There is an apparent contradiction in the innovation capital ecosystem that is worth exploring. Sue Siegel, chief innovation officer at GE and CEO of GE Ventures, who is co-chairman of the Global Corporate Venturing & Innovation (GCVI) Summit, as she opened the conference at the end of last month said: “The pace of change will never be as slow as it is today.”
Innovation, therefore, is speeding up and seen as increasingly important, but the number of venture capital-backed companies has been falling for the past three years.
The fall in volume from a peak of 19,288 venture-backed deals in 2015 to 12,929 last year according to data provider PitchBook, has been perhaps masked by the increase in the value of these deals to $158bn in 2017 from $146bn in 2015.
The value increase in the average round size may reflect the impact of deep-pocketed investors, such as the near-$100bn SoftBank Vision Fund, and other corporate and sovereign-backed funds, among others. GCV Analytics found corporations involved in $109bn of deals last year through more than 2,000 rounds.
But given the procyclical nature of venture capital historically, the fall in volumes in the venture industry overall perhaps indicates a wider change in sentiment among entrepreneurs. The democratisation of funding methods from friends, family and venture capital to a wider host of angels through crowdfunding and initial coin offerings (ICOs), as well as potentially cheaper startups, changes the dynamics for what types of business need venture capital.
Gust has 500,000 funders and 70,000 investors, AngelList has a jobs board, Republic for crowdfunding, partnership with CoinList for ICOs and Producthunt for customers and development. The internet is awash with articles on how to find and raise money from investors on more equal terms.
So, the way we have worked in the innovation ecosystem is perfectly suited to a world that no longer exists. Going round the corner of the village to Stanford or Tokyo universities and hiring your roommate and investing in your friends will only get you so far. Local investors, making small-sized deals led by financial-only investors offering only capital and maybe some advice with terms skewed against founders and employees is an unappealing offering.
The entrepreneur’s customers, products, capital, staff and even the buyers of her whole startup can come from anywhere and the diversity is important to that success.
Instead of “innovation village” capital, therefore, we are moving to city-scale venture capital, where international mixed syndicates can offer aligned terms and meet entrepreneur needs for capital, customers, talent, product development and help with an exit.
What we realised from the annual Global Corporate Venturing survey and inviting portfolio companies at our annual GCVI Summit was you are the so-far hidden wiring that connects it all.
The challenge of finding and working with entrepreneurs and putting them first while engaging them with the corporate parent is a difficult job. The ethos of collaboration encourages more altruistic character traits into the industry, certainly compared with the relative narcissists in much of financial services.
The discussion on diversity and balance that ran through the summit indicates an openness to change. Siegel is right, the pace of change will only become faster but identifying the themes and areas of unique competitive advantage requires people to want to engage and share their insights beyond a traditional core social and professional circle.
The focus of legendary communicators, such as Margit Wennmachers, a venture capitalist at Andreessen Horowitz, or Anna Catalano, board member at Kraton Corporation and Willis Towers Watson and former chief managing officer at BP Ventures, cannot be overstressed.
In her discussion with Peter Bryant, managing partner at Clareo, at the GCVI Summit, Catalano said: “Innovation happens when you are talking to someone who is unlikely to gravitate in your usual orbit – you have to be in touch with people who are not part of your world, and to remain curious about things that exist outside it. You are the means by which corporations can be affected – do not underestim-ate the power you have.”
And that power includes changing the venture model itself.