What I was hoping to do today was to provide a perspective on the main theme for the conference: the idea of sustainability. This is our starting point, it’s not the answer but what I hope to get over the next two days is some of the answers that we can then write and share those best practices to the rest of the industry, to those who haven’t been fortunate enough to attend this, our fourth annual Symposium. (Slides of Mawson’s presentation can be viewed here).
When I was writing about venture capital for Dow Jones in The Wall Street Journal and Private Equity News a few years ago, I got a little bored about saying ‘Why is it that venture capital is struggling, is shrinking as an industry and as an asset class compared to say, the dot.com days?’ One of the classic answers I constantly received was ‘Well, fundamentally, it is pro-cyclical’. That means more funds are raised at the end of the economic cycle and then more deals are done at the end of the economic cycle and then when the economy turns down into recession and prices are lower, VCs are able to raise less money and they do fewer deals.
So I thought ‘Well, is that the case for other people? Wouldn’t you expect them to actually do more deals at the lower part of that economic cycle?’ It turned out to be probably no. If you look back at the history of corporate venturing over the past 40 years, it has been as pro-cyclical, in fact more pro-cyclical than the VC industry as a whole, even though that is counter-intuitive to good venture investing because the earlier you do deals in the cycle, you have longer to hold them to the end of the cycle and so you are likely to get higher prices than the prices that you would have paid at the start of the economic cycle so you are more likely to bear a better financial return and to show any strategic rationale on top of that.
And so what I was interested in back in 2009, 2010 was whether actually for the first time we are seeing corporates understand both, first, the strategic need that they have to show how they could tap into innovation through a venturing ecosystem and, second, deliver what the corporations needed by investing at that earlier point in the economic cycle so that they had a longer time to show the evidence and proof of their success points.
And so this conference in effect is trying to take a half-way viewpoint. Back in 2010 I thought we were likely to see a changed paradigm so that more corporates would be starting to launch their venturing units at that point and then have a six, eight, ten-year track record before the global economy started to turn down again and then be able to show that delivery and have that longevity.
The idea, the theme behind this year’s conference organised by Toby Lewis as Editor, therefore, is pushing the frontiers of venture capital, creating a sustainable ecosystem from the Golden Age. This Golden Age was effectively the 2010 to 2013-year period where we saw a number of groups launched, which then hopefully could do deals and show the track record, both financial and strategic, that will then help when the economy turns down and the chief financial officer and the CEO is then looking to cut costs. They can say: ‘Well actually, look at what we have delivered. We have delivered returns to you both financially and strategically. You would be crazy to cut us. In fact you should invest more now because we can show this performance.’
This year I am delighted to say we have venturing units from parent corporations with more than $4 trillion in aggregate revenues. In a room last year we had $3.68 trillion so we are on the right track. We are getting more corporates with more revenues understanding how important innovation and venture can be to their parent as well as to their own unit itself.
slide showing company names of attendees
Here is a list of just some of the names who attended. I couldn’t fit them all on so apologies to any that I have missed off the slide, but hopefully you can forgive me and next year I will do a better job to make sure that I fit them all in – I will go to a smaller font size.
Venturing’s funky dance [Video]
But if I look back to this idea of venturing and the changed paradigm that we are now in, venturing, particularly corporate venturing, has been a little like this guy doing the funky dance at the Sasquatch! Festival a few years ago. He has the belief, he believes in the vision of innovation, which in this case is dancing in a crazy style but pretty much everyone is looking at him and going ‘What are you doing?’ Then someone else joins and he is doing an equally crazy dance and you are thinking ‘Okay, this is a little bit weird. We are not sure how this is going to go’. You might be able to hear on the sound track from YouTube, there are a few people laughing at him basically and this is corporate venturing if you roll the clock back maybe 10 years ago, everybody was like ‘Corporate venturing? Why are you doing that? What is that? How does that work?’ Yes, the two guys, they are yes, pretty crazy. Here we go, a third one is joining. ‘We are believing it, we’re there’. Corporate venturing, we have a bandwagon going, but fundamentally no-one else really has any idea what they are doing.
We are carrying on and people are looking and listening to the bands. There are a few stiff styles being tried out. We have a couple of more joining. It is created a bit more of a momentum.
Oh, hang on a minute, there are a few more; it has created something. Oh – it’s getting a little bit of momentum and it starts to get a little bit more joined up. If you look at the dancing, it is a little bit more restrained but it is a little bit more organised. Now we are creating in effect a bandwagon moment. We can stop the video. [Video stopped and audience applaud]
Thanks very much.
Number of corporate venturing unit launches by vintage
Effectively what you see is by the end of this video which goes on for a few more minutes is this enormous gathering and everyone is properly connected. That very much is what we see with corporate venturing now – see table on vintage of when corporate venturing units were launched. You will be able to get the slides after the presentations, but what I wanted to get a feel for, so I did some analysis through our database, was how many corporate venturing groups have been around for a while?
A lot of people know there is about 350, 400, 500 corporate venturings formed in that 1999-2000 period and I said ‘How many of them are still going or have a longer than 10-year track record?’ It is about 181 corporate venturing units, such as Intel or Cisco, which have been around for more than 10 years, according to Global Corporate Venturing.
That’s quite a lot. If you look back in the US which is the world’s biggest venture market, financial services provider SVB reckons there maybe 200 to 300 really active VC units doing about two or three or four deals per year.
So 181 corporate venturings with more than a ten-year track record is actually pretty good but then if you look back in 2004 how many corporate venturing units were launched, a lot of those units of that 500 were cut in that 2001, 2002, 2003 downturn. The TMT bubble burst, most economies went into a slight downturn and recession and a lot of corporate venturing units were cut.
2004, 2005, 2006, 2007 some were starting to be launched. 2007, 2008 just before the downturn there were even more but what I found really interesting when I ran some of the analysis was there were more launched coming out in the height of that credit crunch period, 2008, 2009 than there had been before.
That was really interesting to me because I started to go, ‘maybe we are seeing to this point that corporations understand the strategic need behind why they go to venture capital, why they are working with the venture ecosystem’.
Then why I call it the corporate venturing Golden Age. If you look between 2010, 2011, 2012 and last year, you see this massive explosion, this funky dance has really no critiques to it. If you talk to almost any global Fortune 1000 company now, they say ‘How do we get the good ideas into our company; how do we share our good ideas to the rest of the world; how do we break down some of these barriers, this not-invented-here syndrome?
Then last year obviously we saw a slight decline in terms of still much higher than ever before in many ways but we start to see this year and we expect to see over the next few years the aggregate numbers being slightly fewer. But what will be interesting to see, and to this point on sustainability, is how many will be closed?
You, in this audience, you are the experts, you have the $4 trillion in revenues. What do you need to be doing to create that sustainability? What do you need to be doing to go back to your CFO when he says ‘Oh, can we get you to be on an evergreen model? How do we get you to provide returns back to the company?’ It might not be big figures, but if you show that you are a profit centre rather than a cost centre like much of R&D then actually that is a powerful argument when the music stops and the party starts to break up.
What I find quite interesting if I talk to some of the really established groups, whether it is the GlaxoSmithKline or Intel Capital, they tend to be a little bit more on a pendulum. Some years, some decades are a bit more strategic; some years a little bit more financial-orientated.
But the idea of corporate venturing just being a sort of clone of venture capital no longer washes. Corporates do some things worse than VCs, they can do some things better than VCs but they are slightly different from VCs and how you understand and tailor that message to the VCs, to the entrepreneurs and back to your corporate parent and get the connections with the business units is increasingly important.
Certainly through Toby Lewis and Rob Lavine, GCV’s news editor, and the others in our company, we talk to more than 1,000 corporate venturing units each year and the general trend that we are seeing is that corporates are understanding how to get strategic impact. I am interested over the next few days of learning from you, from the other keynote speakers and the other panellists what it is that we will need to be doing as an industry generally to create that sustainability because a downturn will happen so how do you as a company retain the talent, retain the people who will help you through that process?
But there is no question that corporate venturing is much more important to that global entrepreneurial ecosystem.
Stage of investment
This slide we took from our Global Corporate Venturing deal database. We reckon we can get maybe 50%, 60% of deals out there. Not all corporates want to publicise their deals and which deals they are doing but we hope to improve that performance through you. Hopefully we can start to get better track of that. Even if we don’t publicise the name of that corporate venturing deal, the portfolio coming in, it is still useful to know how many deals you have done in a year; what stages they are and how much you have broadly invested.
But this chart shows that broadly corporations are very important both at the very early stage through their incubators and accelerators as well as to see deals that they might do in the A round through to B and C where they can start to see a product that the portfolio company is doing and maybe apply metrics so that they could be partnered back into the ecosystem through to the pre-IPO or even some of the later stage companies where there could be very much more strategic rationales.
Arvind Sodhani, president of Intel Capital, has just done a deal with Cloudera and Toby Lewis, will talk to him about that in his fireside chat after this presentation.
But we understand that corporate venturing has a role to play in the entire ecosystem. If you just look at the VC part of it it becomes very much more focussed on specific sectors, specific cycles, specific stages and what we find is that corporates have a much greater role to play in that ecosystem as a holistic provider, not just of capital but of broader support to those entrepreneurs.
Believe me, we have just taken a round ourselves and one of the questions we had for our investors was ‘How can you help us? Capital’s great, we need it obviously and that is an important part for our growth but how can you help beyond that?’
We have been very fortunate with Simon Leefe, our board representation from the investment group of private equity professionals from 24 Haymarket, and the other shareholders and our chairman, Dominic Riley, that they actually deliver on those things. And any entrepreneur will say the same thing to their potential investors: ‘Great that you are interested and you have this corporate parent; how can we tap into that?’
2013 CVC activity
Again, on the impact of corporate venturing’s activity, is that it is global, both in sources of capital and where deals are done. When we track the deals is the US is obviously the world’s biggest ecosystem. Most of the international corporate venturing units outside of the US go to the US as a point of call when they are internationalised to understand what the US as the world’s biggest, most dynamic economy is doing so well and how they can bring back that to their parent companies and back to their home countries.
Cross-sector investment
But what I also find really interesting and we used our data and Boston Consulting Group did some analysis of it and they came up with a very cool slide which I have used from them.
It shows effectively the different sectors and then where those companies are investing in their sectors. If you go down specific verticals like healthcare, 95% of their deals are done in the healthcare sector. So they look for portfolio companies just in the healthcare sector. They are not going into the IT sector and they are not going into Bio and Clean-Tech to understand what some of the trends might be happening there that they can bring back to their own sector. They are focussing on finding the next Alzheimer’s drug.
But then if you look at some of the other sectors, whether it’s media, whether it is energy, they will also look outside their sectors and saying ‘What are the trends; what are the issues that are happening outside that might disrupt us?’
Software is eating the world has become a sort of truism but effectively for companies outside their sectors they need to understand what some of those trends are. And although it is getting cheaper to start companies, globalising them and remaining competitive is taking potentially ever-larger amounts of money.
Quentin Carruthers, who is the editor of Global Government Venturing, has just published this bit of research in his inaugural issue to help people trying to understand not just how many start-ups are being formed but how many of the most influential start-ups are there.
Table on $100m deals
These are the so-called unicorns, those that get to a $1bn in valuation, those which are more likely to hire more people, create a hub that other start-ups can then feed around. They are such a dramatically important part of any economy.
I ran some analysis which was how many large deals are there, and are they more likely to become unicorns to create this $1bn valuation now than in previous periods of large rounds sizes?
There is a longer snapshot of this table in Global Government Venturing which goes back a couple of years. If you look there, it shows there is now a large deal for at least $100m every couple of days at the moment, certainly has been in May and there has been this increase in these large deals. Pinterest has done three venture rounds in the past 12 months or so of at least $100m and their valuation is now £5bn.
But are they all US companies, these unicorns? Certainly much of the popular press will talk about unicorns and they will talk about it in a fundamentally US-centric way but if you look at Q1, US and China are the two main markets. There were a number of deals which were done primarily with US investors outside of the US and China but the two big markets are China and the US and the Global Government Venturing runs through that analysis of why that might be.
But the interesting question is, who are the investors which are creating that? In China they are the big companies – Baidu, Alibaba, Tencent, Qihoo and Sina – and in the US corporates are particularly important for these large rounds to be done, so not just at the early stage, the accelerators where you are trying to create an ecosystem which might create these winners. They are then following through all the way to these big rounds.
Intel Capital obviously with Cloudera but the other investors on that deal show how diverse the investing syndicates are becoming. On Cloudera were Google, T Rowe Price, which is more of a mutual fund investor, MSD, Michael Dell’s family office, etc.
We find this is quite an interesting dynamic and this is going to be increasingly important to the sustainability of the corporate venturing community – not just to have the accelerators but the means and ability to back the larger rounds and one that few European corporate venturing units appear up to.
But it is not all negative in Europe as it still produces amazing technology. On 22 May, our sponsor, SVB will host a pitch day by some great technology companies it banks – disclosure, we are one of its clients – but this technology in our globalising world can find its way into amazing places – even space. In January 2005, Elon Musk’s SpaceX bought a 10% stake in UK university spin-out Surrey Satellite Technology – the sort of deal written about by Gregg Bayes-Brown, editor of our Global University Venturing publication.
And ultimately why corporations start venturing and what will make it sustainable in the longer-term is really shown by this next video which is fundamentally why you work with start-ups because they can do things like this.
This is a slow motion video and will build up of the launch and landing of SpaceX. What’s great about this rocket you will shortly see but it makes it fairly unique but if you talk to some of the big defence companies, whether it’s Lockheed Martin or anyone else, they go ‘How can he do this?’ because fundamentally the big corporations haven’t done this in the 40-odd years since the moon shot, the rocket hit the moon. They don’t do this – launch and reland a rocket. It required a start-up to do this. This is ambitious, this is bold but this is why what you do in this room is important.
If you help these start-ups achieve their dreams in this way then the world becomes a better place.
Thank You
Question from Martin Haemmig, Cetim: The numbers that you showed on the growth of CV units, can you break that down by geography?
James Mawson: So, broadly the US is about a third of all launches in that golden age period between 2010 and 2013. Asia, particularly China, and a number in Japan, is about a third. In Europe it has been about a third as well so it has broadly worked out that way. There are some outliers in Brazil with RBS and people like that in Africa.