There is a potential for corporate venturing to go from about 1% of global corporate R&D budgets to 10% over the next decade.
In 2011, the publication of Global Corporate Venturing’s (GCV) first annual review saw insights shared by dozens of corporate venture capitalists. Now, about 500 have answered at least some of our survey questions. And many of the themes remain the same.
In 2011, Dominique Mégret, head of Swisscom Ventures, said a key theme was understanding “whether the economic recovery would be confirmed and the IPO window finally open for tech companies, or will the number of VCs keep declining, leading to lower competition for good deals and healthier VC returns.”
You could ask those same questions today. US and European stock markets last year had their lowest issuance for nearly a decade, according to accountancy firm EY, while VCs backed 25% fewer deals than the year before, according to data provider Pitchbook.
In 2023, therefore, the outlook for the venture market is still uncertain, as valuations continue to decline in response to public market falls and as forecasts for inflation and interest rates remain mixed. Returns on deals done over the next few years are likely to be better than for those done in the investment rush of 2021, just as Mégret recognised a decade earlier coming out of the global financial crisis. GCV coined this 2011 to 2016 period the golden age for venture.
Venture capital is a pro-cyclical business. When VCs rely on institutional capital, they do more when the markets are high, and less when markets fall, as the limited partners’ (LP) allocation is affected by other parts of their portfolio.
In one area, at least, the past decade has seen a transformation. In the 2010s there was still a view that corporate venturing was “dumb money” and CVCs were “tourists”. VC Fred Wilson told the Future of Fintech Conference in 2016: “I hate corporate investing… it is stupid. Corporations should buy companies.”
Wilson can be forgiven for his rather scathing assessment, given that at the time there were ever- increasing numbers of so-called unicorns – private companies worth at least $1bn – with few exit options. Now, there are more than 1,000 private companies valued at more than $1bn. There are, however, only 200 companies in the past decade that have floated in an initial public offering (IPO) with a market capitalisation of more than $1bn, according to VC Jesse Randall.
Now, the estimated $22 trillion of cash on corporate books enables them to both use their mergers and acquisitions (M&A) teams to buy, and CVC units to invest in private companies. Those that show their edge in the innovation matrix, which also includes research and development (R&D), venture building and partnering with entrepreneurs, outperform their less-successful peers.
The GCV list of the 100 most active US-listed CVCs will outperform their market peers, according to Touchdown research.
Whereas VC dealmaking fell off a cliff last year, for CVCs, deal volume was down 2%, according to GCV Analytics. They are stepping in to support the next generation of VCs, too. Corporate LPs were cornerstone investors in the majority of debut VC funds raised last year, GCV Analytics found (GCV’s parent company is an active LP in emerging VC firms set up by former strategic managers or CVCs raising external capital).
There is a potential for corporate venturing to go from about 1% of global corporate R&D budgets to 10% over the next decade, as executives realise corporate venturing’s positive return on investment, allied to improved efficiency it causes among R&D and M&A teams.
Repeating past mistakes
The challenge is that not all corporates follow venturing best practice and that too many repeat past mistakes.
Corporate executives continue to close or mothball CVC units to save cash short-term. More than 6,000 corporations tracked by GCV Analytics since 2010 have begun investing, but two-thirds fail to get through their first inflection point at around year three. With more than 1,000 CVCs striking their first deal during the pandemic years of 2020 and 2021, at the height of the market, many of them could quickly be shut. These failures are a waste of everyone’s time and money and a disservice to the entrepreneurs and syndicate partners, let alone the staff and corporate parent.
Built on insights shared at the GCVI Summit and our other events, as well as through the BMG consultancy run by Liz Arrington, the GCV Institute trains hundreds each year on how to invest effectively and bring the value of working with startups back to the parent company. There has never been a greater need for this.
The current downturn is uncovering newer, more creative challenges in startup development.
Startup companies, most notably in crypto and blockchain/Web3, now sometimes use the funding they raise to create their own CVC units, to build an ecosystem of startups. These crossholdings can cause contagion when one participant struggles, as seen with the unfolding FTX’s bankruptcy procedure.
We are also seeing large companies use CVC to access clients. Startups sometimes use part of their investment rounds to provide supplier contracts to their CVC’s parent. Sometimes both sides benefit, as in the case of Microsoft’s $1bn investment deal with OpenAI in 2019, which requires the startup to use its Azure cloud service.
Other times, the model can cause challenges. Palantir is a good example. As investor Jeffrey Funk, says, commenting on Wall Street Journal research: “The data-analytics company invested more than $400m in SPAC-funded startups that simultaneously signed deals to buy Palantir’s software. Some deals called for startups to pay back Palantir large chunks of the investment within days of receiving the money. The arrangement gave Palantir more than $700m in total contracts.”
However, now Palantir’s 20 startup investments, including a flying-taxi and many electric-vehicle startups, are down more than 80%. One has already gone bankrupt and one was delisted from NY Stock Exchange. More than half are warning they may go bust. Palantir was unavailable to comment at the time of writing, but in its quarterly financial results to end-September it posted a $260m loss on its “marketable securities”, which had shrunk to $57.3m on its balance sheet.
Legendary investor Charlie Munger once said: “A majority of life’s errors are caused by forgetting what one is really trying to do.”
Corporate venturing is a service to entrepreneurs through adding value to help meet their needs. In return, the corporations benefit from a potential strategic and financial return. It is probably the hardest job in financial services, but it is also one of the most rewarding, as it offers a chance to genuinely make the world a better place.