“The difficulty lies, not in the new ideas, but in escaping from the old ones” – John Milton Keynes
It is all change here at Mawsonia. Some of you might have noticed the new coat of paint on our Global University Venturing (GUV) and Global Government Venturing (GGV) titles, and Global Corporate Venturing (GCV) of course. This may well mean a little disruption over the past and next few days, but, as our news editor, Rob Lavine, puts it, think of it as the digital equivalent of making a cup of tea while your kitchen’s being redecorated. If you encounter any serious issues drop an email to hbayes-brown@globalcorporateventuring.com and we will do our best to sort it out.
But while change is in the air here – our GCV Connect platform will also be rolled out this autumn to subscribers to collaborate and share deals with their corporate venturing peers – the industry continues to evolve in better service to entrepreneurs and the parents providing funds and other support.
An eye-catching statistic from reporter Kaloyan Andonov in our GCV Analytics review of the data so far this year is that the value of corporate-backed deals has already overtaken the total for the whole of last year.
Last year was itself a record year, and that 2018 is on track to smash those numbers by value indicates the flattening nature of the traditional bell-curve approach to dealmaking by corporate venture capitalists.
As guest speaker Charles Szrom, investment manager at Verizon Ventures, noted in last month’s GCV Analytics webinar on the telecoms sector, CVCs typically invested in series A to C rounds, but with their role in the innovation toolkit of their corporate parents growing, they are moving to earlier stages in pursuit of the longer-term ideas coming out of universities and other founts of entrepreneurialism, such as accelerators, and to later stages for the larger rounds of at least $100m.
As last month’s review of the sector indicated, telecoms – much like the energy industry in this month’s sector review and the focus of our Venture Houston conference next month – has in many ways been a bellwether for the industry, reflected in its personnel upheavals, strategic dislocations and fundraising.
Before our GCV Asia Congress in Hong Kong – my thanks to co-chairmen Jeffrey Li and Jay Eum, managing partners at Tencent Investment and Translink Capital respectively, for their help organising the largest CVC event in the region – I was honoured to attend the biannual Swisscom gathering of ICT and technology-focused investors in the Alps last month. The themes chosen by Dominique Mégret, head of Swisscom Ventures, reflected many of the areas currently under most development, including funding and initial coin offerings, strategic value, incentives and co-investing with peers.
A who’s who of the CVC community, including leaders from Axel Springer Digital Ventures, Cisco, Deutsche Telekom Capital Partners, Ginko Ventures, Hasso Plattner Ventures, Innovacom, KPN Ventures, NGP Capital, NTT Docomo Ventures, Orange, Samsung and SEB Venture Capital, shared their insights at the Swisscom Ventures Summit 2018 under Chatham House rules.
On funding, the relative outperformance of CVCs compared with other asset classes and types of investors means it is increasingly attractive to institutional investors looking purely for financial returns.
Steven Kaplan, a professor at University of Chicago’s Booth School of Business, found VCs over the past decade on average delivered about double their multiple on invested capital (MOIC) at about an internal rate of return (IRR – a measure of performance) of 20%, but, with fellow economist Antoinette Schoar over at massachusetts Institute of Technology, calculated they had also outperformed the public markets over this period.
A glance at last year’s annual survey of CVCs for the World of Corporate Venturing, in collaboration with Stanford and Insead business schools, with the modal result at 11% to 20% IRR and 100% to 150% MOIC. Naturally, average or modal figures are a partial snapshot – venture skews to the relatively few outperformers, such as Tencent, SoftBank and Naspers, which have generated tens of billions of dollars through their deals.
Smart institutional investors are looking for these outliers, hence SoftBank raising tens of billions of dollars from sovereign and corporate investors for its near-$100bn SoftBank Vision Fund, Swisscom raising more than $200m for its Digital Transformation Fund and Telstra taking in minority backing by secondaries investor HarbourVest – Tim Flower, managing director at HarbourVest, and Chris Pu, head of Greater China at Telstra Ventures, discussed the deal at the GCV Asia Congress (see conference review).
But rather than become purely independent with weak, if any, ties to the original corporate sponsors, a number of CVCs are trying to combine the stability and greater firepower of larger funds, often with better remuneration packages for their team to compete with independent VCs, with the greater opportunities to support portfolio companies’ needs of product development, finding customers, hiring and an exit, as well as capital.
The development of blockchain and initial coin offerings as disruptive issues for portfolio companies and the venture industry itself, through changing the nature of the transaction of securities and how entrepreneurs are funded, remains nascent but potentially seismic over the next decade, and a host of corporations are already exploring how to incubate or invest in them.
From a corporate CEO’s perspective, however, the strategic value of a CVC unit can be harder to see than the financial value. Corporations typically ascribe value to the information that flows back to the parent from the range of entrepreneurs and ideas they see, and hence the improved efficiency of other innovation tools, such as research and development, and mergers and acquisitions, that can accrue.
This eyes-and-ears approach is helpful, and CVC can be the start of approaches to new markets or sectors, such as those by Nestlé, Bertelsmann, Naspers and other groups.
A more interesting angle could be the strategic value for the corporation of investing in the portfolio companies and having them as a centre of attention. The life-and-death cycle of large corporations listed on stock exchanges indicates relatively few survive across decades or technology changes, and those that do often thrive if the new business units have relative autonomy to find innovation.
IBM was a classic case of reinventing itself through newer units in its move from mainframes to PCs to services, while Microsoft has seen effectively an internal coup to push artificial intelligence and the cloud against legacy office software and, in wake of the success of Warren Buffett’s Berkshire Hathaway holding company over decades, Google renamed itself Alphabet as a way of forcing investors to recognise its adverts-driven search engine was the main profit driver for now, but it would take bets in other areas through corporate venturing to try to create future growth – similar to the approaches of Tencent, Alibaba and SoftBank more recently.
In this light, strategic value could best be seen by thinking of the portfolio companies as the important stakeholders to support, and the parent as a legacy to manage and enable its children’s success. Tencent, for example, has supported the portfolio companies but also earned fees for its own nascent services.
But for this to happen efficiently in a field of minority investing, CVCs have to find suitable co-investing partners. The gradual blurring of venture capital as an overall industry into its larger private capital markets brethren, more closely related to public markets, is improving the professionalism and attractiveness of the industry to new recruits and existing partners as pay, already rich to the average employee, reaches the top echelons of financial services.
The calibre of CVC teams, particularly new recruits over the past few years, is impressive. The GCV Rising Stars awards – this year’s nominations start this month, so applications to me – and the interns and mentoring program developed by GCV’s advisory board chairman, Intel Capital president Wendell Brooks, shows the industry as a whole has deep pools of talent that if managed well, and without the ethical failings seen in most other areas of financial services, promises a better world.
Integrating the real-life networking and relationships of the leaders of the CVC community with modern digital messaging and analytics tools promises a brighter future for those best-in-class organisations by providing a better way to see and measure the support they give to the people that matter – entrepreneurs and C-suite leaders – and find suitable contemporaries to join the long road of successful investing.
As Greek philosopher Heraclitus was reported to have said: “Everything changes and nothing stands still.”
