There is a fine line between confidence and optimism, and arrogance and hubris. Step over to the latter and nemesis will follow.
It is a danger corporate venturing units can avoid by remembering the old poker adage – if you look round the table and cannot see the mark then it is you.
The salutary lesson from many groups during the first dot.com bubble around the turn of the millennium was to beware invitations to join the inner club of successful investors.
That a small club of very successful investment firms, with close links to the investment banks, media and advisers that help promote deals and exits, have the ability to fund and create markets is in little doubt.
The success of a number of internet-based software groups, from Google to Tencent and Facebook and on to Groupon, Zynga and Dropbox, is in finding a service with global appeal and then tapping the financial resources to maintain market share through a land grab acquisition and marketing strategy over peers.
That online games company Zynga, almost totally dependent as it is on a third party to host its games, is reportedly being valued ahead of its flotation at the same combined value as the world’s two biggest computer game makers and up to 20 times its projected earnings is confidence bordering on hubristic.
But at least Zynga has proved able to deliver sizeable revenues ($597m last year), whereas Dropbox (which we use here at Global Corporate Venturing and is very good) is reportedly worth $5bn to $10bn based on its 25 million users.
As investment advisory firm Go4Venture put it: "By any measure, it is difficult to believe that DropBox, a firm which has raised $7.2m so far (in 2007), should now raise $200m or $300m (including "a secondary component of less than 50%", according to an unnamed source [quoted by news provider] TechCrunch) at a $5bn to $10bn valuation."
Creating bubble conditions plays to the advantage of first-mover investors and intermediaries (through deal fees and ability to raise funds off the back of portfolio company valuations) rather than necessarily limited partners in venture capital funds across a series of vintages and the public who rely on financial services firms for their retirement and savings.
However, having the confidence to invest in the future requires optimism and a history of success. It is, therefore, no surprise that the most ambitious and confident corporate venturing units are often present in emerging markets where economic performance has been good for a number of years. Venture investing is a cyclical activity – it increases as economies grow and falls as recession bites – and while countries such as China and India are growing by about 10% per year, financial returns from investing are likely to remain positive.
This factor allied to strong internal cashflows and that corporate venturing units’ sponsors are often still controlled by entrepreneurial founders is a recipe for confidence.
For these corporate venturing units and their parent founders’ angel investment programme, there is a willingness to start, or support with large amounts of money, third parties in a bid to create a new platform that can also go global.
The confidence is also coming out in the utilities sector, which has a reputation for conservatism but in corporate venturing is the most cyclical in sentiment, according to academic research.
That more utilities have set up corporate venturing programmes in the past 18 months even than in the four year around the first dot.com bubble, therefore, is positive.
Rather than coming in at the end of the economic cycle, groups are investing soon after the past crisis.
Unless there is a significant exogenous shock this should give firms a number of years to prove their strategic and, hopefully, financial worth to parents. But to ensure longer-term survival better, rather than the historic two to three-year longevity, a number of groups are putting in place the governance structures that provide greater independence and stability of funding, and working out their own comparative advantages rather than blindly following the hot investment areas.
These are developments to be welcomed, rather than seeing their names on the pre-flotation rounds of hyped consumer internet deals.