As the Silicon Valley Bank collapse still shakes the industry, corporate investors are finding a voice and stepping up, but must become more transparent.

GCVI Summit attendees Photo by Adam Bacher

Last week’s GCVI Summit in Monterey was almost a perfect example of the “pathetic fallacy” of cheap novels, where the weather is used to mirror the inner turmoil of characters. The 10-year drought that gripped California broke dramatically with storms and rivers bursting their banks, while the run on Silicon Valley Bank (SVB) appeared to be the bursting of a decade-long golden period for startups and their investors.

During the weekend leading up to the summit we wondered if the event would happen at all — either because flooding would prevent people from physically reaching the Hyatt Regency Hotel in Monterey, or because investors would be too occupied in trying to salvage portfolio companies pulled into insolvency by the Silicon Valley Bank disaster.

“If the Federal Deposit Insurance Corporation (FDIC) hadn’t stepped in, this conference would not have happened. People would not have come. They would have been too busy trying to save their portfolio companies,” I was told by one of the investors in Monterey.

But, luckily, the FDIC did step in to guarantee the deposits in SVB in full on Sunday night, as the rain abated and the roads around Monterey dried out enough to allow access. We heard multiple stories of investors who had been flying out to Silicon Valley, getting on the plane in a state of high anxiety and then disembarking to a flurry of messages and profound relief as they got news of the government deal.

We had, in the end, a full attendee list of more than 750 people at the GCVI Summit, all shaken but with a sense of danger averted. Jacqueline LeSage, managing general partner of Munich Re Ventures and GCVI Summit chair, began her keynote address on the first day by getting the audience to do a collective breathing exercise. There was a general feeling that the industry — which had spent the weekend devising potential rescue funding plans for their portfolio companies — needed to take a deep breath and regroup.

1. The CVC community is finding a collective voice

The CVC community came together at the Summit to issue a joint statement on the SVB situation. If you would like to add your name to this, please have a look at the statement and contact us through the admin link provided. We’re happy to keep adding voices to this.

The statement itself has limited value — would it stop anyone from pulling money out of the newly resurrected Silicon Valley Bridge Bank if a new crisis arose? Probably not. But putting together a joint statement has some value as an act of self-definition and collective action by the CVC community.

One of the comments we came across during the GCVI Summit was that corporate venture capital was maturing and professionalising as an industry. If one in five deals startup deals now has a corporate backer, CVC investors are becoming increasingly influential. As GCV founder James Mawson observed in the introduction to this year’s World of Corporate Venturing, our annual survey of the state of the industry, venture capital is becoming a growing part of the arsenal of tools corporations use to innovate, alongside R&D and M&A.

“There is a potential for corporate venturing to go from about 1% of global corporate R&D budgets to 10% over the next decade,” he writes.

Many delegates at the summit talked about the aftermath of SVB as being a moment for corporate ventures units to step up. As funding gets more difficult to raise, corporate investors must do more to support their portfolio companies. Corporate investors can do more to lead investments, using their industry expertise to do the due diligence on startups.

 

2. The immediate SVB crisis might have been averted but there’s a lot more pain to come.

One of the fascinating sessions at the GCVI Summit was this presentation by Laurence Levi at VO2 partners, a consulting firm that helps VC firms manage their portfolios when things go wrong. Levi believes SVB is a systemic shock that will bring the current cycle of CVC investing to an end.

This is an event similar to the shocks that ended previous periods of heightened CVC activity — much like the 1987 stock market crash that ended the CVC bull run of the 1970s and 80s. That event led to the closure of the most active corporate venture unit of it’s time, at Xerox. Later, the dotcom crash of 2000 ended the investment arms of big names like AT&T, Microsoft and Starbucks.

Levi believes we’ve yet to see valuations really come down to where they need to be. “There is a lot more downward pressure to come,” he said. “Public Saas company valuations are down 50-70% in last 18 months. Their privately held counterparts are down only half that much,” he told the summit audience.

And if you are thinking of selling your portfolio company holdings, either in a full exit or on the secondary market, there is still a big gulf in what buyers and sellers think companies are worth. “Bidders are asking for 52% discount, sellers are asking for 32% discount. The haircuts are going to get more painful,” said Levi.

3. Deal activity is likely to be down for two years

The speed of dealmaking has already slowed and is likely to stay low for two years, said Bob Flanagan, managing director of Raymond James, the investment bank. If you look at what happened after the dotcom crash and the financial crisis, he said, “stock valuations and deal activity dropped for two years”. It took between seven and eight years for the market to get back to its prior peak.

There’s no reason to believe it will be wildly different this time. There are some more headwinds in the market, Flanagan said. Interest rates are rising rather than falling as they did on previous occasions, and inflation is much higher. On the positive side, however, investors have more unspent capital, or “dry powder”, available. Investors and buyers have already been holding back for nine months, and the pressure is growing for them to deploy their money somewhere.

In the meantime, would-be sellers should wait. “If you don’t need to sell right now, don’t,” advised Flanagan. Instead, it is worth spending the time doing the things that will make the company more attractive to buyers. Take stock of the business and fix the non-performing parts, build the valuation model that you want to show to investors, go to industry events and network with potential acquirers.

 

4. CVCs are still investing

Most CVC investors we spoke to are still looking at deals and investing. As Reese Schroeder at Allstate Strategic Ventures put it: “Right now is the time to invest. It is not the time to pull back. There are companies that are relooking at their valuations and are getting more reasonable. Never forget: great companies have been born through downturns. Our team believes there will be great companies that will be born and funded over the next couple of years.”

Indeed, we heard about a number of new deals while at the GCVI Summit.

5. The next frontier for AI is the physical world

Generative AI was never far from discussion topics at the conference. Anima Anandkumar, senior director of AI research at Nvidia and Breen Professor at Caltech, gave a brief but fascinating rundown of what to expect next. We are now getting the computing power and algorithms to allow us to use generative AI to do things that were previously considered far too complex, she said.

Programmes like ChatGPT have captured the public imagination because of what they can do with text and images, but the next frontiers could be science and manufacturing.

“We need to bring the laws of physics in and look at how fluid changes over time, how materials degrade in a show. How do we capture carbon and store it underground. How do we create new materials,” she said.

Simulating these is hard at the moment. Climate scientists, for example, believe we need 100bn times more computing power to be able to really remove sources of uncertainty in climate models. AI isn’t quite bringing this 100bn increase but can soon speed things 100m times.

 

6. Older CVCs are terrified new CVCs will spoil their reputation

A concern we heard repeatedly at the GCVI Summit was that newer corporate investors — we saw more than a hundred new units formed last year — will ruin the reputation of the more established corporate investors. The old guard worry that the newbies will invest at inflated valuations, end up with a poor choice of portfolio companies and be shut down by their parent companies early, making corporate venturing as a whole look unstable and untrustworthy. Some of these worries could be allayed by more communication — sharing investment best practice, deal methodologies, term sheet details. Here’s where GCV is trying to help. Our recent webinar on how to manage a portfolio through a downturn couldn’t have been timelier, and is here for anyone to reference.

7. CVC needs more transparency

Other than mentioning the early morning breathing exercise, I can’t tell you much about the rest of what was said by LeSage and others on that first morning of the GCVI Summit, because so many speakers, jittery about the still unfolding situation, asked for their sessions to be off the record.

But opting for such secrecy may not be the best course. With maturity comes a need for transparency. If CVC wants to be seen as a fully-fledged actor in innovation ecosystem, it will need to accept some media attention. Public companies, of course, can have strict restrictions on who is allowed to speak on behalf of the organisation, and making forward-looking statements out of turn can have legal consequences. But most are able to work around these with some simple guidelines.

The SVB crisis has caused a lot of people to question the current venture capital model. There’s a good summary of this questioning in this Wired opinion piece by VC investor Del Johnson. Commentators are asking why some 5% of VC managers control 50% of the capital in the US, why 75% of these investors attended the same Ivy Leagues schools, Caltech, Stanford or MIT, and why 91% of them are male. If the VC industry is structurally important enough to threaten the wider economy, why are VCs not subject to the same standards and rules of responsibility that other professions are?

CVC will face its fair share of these questions. Now, more than ever, its investment decisions and practices cannot seem like a black box and governed by hard-to-map networks. Moreover, there are some questions specific to CVC investors.

Startups are still confused about how corporate investing works — we hear this comment constantly from startups and corporate investors alike. Many of them still labour under old misconceptions.

Vab Goel, founding partner of NTTV, the VC arm of NTT, told the conference that among members of the innovation community strategic corporate investors are not expected to “do a whole lot”. When Celona Networks was considering taking investment from NTTVC, confirmed Rajeev Shah, CEO and cofounder of Celona, a big concern was that a corporate investor just wouldn’t be able to move quickly enough. Working together has dispelled these misgivings, but more work needs to be done by the sector as a whole.

Insights into how different corporate venturing units work is one of the most interesting parts of the GCVI Summit

Corporate investors who took to the stage at the GCVI Summit often started with a brief rundown of how their units worked. It demonstrated, yet again, that no two units are alike and there are dozens of variations in funding models, deal pace, team structure, portfolio management strategy and more. We can’t possibly summarise all we learned, but here’s a list of the companies whose strategies are outlined in our GCVI Summit videos:

9. The CVC sector needs us as a “critical friend”

It is hard to think of an industry that has been improved by secrecy, but easy to recall cases — FIFA, the Catholic Church — where a culture of opacity led to scandal.

The GCV editorial team wants to help with this transparency. We aim to report on this sector with the same principles you’d find in the Financial Times, Wall Street Journal, Forbes and the rest. We will report both good and bad, fairly. We won’t hide stories of CVC units closing even as we report ones opening. We’ll point out poor practice as well as good. We’ll always strive to do this fairly — any in the few cases so far where we have reported more “negative” stories about CVC units, the feedback we had from those directly involved was that our articles were accurate and considered, and that the experience was positive in the long run.

An industry-focused media organisation like GCV should be thought of as a “critical friend”. Both words in that phrase are equally important. We’re all about promoting corporate investment as a career and a funding option, about giving this sector a bigger voice. But a real friend will also point when you have spinach in your teeth or your flies are undone. The more you step out onto the big stage, the more necessary this becomes.

Maija Palmer

Maija Palmer is editor of Global Venturing and puts together the weekly email newsletter (sign up here for free).
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