Perhaps the only really successful venture investing strategy is the one where firms use their initial luck in backing a fast-growing company and then maintain and build on the relationship to help drive the success of future portfolio companies.
As venture capital firms Sequoia and Kleiner Perkins Caufield & Byers were helped by their backing of technology companies Cisco and Google that are serial acquirers of venture-backed entrepreneurs, or Emergence Capital has reaped the dividends from its early connection and investment in software-as-a-service pioneer Salesforce, there is a long-term history going all the way back to Arthur Rock supporting the so-called Traitorous Eight leaving Shockley Semiconductor to form Fairchild Semiconductor and then spreading out on to NM Electronics (now Intel).
This factor more than any other probably accounts for the degree of persistence academics have observed in the industry over the past 40 years. And as the industry matures and globalises, so this hidden wiring of personal relationships becomes increasingly complicated but influential.
In the US the regulators’ blind eye towards the alleged potential for conflicts of interest between corporate executives running their own venture capital (VC) firms or being limited partners in VC funds has enabled Silicon Valley to create its own culture of personal ties boosting exit prices for a select few that in Europe has been partly stymied by the European Commission’s anti-trust concerns.
But, globally, there are a few eminence grises, such as the Samwer brothers, the Draper and Rothschild families and South Africa-based media group Naspers, able to wield similar power as the handful of top US VCs have done in their local ecosystem.
The latter is one of the more interesting nexuses through its portfolio companies spawning their own highly successful corporate venturing units that in turn build links across borders and have the ability to turn also-rans into profitable champions (the measure of VC pre-eminence).
In the past week, Naspers’ Brazil-based portfolio company Grupo Abril has invested in the latest round for bespoke marketing company Rock Content, while Mail.Ru Group, in which Naspers also holds a minority stake, has made a $1.5m corporate venturing investment in Israel-based Cortica, which looks at images and videos through its Image2Text technology.
Longer-term, Mail.Ru has backed US-listed social network Facebook among other American internet stars, while Naspers-backed Tencent, a China-based media group now with a larger market capitalisation than Facebook, has created its own champions in other countries, including taking a stake in Mail.Ru and South Korea-based Kakao – whose founder, Kim Bum-su, in turn has made a series of angel investments, a venture capital firm (K Cube Ventures) and also gone on to set up web portal provider NHN and its influential corporate venturing unit.
The trail of influence, therefore, can rapidly spin a successful business into a higher atmosphere and create opportunities to grow and expand far more rapidly than groups reliant on more traditional mergers and acquisitions or expansion in large economies can do so.
Sir Martin Sorrell, chief executive at WPP, the world’s largest marketing and advertising services company, put it succinctly in a keynote speech at the third annual Global Corporate Venturing Symposium. Sir Martin said there were now probably no large markets to be opened up now that Myanmar/Burma had been welcomed back into the global economy. The integration of more than two billion people into a capitalist-orientated global economy has been probably the primary factor behind the low-inflation, constant expanding economy over the past 20 years. But this period of low-hanging fruit is ending, apart from a few regions where demographics creates a tailwind to investing, such as Africa.
This puts greater pressure on what Charles Searle, head of listed and social media at Naspers and this year’s winner of the GCV Lifetime Achievement award, in another keynote speech at the Symposium described as the next wave of investing: going from taking ideas to new or underdeveloped markets around the world to being better able to connect up the dots and share ideas across borders. Searle’s unique ability has been to find and work with technologists and entrepreneurs, such as Pony Ma and Yuri Milner from Tencent and Mail.Ru, respectively, from wildly different cultures and backgrounds and help them achieve their goals over years now stretching towards decades.
It is a lead and understanding that will prove hard for others to replicate.