There is a tension in any industry when a region, sector or handful of companies start to shift the established metrics for success and traditionalists begin to feel uncomfortable. This is undoubtedly starting to happen in venture capital more broadly as corporate venturers move the model from, effectively, a local, village-style provision of capital and advice to an international, service-led approach to meet the entrepreneurs’ five primary needs of capital, customers, product development, hiring and an exit.
This large shift being played out over the past decade primarily through the impact of corporations adding their often unique ability to provide large amounts of capital, acquire or help float venture-backed companies and offer a firehose of customers and technical support.
But even within this broader development, much of the momentum has come from a relatively small number of corporate venturers. GCV Analytics tracked 1,354 deals worth an estimated $85.3bn in the first half 2018, of which $66bn – 77% – were deployed in 145 deals that were $100m or larger.
For context, in the 12 months to the end of March 2014, there were 47 deals of at least $100m, 41 of which included corporate venturing units in their investment histories, before the numbers started to shoot up in the second-quarter that year with 32 large deals of at least $100m that raised nearly $7.4bn overall, according to Global Corporate Venturing’s analysis and a GCV Symposium keynote address.
The same sorts of names crop up in many of these large rounds, such as SoftBank, Tencent and Alibaba. Probably unsurprisingly, therefore, during the first half of 2018, $42.3bn of the $66bn GCV Analytics tracked went to China-based companies. In comparison, $15.3bn went to US-based emerging businesses.
It is hard to comprehend the speed of the transformation in the innovation ecosystem’s locus effectively from Silicon Valley in California to the region around Hong Kong and Shenzhen. You can get a good sense by comparing the GCV Asia Congress in the latter region this month with the Global Corporate Venturing & Innovation Summit in Monterey in January.
And while all sectors and regions have developed their corporate venturing strategies, the leaders have been technology companies, whether Alphabet, Amazon and Apple in the US or Chinese peers, such as Baidu, Alibaba and Tencent. All have created multiple ways to find and support entrepreneurs as part of platform expansion into different geographies and markets.
But whereas the concerns in the mid-point of the decade were around whether such large deals could ever see a profitable exit, the answer so far has clearly been yes. A glance at the host of initial public offerings announced or completed shows billions in paper returns for the groups able to invest in fast-growing companies and provide the capital and resources to help them scale.
There is perhaps an element of fortune in this. The unusual length of the economic growth in the current cycle has resulted in a bull run in US stocks, which last month passed the previous record leading up to the dot.com crash around the millennium. Smart well-connected investors close to the edge can create favourable market conditions and time entry and exit.
But behind the scenes what is also interesting is the joined-up thinking about portfolio management by corporate venture capitalists. The techniques in private equity groups to connect portfolio companies and tap them for recurring revenue streams have morphed in new ways through diversified holding companies.
Rather than reaping purely management fees from portfolio companies, along with a host of other costs, CVCs are using their core services to support portfolio companies or connecting them to each other as part of a bigger perspective on market dominance and longer-term value creation running into decades or hundreds of years.
This is creating challenges for more traditional-minded CVCs following the old venture capital playbook. Without free cashflow in the billions to invest and a dedicated leadership committed to the new approach, the alternatives are to be smarter in working with other corporations and investors to leverage the balance sheet and rework portfolio management to offer greater service to the entrepreneurs.
Wendell Brooks, president of Intel Capital and chairman of the GCV Leadership Society for the next two years, put it most eloquently in his call at the GCVI Summit this year that “we are better, together”.
As we roll out our GCV Connect platform to help corporate ventures collaborate on portfolio companies, syndicating online and in real life through events, whether in London, Sao Paulo, Helsinki or New York, Houston, California or China, all will be able to benefit and continue making the world a better place through the power of innovation capital supporting entrepreneurs.