Is the current penchant for CVC just the usual part of the cycle?
I spent a fascinating couple of days at James Mawson’s Global Corporate Venture Capital conference in London this week. Venture capital of all hues is booming. I wrote about it in this week’s issue of my newsletter Exponential View. You can read my thoughts below. For more, subscribe to Exponential View, it’s free and you’ll find it useful.
Last year, $163bn was invested into founders globally, compared to a $25–56bn range in the 10-year period to 2013. Corporate venture capital (CVC), whereby large firms invest in interesting startups, is on an upswing. CVC, traditionally a second-tier option for enterpreneurs, now represents about 18% of all venture deals globally and about a third of all dollars invested in venture. CVC of 2017 is bigger than the entire VC industry of 2013.How do you make sense of it?
Corporate capital is now at substantial scale and could fit the model outlined by Venezuelan economist, Carlota Perez. As many readers know, I’m a fan of Carlota Perez’s thesis in “Technological Revolutions & Financial Capital” which I believe can shed some light on what is going on.
In Carlota’s thesis, innovation goes through a number of stages. A first stage, an installation stage, involves novel technologies backed by financial technologies. The middle stage takes the form of a bubble, collapse and crisis. The third stage, the deployment stage, sees the widespread distribution of the benefits of a now mature set of technologies, funded increasingly by what she terms “production capital”. This is different to financial capital because production capital’s purpose not solely to secure speculative gains.
What we seem to be seeing today is a transition to the third stage of a Perez cycle, the deployment stage, of the information and communication revolution which started with the Intel 4004 in 1971. And we do seem to be seeing a resurgence of the corporate capital in investing. Many of the target investments are classically in “deployment” opportunities, that is products and services higher up the stack rather than in lower-level enabling technologies or infrastructure.
Take the Softbank Vision fund which is quite a category-defying fund. But while much of the capital has come from non-corporate investors, it is in some sense tied to the vision of Masayoshi Son, Softbank’s CEO. Softbank is a corporate, a conglomerate that operates a mobile operator. It is not a traditional CVC, to be sure, but it isn’t exactly a stand alone financial VC either.
Equally, a firm like South African internet conglomerate, Naspers, has started to cash in on its holding in Tencent, recently harvesting $12bn of those gains, to put towards a war chest for investments.
Intel, the grand-daddy of the corporate venture, has invested more than $15bn in around 1,500 companies in the past couple of decades. (By scale, that would make it one of the most generous deployers of venture capital ever. The largest traditional VC house, NEA, has raised $8.2bn in the past decade.)
These are big numbers and meaningful in the relatively parsimonious world of venture capital, which makes up less than 1% of global assets under management (which were estimated at $84.9 trillion in 2016.)
But is the current penchant for corporate venture capital just the usual part of the cycle? That cycle of corporates getting excited by waves of innovation: the internet, then social; and jumping in to venture, a field they don’t know well, just as the market reaches new highs; only to be burnt in a downturn and shut down their programmes? We’ve seen that pattern many times before. But I’ll suggests three reasons why this time it’s different.
- The Perez argument is highly relevant. No company can deny that every business model and way of operating seems up in the air. Detroit’s grizzled veterans say the car industry is dead. Traditional retailers across the world are being eviscerated and urged to do something. Newspapers in shock from the violent 1–2 from Google and Facebook. Pharma pipelines are running into dead ends, even for promising areas like Alzheimer’s treatments. And so on…
- Corporate research and development is getting progressively more expensive and yielding less and less, except in a handful of superstar firms. And these firms (Google, Microsoft, Amazon, etc) are aggressive in their use of corporate venturing & acquisitions.
- The nature of investments in the information age doesn’t suit the internal capabilities, financial controls, strategic planning and risk perception of ‘old economy firms’. The reason is the intangible nature of value created in information businesses (such as marketplaces or software), as described by EV reader, Stian Westlake, is his tasty economics book, Capitalism without Capital. These internet unicorns like Deliveroo or Lyft require capital to build real businesses and aren’t worth much until they do. And if an incumbent can’t build them organically, it’ll need to buy them. I have argued that CVC provides a useful tool for large firms to make smarter acquisition decisions.
In the noughties, corporate venture capital was often been seen as an investor of last resort. Knackered (or naïve) entrepreneurs might turn to CVC if the long stroll up and down Sandhill Road hadn’t yielded a term sheet.
CVC funds are getting more professional at doing what they do, and their corporate parents are being less burdensome and annoying towards founders. Not perfect, by any means, but getting there. And CVC is slowly learning to play alongside dedicated VC funds which maintain their expertise in helping founders to build companies, access the right talent and attenuate the existential stress of being a founder.
It’s likely this trend will continue and an increasing number of founders will find a corporate venture capital investor on their shareholder roster.