October 2021 issue editorial by James Mawson, editor-in-chief, Global Corporate Venturing
More than a decade ago, venture capitalists Marc Andreessen and Ben Horowitz looked at talent agency Creative Artists Agency (CAA) for inspiration in how to support entrepreneurs and run their then-new firm.
Michael Ovitz, CAA’s co-founder, served on Andreessen and Horowitz’s prior startup, Opsware’s, board from 2000 until Hewlett-Packard’s $1.6bn acquisition in 2007 and shared his secrets with the two partners, Horowitz told the Wall Street Journal back in 2011.
Behind the scenes, however, they were also looking closely at corporate venture capital firms, such as Intel Capital, for insights in how to add strategic value to entrepreneurs and also connect them to their nascent portfolio companies, insiders said.
The model has worked for all parties able to add value to entrepreneurs and win deals in an increasingly competitive landscape for scalable businesses. The third-quarter results have seen record activity in the venture industry, with hedge funds alone investing about $153bn in 770 deals so far this year, which was about 4% of deal volume but about 27% by value, according to Kristin Kramer at investment bank Goldman Sachs in its podcast, Why Hedge Funds Are Turning to the Private Markets.
Corporations in the first nine months of the year have been involved in more deals by value than the entirety of 2020, according to GCV Analytics (see page 56).
The ability of investors to identify areas of interest and pull together a working group of entrepreneurs and people to test out a thesis through accelerators or venture studios has grown in efficiency.
As James Currier told Azeem Azhar on the Exponential View podcast published by Harvard Business Review: “We can look to the movie industry as a historical example of what will happen.
“When we first had movie technology in the 1920s, you had entrepreneurs doing it. And then you got these studios, which had the knowledge about how to make movies – the technology, the audio, the distribution of the movie houses. And the studio model dominated until the 1960s, when enough people had been on enough great movies.
“So all the people who worked on Casablanca, all the people who worked on Gone with The Wind – they had seen what it looks like when you make a great movie, when you had enough of this operational expertise out there. Then you move to a world where the agents ran Hollywood because they could pull together a group of 12 and they could pretty reliably make a great movie.
“And we are getting to that point in tech, on business SaaS [software-as-a-service]. And these network effect businesses are still not well understood, but they hopefully will be in the next 15 or 20 years. And we will move to more of an agent model where you can bring together a group of 12 people and they can attack a problem like this and solve a problem that is a little more intractable, like competing with Uber.”
As Pat Riley from Global Accelerator Network highlights in his blog about its White Paper, The Rise of Startup Studios: “While the specific stage gates and cost per gate may differ from studio to studio, almost all studios have some form of go/no-go process.
“And, the order of the stage gates may shift from project to project. For example, if a project starts because a customer approaches the studio intending to solve a problem, it reduces risk faster.
“The advantage of having multiple clear and defined stage gates in an iterative process is that the team can be objective about success and failure.”
The model is highly effective in the right hands, whether by groups, such as Mach49, that can enable inside-out innovation or intrapreneurship or university-affiliated providers, such SETsquared, Cambridge Innovation Capital and Oxford Sciences Enterprises, that can support entrepreneurs and link them to investors and corporations.
The funding, however, has been usually provided as equity but the value of a business has been particularly driven by network effects, that is how customers or suppliers or other actors (all called nodes) work together.
Value derived from these network-driven businesses then usually accretes to the shareholders and employees. But the rapid growth in non-fungible tokens (NFTs) and the blockchain open up ways to support the wider set of nodes that make a business works, Currier and Azhar noted in their podcast.
Some of the most interesting discussions at the GCVI Summit last month centred on how corporate venturers are receiving NFTs alongside equity in startups in return for specific help with network effects. But the two can also work independently.
If a CVC sees 1,000 or more potential investments but backs 1% of them the work involved remains intense. Value captured from the non-invested startups has been usually limited often to insights and potential introductions to other development officers for partnerships or purchases.
With tokens there could be ways to further take advantage but most finance officers are struggling to value or recognise this and the question of where to allocate time and support to which projects remains crucial.
Investing, therefore, will likely remain the tip of the innovation spear for identifying opportunities to back even in a decentralised world and especially if you can find the platforms that will enable the metaverse or multi-chain future, such as Rangers Protocol or DeSo Foundation.
