer how this can be monitised and distributed to a global audience.
Another way to be luckier is to meet people able to help you, and vice versa, and for both sides to realise as much and have the time and inclination to do so. Hoffman in his book, The Start-up of You, co-written with Ben Casnocha, says weak links, people you don’t know very well, are the most important parts of your network as "they are the gateways to things you don’t know about already". But the strong links and people/firms highly-rated by peers – for which in corporate venturing see our awards shortlist here – are often more influential to decision-making.
Which is why the PartnerConnect conference and those similar to it remain useful to explore ideas from those with tangential or close interests to your own.
* I’m interested in writing a longer article about how to become luckier, such as using simple algorithms to provide more consistency and avoid heutistic fallacies – thoughts and ideas most welcome to jmawson@globalcorporateventuring.com.