Speaking at the Global Corporate Venturing Symposium 2019, Max Fowinkel and William Janeway, managing director and special limited partner at at private equity firm Warburg Pincus respectively, discussed how corporate venture capital (CVC) funds can make returns in a difficult marco environment.
Janeway kicked off the discussion by saying the ‘distinct investment environment’ is entering a second decade of real risk free interest rates of negative-to-zero levels.
Without neglecting CVC funds, Janeway said the institutional investors that are providing capital across the entire private equity spectrum are still dominating the investment space. More importantly, their need for return is driving models of behaviour that have never been seen in professional venture capital.
Janeway added: “It has created this extraordinary environment where startups not only have the opportunity to burn humongous amounts of cash, but when tested, as (electric carmaker) Tesla is being tested right now, have no plausible path to positive cash flow from operations.”
Due to low interest rates and the assumption that they will always be able to raise capital even without positive cash flow, Fowinkel agreed that companies can get away with saying they do not expect their business to be profitable for a long period of time, and suggested that some are taking that assumption for granted.
“What we always look for is to make sure that we do not get into funding a company based on the assumption that someone else is going to fund the company in the future, because at one point it can go wrong for whatever reason,” he added.
Janeway said: “It does not matter where the venture starts, everyone needs to have an evolving, working and operating plan as to how we get the positive cash flow,” and told the audience the risks of this environment are actually ‘very positive’ for corporate venture capital.
Whether it is because of the micro reversals of losing faith in the Uber, Lyft and Tesla model, or whether it comes down to the macro risks of rising interest rates, Janeway said that when these issues occur corporate venture capitalists can maintain the continuity of a strategic investing process.
In recent years, startups have predominantly been purchased by corporates, as opposed to taking the initial public offering route, Janeway claimed.
“In that environment, corporate venture capitalists’ roles as scouts for market research and for entrepreneurial talent can be an asset that transcends the financial return to be delivered to the corporate.”