CVCs need to play the “Sequoia game” in a downturn

Six years ago this column argued that corporations could learn from venture capital firms in how to play the public relations game.

Sequoia, for example, has a habit over the past few decades of calling for entrepreneurs to show moderation in valuations — while at the same time going after deals aggressively itself.

It is a smart strategy. Could the firm and its peers, such as Lightspeed, another top group, be striking the same note again with Sequoia calling the downturn a “crucible moment” and advising their founders to face reality and shore up to come out of it stronger?

It is hard to tell without the benefit of hindsight. A better question for us to think about in Global Corporate Venturing is whether, if VCs pull back from deals and leading rounds whether corporations will step up and take their place.

Here the signs are positive as VCs try and join CVC-lead syndicates, according to Gary Dushnitsky at London Business School at the recent GCV Symposium. The first quarter data from GCV Analytics showed CVCs continuing to back deals, just at smaller ticket sizes and probably earlier stages.

Julien Villeret, chief innovation officer at France-listed energy group EDF, told Energy Monitor that despite being heavily indebted: “We are still investing the same amount in innovation and R&D [research and development] as in previous years. So that is around €600m for R&D and approximately €60m a year for startups and innovation. This will stay flat for the foreseeable future.”

The elasticity of CVC compared to investment through R&D and mergers and acquisitions (M&A) will be crucial. Generally, CVC increases as R&D and M&A increases, as GCV research uncovered over three-year cycles through the 2010s.

Corporations are now allocating more to CVC as a proportion of sales as compared to R&D, insiders said in private discussion both at the GCV Symposium this month and at a CVC workshop organized by the European Commission. The firepower to step into deals when VCs hang back seems to be there.

Can CVCs get the best deals? 

The other question is whether corporate investors can get into the deals they want. Ilya Strebulaev from Stanford Graduate School of Business, speaking to the Kauffman Fellows, warned that the two-layer approval process for many CVCs (90% of S&P500), could make them “miss the best deals”.

However, in subsequent discussions, many saw CVCs’ ability to add value to startups and their ability to understand the technological work being done by the startups was seen as more than a compensation for relatively slower decisions.

In a downturn, when all bit the biggest VCs are frozen on pricing and deals, CVCs’ ability to look through the turmoil and uncover technology and business model changes and improvements will be crucial.

This is the requirement for venture to become an asset class rather than amateur operation. It is why it has been so encouraging to hear from hundreds of CVCs this past month how they are using the training from the GCV Institute on how to land the value of corporate venturing internally.

They can then step up to the opportunity from this crucible moment rather than just talk to the market about doing so. Actions will speak louder than words.

Photo by Sebastian Voortman form PxHere