Sue Siegel, CEO of GE Ventures, industrial conglomerate General Electric’s corporate venturing unit, told attendees at the Global Corporate Venturing & Innovation (GCVI) Summit last month that “the time is now” for the industry to collaborate with entrepreneurs. Indeed, a platform for the venture industry has been taking shape even as technology’s rate of adoption seems to be speeding up.
But while innovation presents opportunities for entrepreneurs, it spells change for incumbents. About half the S&P 500 will be replaced over the next 10 years, according to Innosight’s latest rolling seven-year forecast, in what the management consulting firm described as the “most potentially turbulent” period for large corporates in modern history.
Part of this disruption is perhaps due to short-sightedness. Buybacks and dividends as a percentage of net income reached record highs in the 12 months to the end of June, at 128%, which means the S&P 500 spent over a quarter more than it earned returning cash to shareholders. In contrast, at the turn of this decade, about two-thirds of net income was used for dividends and share buybacks.
Furthermore, 42 companies in the S&P 500 paid dividends in the same 12 months that exceeded their reported net income, according to USA Today, while 119 companies spent more on buybacks in the 12 months to the end of the third quarter than they generated in earnings, according to FactSet.
The winners in this period of disruptive change are tech corporations, which make up the five largest companies by market cap in the US, and the largest in China over the past year with changes in Tencent’s market cap. Many of these companies generate so much cash that they struggle to spend all the money they earn, even with increasingly active CVC units.
Tech companies generate so much cash in part because they know that growth drives total shareholder returns, not just dividends and buybacks, and they are prepared to get deals done to fuel that growth. More corporations seem to recognise the importance of acquiring emerging enterprises that can bolster growth – 965 CVCs completed at least one deal last year, a 20% jump from the year before, GCV Analytics data shows.
The share of CVCs in the volume of venture deals was 20% last year. But CVCs were involved in two-thirds of the deals by value. Corporate venturing leaders are responsible for much of this shift, with 20% of the industry responsible for 85% of dealflow. Given current fundraising trends, the reach and influence of CVCs are likely to be felt across the venture capital industry.
Here are just a few more reasons why. Inside a decade, more than a third of deals by value will involve CVCs, with an increase in strategic growth investments, Australia-based telecoms company Telstra estimates. The New York Times has reported that about three-quarters of SoftBank’s $100bn Vision fund will be allocated to larger deals, but that still leaves a whopping $25bn for venture-type investments.
One of the largest and most successful traditional VC firms, NEA, led by managing general partner Scott Sandell, who spoke at the GCVI Summit last year, raises about $3bn every two years – and that is considered a large amount.
What are the implications of all this available capital? The most expensive phrases in history have been “this time it is different” and “paradigm shift”. So I will not use them.
Instead, to paraphrase Scott Sandell, I will say that the top VCs will keep on winning. Entrepreneurs have relatively simple needs – they are looking for cash, customers, staff and help with exits. The best VCs provide cash, and they really help with exits. Smart ones, such as Andreessen Horowitz, have been trying to help portfolio companies pull in good staff and customers too.
That is exactly the kind of help that the best CVCs can offer. Check out Yao Xia’s interview in our Rising Stars supplement for more on this topic.
Intel, Tencent, Salesforce, Alphabet, SoftBank, Qualcomm and Fidelity all feature in the top GCV Analytics rankings. Which CVCs does NEA like to co-invest with? The top CVCs.
The time is indeed now for all good investors.
Thank you to our attendees at last month’s sold-out GCVI Summit, and to events manager Christina Riboldi and the team that organised it. See our conference review for more