This is the second part of the speech we are preparing for the publication of the World of Corporate Venturing annual review and our next GCVDigitalForum.com on January 21 to 27. Yesterday we published the synopsis, while today’s leader will look in more detail at the abundant innovation capital, Wednesday’s will show how markets are blurring and Thursday’s will show the added value now required. Our next podcast episode will pick up the feedback – your insights will be much appreciated. Email jmawson@mawsonia.com by Friday 2pm UK time.
- Capital is fungible and abundant
- VCs have become minority participants in innovation capital
- Debt and equity should erode excess value
In a world where of effectively money is a fungible commodity, outperformance comes from understanding the drivers behind equity growth – human and physical capital and innovation and intangibles – and then being able to use this alpha to borrow more at more favourable terms to leverage returns even higher.
In a perfectly competitive market of course, competition should reduce economic profit to zero as people are trained up (the US’s 20th century economic advantage arguably lay as much in the training provided by its business schools to company managers as in the size of global market it shaped after the Second World War through the Bretton Woods and other global tools and structures), replicated through bringing on more resources and the innovation or intangible assets are copied.
As Jerry Neumann said in his blog, the Reaction Wheel: “The sum of the excess profit from innovation through [to] perfect competition I call excess value.
“Companies can lengthen the time between introduction of an innovation and imitation, and thus increase excess value, by creating barriers to entry, or moats.”
Neumann notes the best VCs often succeed by identifying entrepreneurs using established technology to tap new markets and who can use the uncertainty about whether it will work to build a moat through contracts and standards.
Venture investors are seeing their own excess value being eroded. Data provider Pitchbook in its review of the 2010s at the end of 2019 summed up the changes as: “Every kind of participant, it seemed, rushed into the market to place their bets on VC and other alternative assets. Hundreds of new VC firms also came on the scene and made a splash.”
Of the $1.37 trillion invested in the 2010s, VCs contributed less than half based on a proxy of the $553bn in funds raised by them according to Pitchbook.
Corporate venture capitalists (CVC) were involved with more than half of the deals by value – driven by SoftBank’s near-$100bn first Vision Fund, according to GCV Analytics. Along with other non-traditional investors, such as private equity firms, hedge funds, mutual funds and sovereign wealth funds, CVCs helped push more money to later-stage deals.
A glance at the 40 or so $100m venture rounds last month alone and the majority of participants were non-traditional investors. VCs followed on where they could but were more rarely lead investors. As Pitchbook in its 2021 US Venture Capital Outlook noted: “Tiger Global and Coatue Management—hedge funds that have raised dedicated venture funds— have instilled VC as a standard investment strategy at the firm. Since the beginning of 2018, these two investors alone have led or solely financed 71 VC deals in the US.”
And debt is following the larger rounds as a potentially cheaper and non-dilutive option to equity. Pitchbook expected this year to see “venture debt issuance continue a string of record years, surpassing 2,600 deals and $25bn originated for the fourth consecutive year”.
