As the bitter watches of the night grow longer in the northern hemisphere I was asked whether there would be the same number of corporate venturing funds raised next year as this year.
The easy answer was "who knows?". But then I hedged some more by saying: "If the world’s economy does slow or turn into recession then fewer, maybe 25 to 50 compared to about 100 this past year. If the economy continues okay then probably the same again."
Venture capital in general is a cyclical business – more funds are raised and invested as economies grow and fewer deals and vehicles are backed during recessions. A number of large businesses sensitive to economic conditions are drawing in their fiscal belts by cutting discretionary expenditure in expectation of a slow-down. This would presage the lower end of my range, as fewer firms will commit to new programmes that promise longer-term survival and profits if the core business needs cash to survive now.
Structural issues can affect this general trend at the margins, such as regulatory and capital adequacy pressures on traditional limited partners to independent venture capital (VC) funds. Kate Mitchell, co-founder of Scale Venture Partners and the 2010-2011 chairman of the National Venture Capital Association (NVCA), writing about "How the Past Informs the Future…Today" in volume two of the Kauffman Fellows Report for 2011, said the number of VC firms had fallen every year since the all time high of 1,023 firms in 2005 to 791 in 2010.
She added: "Venture fundraising from limited partners hit a seven-year low in 2010, coming in at $12.3bn [down from $26.4bn and $16.3bn in 2008 and 2009, respectively]. Fund sizes between $50m and $150m will soon be the norm again."
As well as structural factors, the fewer commitments to VC funds follow a decade of poor returns, partly based on too much money being invested and the multiple for trade acquisitions falling from an average of seven times in the 1990s to 2.7 times in the 2001-2009 time range. A survey by Tamara Elias, also in the really excellent Kauffman Fellows Report, of 22 investors with an average $32bn under management and 23% commitment to venture found about one-third of the LPs met or exceeded their benchmarks – 12% to 20% absolute internal rate of return (annual performance) and a 1.7 times to three times multiple return – over the past 10 years, "which also means that two-thirds did not".
For corporate venturing, however, the structural issues are more positive. Even in a downturn some businesses or regions do well and there is a greater pressure to cut costs, which encourages entrepreneurialism and use of start-ups. Companies have in general also retained astonishing amounts of cash on their balance sheets and with labour and other factor inputs relatively low, margins have proportionally almost never been higher. Finally, corporations remained behind their venturing units through the first part of the credit crunch between mid-2007 and early 2010, thereby breaking the link between starting late in the cycle only to close during the downturn seen in earlier waves of venturing.
This resilience follows the ideas behind open innovation and investing in third parties reaching a tipping point over the past decade. It is now axiomatic that any firm of reasonable size thinks about how to look externally to innovate and taking minority stakes is one element in the tool kit to consider using.
The thinking is leading to previously what would have been considered strange bedfellows. Often previously hidden by corporations from the same or similar sectors backing blind pool funds managed by independent firms to avoid conflicts of interest, this year has seen a number of firms grow in confidence about investing directly alongside peers.
This month, four of France’s largest companies set up a €30m ($40m) corporate venturing fund to invest in sustainable transport start-ups.
State-owned rail company SNCF, oil major Total, mobile phone operator Orange and car maker PSA Peugeot Citroën founded Ecomobilité Ventures, which will be headed by SNCF’s Fabienne Herlaut.
The fund follows a similar aggregation under Aster Capital by industrial groups Alstom, Schneider Electric and Rhodia and Energy Technology Ventures by General Electric, ConocoPhillips and NRG Energy.
As a result, providing trust in globalisation and the disruptive power of innovation remains, corporate venturing fund launches should remain near the upper end of the range next year even with a slowing global economy. (Financial Armageddon is a different matter.)
And the longer-term prognosis is good for corporate venturing given the relative better valuations they will be investing in for most sectors and regions next year compared to what they will receive from exits at the top of the next economic cycle later this decade.
This is just my current opinion – to help me take advantage of the wisdom of crowds, please help fill in these eight questions and email me back so I can include in the Outlook edition of Global Corporate Venturing. This January issue will also have a special focus on the transport and logistics sector so more about Ecomobilité Ventures then, too, while the December issue has more from the Annual Review and an analysis of corporate venturer’s careers using a unique study of 700 people that have worked at units in the US over the past decade.
Review and Outlook Survey:
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