The number of deals might have slowed noticeably in the US in the first quarter of the year, but there was no shortage of excitement in the industry. In the past month alone there has been a rash of big deals, many in China (see all the data and insights from our GCV Analytics platform).
However, it was the sale of Cruise Automation to car maker General Motors, reportedly for at least $1bn, that sparked plenty of interest given chip company Qualcomm Ventures’ early involvement. In Qualcomm’s analysis (see Early-stage VC at Qualcomm Ventures) lead investor Varun Jain described his cold email approach to Cruise CEO Kyle Vogt.
Patrick Eggen, early-stage lead at Qualcomm Ventures, at the Global Corporate Venturing & Innovation (GCVI) Summit in January praised Qualcomm’s “ability to do investments ($2m) in bold and ambitious ideas despite unknown regulatory and technology barriers”.
Cruise is a textbook example of a deal from Qualcomm’s Early Stage Fund as its structure allowed Jain and Eggen to move very quickly – within a week – for a small pre-emptive interim round in November in which it was the only investor,. However, the price of entry was a two-times premium compared with the $12.5m A round that closed in September. That still seems a bargain.
It is a timely reminder of the returns that can come from early-stage dealmaking. Other noted early investors, such as GV, formerly Google Ventures, and others have more recently slowed their pace in this stage. If a company shows promise and strategic value then acquirers are still prepared to strike quickly. A week after Israel-based virtual reality company Replay Technologies closed its $13.5m series B round, led by Germany-based phone operator Deutsche Telekom’s Capital Partners division, US-listed chip maker Intel acquired it for a reported $175m.
Speaking to Global Corporate Venturing in October about his plans, Wendell Brooks, president of Intel Capital and senior vice-president covering mergers and acquistions, outlined a strategy that would entail Intel Capital making fewer but larger investments, saying: “It is still early days, but I think we will take slightly larger bets, with more of a leadership role in transactions as opposed to passive secondary roles. The portfolio may be somewhat smaller when looking back at it five years from now, but with larger bets on technology. This is my predisposition.”
Intel Capital made headlines when Bloomberg reported it had hired investment bank UBS to review its portfolio and examine whether a secondaries sale of some investee companies could be helpful (see analysis: The sky is not falling with Intel Capital’s review).
However, while tweaking of portfolio investment strategies and focus areas of investment will and always should go on, the real value in corporate venturing comes from the bigger perspective – how and why corporations are trying to help entrepreneurs and what value they can gain.
It is a move that leveraged buyout firms started taking more seriously about a decade ago as they tried to drive returns in a world where capital – debt and private equity – was becoming more fungible and financial value-creation methods more ubiquitous.
Venture capitalists have been facing similar challenges more recently. Entrepreneurs have a clearer understanding of how VCs make returns from preference shares, while two-thirds of capital in venture is estimated by data provider Pitchbook to have come from non-traditional investors – somewhat pejoratively dubbed “tourists”. Of the $119bn invested in 10,088 venture deals last year, Pitchbook said tourists accounted for about 66%, using VC fundraising as a proxy for the amount they spent.
While the methodology is somewhat suspect, the direction is clearly one where non-VCs, such as hedge and mutual funds, are more important at specific times in a cycle. With more money and greater varieties and numbers of investors, venture becomes increasingly an asset class where reputation, network, experience and branding become differentiating factors. Groups, such as Intel Capital, that have long-term track records can leverage this into unique analytics, proprietary entrepreneur and co-investor networks, and support for entrepreneurs if they take the lessons of top VCs, such as Andreessen Horowitz and Sequoia, to heart.
The differentiator is less about investing $300m to $500m a year in a world where half a dozen VCs in a six-month period can raise more than $1bn in funds, according to PitchBook. The difference comes in using the corporate parent and a strong business development and marketing team to help, as Brooks has recognised.
Corporate venturing as an industry can use this slowdown in deals to position itself more strongly for the next cycle. There are a number of new corporate venturing role models, including George Ugras, incoming head of IBM Venture Capital Group, who will give his first GCV Symposium talk with his new role in London on May 24. This brings new hope that they will take this opportunity to invest as part of a broader mandate from their corporate parents.