The start to Andrew Grove’s book, Only the Paranoid Survive, quotes noted economist Joseph Schumpeter: “It is not (price) competition which counts but the competition from the new commodity, the new technology, the source of supply, the new type of organization… competition which… strikes not at the margins… of the existing firms but at their foundations and their very lives.”
Groves, former CEO of chipmaker Intel, goes on in his book to ask what a 10 times change can do to a business “is profound, and how the business manages this transition determines its future”.
The innovation capital ecosystem has been grappling with its own 10-fold strategic inflection point over the past few years.
Japan-listed internet and phone conglomerate SoftBank in 2017 shocked the tech investment community when it raised nearly $100bn for its first Vision Fund and set about adding others that individually would each count as some of the largest venture funds ever raised.
The Vision Fund was several orders of magnitude larger than any other venture-focused investment fund, including those of Silicon Valley veterans, such as NEA, Sequoia and even newer stars, such as Andreessen Horowitz (A16Z), more used to raising hundreds of millions of dollars or billions every few years.
The daunting challenge of hiring hundreds of people to manage the Vision fund even while investing it at a rapid pace has led to high-profile challenges and a near-$17bn write-down in valuations in the past financial year for SoftBank.
The genie, however, is out of the bottle.
SoftBank’s star portfolio company, Alibaba, which was already one of the largest corporate venturing investors itself, has allocated nearly $30bn to a three-year investment plan in its technology.
Alibaba’s China-based peer, Tencent, will be investing about $70bn over the next five years to invest in artificial intelligence, blockchain, the internet of things (IoT) and quantum computing. Not all will go to venture investments but given Tencent over the past decade has allocated almost all its free cashflow to minority investing in public and private capital markets it is likely a lot of it will do so.
Tencent’s main corporate venturing backer, Prosus, which spun out of Naspers to float on the Netherlands stock exchange last year, is reinvesting its $10bn or so stake sale in more third-party purchases.
Similarly, Alphabet is putting out hundreds of millions of dollars into billions through its main corporate venturing units, GV, CapitalG and Gradient. Intel itself has spent much of the past three decades investing up to $500m per year through Intel Capital.
The idea that has taken hold over the past decade, therefore, is disruptive to traditional investors in two ways.
First, there are few reasons to sell a successful stake and reinvesting winnings through an evergreen model is beneficial to overall return multiples and enables more assets to be managed. Corporate venturing groups now individually manage hundreds of portfolio companies, and many of these are so-called unicorns worth at least $1bn and often with active corporate venturing units themselves that create powerful ties in and across sectors and countries.
For traditional venture capital funds trying to invest in a few years and then eke out sales as fast as possible to show returns and raise a new fund struggle to show the quantum of returns possible with longer holds. And entrepreneurs understand seismic, disruptive change often can take decades to occur in most industries outside of some consumer software plays.
This leads to corporate venturing’s second main competitive advantage. Entrepreneurs, as well as capital, are often looking for customers, suppliers, people to hire and, eventually, an exit. The GCV Powerlist leaders recognised they can often help in all these areas.
VCs used to offering capital and some advice to win an entrepreneur’s support struggle to compete for allocation when up against the largest CVC investors. Tencent and Alibaba are in almost all the main unicorns in China. Similarly, in the west, VCs increasingly rely on corporations to lead or join rounds in challenging, cash-intensive sectors, such as healthcare, energy, mobility, financial services and industrial.
The best VCs, of course, have responded well over the past few years. Sequoia and NEA co-invest with the top CVCs, A16Z modelled itself on Intel Capital to offer business development days.
The top investors look the same way at deals, offer strong levels of support and, increasingly in the case of CVCs following SoftBank’s example, are able to raise third-party capital. Whereas CVCs and VCs a decade ago were often separated by structure and experience, now the differences appear slight.
As Groves said in his book: “Eventually, a new framework, a new set of understandings, a new set of actions emerges.”
Questions about whether an investor is strategic or financial is less important than recognising all investors have to be both. They have to understand the future of industries and economies and how to help portfolio companies battle a competitive landscape increasingly strained by geopolitical forces and in a more nuanced environment for innovation that likely will require more permission from society in order to develop the financial returns that enables further capital to be committed.
A VC is no longer as separate from a corporate venturer, or vice versa. The greater differences increasingly will be how much political pressure will be exerted on them to support sectors or certain businesses and how do they compete against sovereign wealth funds who will use a sixth force on entrepreneurs to win deal – nationalism.
This is the reason we have set up the Global Innovation Capital Council to represent the best investors whose goal remains the same as it ever was: how do we help and support the entrepreneurs with her dreams and vision to make the world a better place.
My thanks to Liwen-Edison Fu for the profiles and analysis to select the GCV Powerlist 100.
- Tencent – Jeffrey Li
- Alibaba – Maggie Wu
- Comcast Ventures – Amy Banse
- Prosus Ventures – Larry Illg
- Samsung Catalyst Fund – Francis Ho & Shankar Chandran
- GV – David Krane
- Intel Capital – Wendell Brooks
- Pfizer – Barbara Dalton
- Novartis – Anja Koenig
- SoftBank Vision Fund – Rajeev Misra & Marcelo Claure
- Sony Innovation Fund – Gen Tsuchikawa
- M12 – Nagraj Kashyap
- Qualcomm Ventures – Quinn Li
- Shell Technology Ventures – Geert van de Wouw
- National Grid Partners – Lisa Lambert
- Salesforce Ventures – John Somorjai
- Munich Re Ventures – Jacqueline LeSage Krause
- Merck Global Health Innovation – William Taranto
- BP Ventures – David Hayes
- Bertelsmann Asia Investments – Annabelle Long
- Citi Ventures – Arvind Purushotham
- Total Carbon Neutrality Ventures – Girish Nadkarni
- Roche Venture Fund – Carole Nuechterlein
- Echo Health Ventures – Rob Coppedge
- Chevron Technology Ventures – Barbara Burger
