April 2022 editorial by James Mawson, editor-in-chief, Global Corporate Venturing
Larry Fink, head of the world’s largest asset manager, BlackRock, told investors in his annual letter that globalisation was over. Business and capital have retreated from Russia in the face of its invasion of Ukraine. This could be bad news for inflation, the economy and by association the stock market.
The initial public offering (IPO) and mergers and acquisitions (M&A) markets have already slowed dramatically in the first quarter and looks set to remain subdued in the second. According to a report from Renaissance Capital: “Plummeting returns at the end of 2021 effectively put an end to the past year’s IPO boom, and coupled with the escalating war in Europe, issuance ground to a halt in late February.”
The plummeting IPO volumes are mainly due to the 90% fall in the number of special purpose acquisition companies able to list in the US in the first quarter. Given Spacs’ target acquisitions were often loss-making, venture-backed startups this drying up of liquidity will knock M&A as an exit route and put more pressure on them to raise further rounds even if at lower valuations.
The fall in public market valuations has knocked on to the fair valuations of venture capital investments. Tiger Global Management’s flagship hedge fund fell nearly 34% in the first quarter, due to poor-performing stocks and markdowns of private holdings, according to an investor letter seen by reporters at Bloomberg. “In hindsight, we should have sold more shares across our portfolio in 2021 than we did”, the firm wrote in the letter. “We are reassessing and refining our models using all the inputs available to us.”
Lennar, a US-listed house builder, last month said it would spin off its corporate venturing unit after losses from its investments.
As reported by Global Corporate Venturing, Lennar said it would spin off its LenX investment division later this year to become a “pure-play homebuilding company,” citing volatility in the valuations of the publicly-traded companies it holds a stake.
In its latest quarterly earnings report, Lennar recognised $395m in paper losses during the quarter to the end of February from its investments in six publicly traded tech companies: real estate tech startups Opendoor, banking software provider Blend Labs, rental manager Sonder, home insurance startup Hippo, solar and energy service provider Sunnova, and self-guided tour provider SmartRent.
Lennar had backed Sonder’s $170m series E round and Opendoor’s $135m round before their flotations. LenX is also a major stakeholder in Doma, a publicly traded digital title, escrow and closing provider, but uses a different accounting method to estimate its value, according to news provider Inman.
The group has been an active investor as LenX. Its deals this year include Veev, the US-based operator of a vertically-integrated homebuilding service, which secured $400m in a series D round, joining the $185m second tranche of US-based advanced materials-focused homebuilder Icon’s series B round, investing $30m in Withco, the US-based creator of a software platform designed to help small businesses manage commercial property, and walkable neighbourhood developer Culdesac’s equity financing as it prepares to open its first housing units.
The challenge for even the recent deals is their valuations could seem overpriced. One expert advisory firm that lawyers use to provide independent valuations said even under the least conservative metrics many rounds priced by VCs even in the past month were overvalued by 50% or more. Of course, VCs are sitting on record amounts of dry powder – money raised from their limited partners on which they will earn management fees once put to work – and so most tend to be pro-cyclical investors, that is they do more deals at the end of the economic cycles than at the start.
Corporate venturers are often caught up in VCs’ hype – see CVC activity for the first quarter of the year on page 67 – but face more danger given chief financial officers and executive change can pull the plug on even successful groups unless strategic impact and experience can pull them through. Education is vital to prevent the more than 1,000 corporations that have started venture investing since the pandemic first hit from folding causing reputational damage to the industry and affecting a generation of entrepreneurs as well as preventing corporate executives screwing up even established teams.
More than 60% of the senior executives at Fortune 500 companies Stanford academics Ilya Strebulaev and Amanda Wang spoke with confided that their parent companies do not understand the norms of venture capital.
This is leading more of them to the GCV Institute where about half the 200+ corporate attendees to courses last year came from those learning how to “land the value of CVC” inside the organisation (the other half came from the CVCs learning the latest insights of organisation and professional development).
The totemic investor for this generation is of course SoftBank, which has invested about $100bn in the past five years to buy stakes in private companies.
SoftBank founder Masayoshi Son has told his top executives to slow down investments, as the world’s largest tech investor seeks to raise cash amid falling tech stocks and a regulatory crackdown in China, according to the Financial Times.
The estimated writedown at the Japanese group for this quarter stood at $30bn, although a recent uptick in some shares meant it was now closer to around $20bn, the people told the FT. “Valuations for Chinese companies listed overseas have collapsed,” said one person close to SoftBank’s China team to the newspaper. “We do not expect a turnround anytime soon.”
The value of SoftBank’s Alibaba stake plummeted from about $208bn in November 2020 to $69bn in March, while its stake in ride-hailing giant Didi was about $9bn underwater, the FT said.
One person familiar with the company’s plans added to the FT that SoftBank was pushing to raise cash and was evaluating assets that could be liquidated. Early in March, SoftBank sold a $1bn block of shares in the South Korean ecommerce company Coupang, at under $21 per share, a 40% reduction from its IPO last year.
The Japanese tech group is also finalising loans worth as much as $10bn tied to the IPO of chip designer Arm, following the collapse of its $66bn sale to US peer Nvidia this year.
Arm’s IPO is expected to be on US markets as its main executives and customers in Apple and Qualcomm are there. However, Arm faces the open source threat of Risc-V so whether its valuation can reach its reported heights of $60bn seems a stretch to some who know the company well talking on background.
SoftBank has an estimated $23bn of cash and was confident of continuing investing, albeit at a slower pace than the about 200 deals it struck last year. Speaking at a Los Angeles venture capital conference in March, Nagraj Kashyap, a managing partner at SoftBank’s Vision Funds after joining from peer Microsoft’s M12 CVC unit last year, said the fund aimed to make fewer investments, but with higher amounts of conviction. “There is a slow reset of expectations that is trickling through the private markets,” Kashyap said as reported by the FT. “They have not caught up to the public markets, clearly.”
Logan Bartlett, partner at VC firm Redpoint, agreed in its state of current market report last month that “private markets have not yet meaningfully corrected. [There is] anecdotal information about retrades and lower prices but not yet widespread.”
He pointed to deals at 100 to 200-times annual recurring revenue (ARR) were still happening regularly.
And Bartlett added in summary: “[We] can try to draw insight from internet bubble and housing crisis for how it might impact private markets. Each took about 10 quarters to go from peak to trough. [This] would mean we are still 2.5 years from bottom.”
However, the private capital markets are now much bigger than they were back in 2000 or 2008 and a roiling market will have more impact than the limited effects the dot com bubble imploding had 20 years ago.
Unregistered investment companies – comprising venture capital, hedge, and private equity funds – hold more than $14trn in net assets, according to the US regulator. By comparison, the entire US banking sector holds only a little more than $20trn of assets.
The nature of funds should mean there is little systemic risk compared to toxic derivatives at banks but wiping out a lot of money will still hurt and cause scars.
Funds offer better returns through diversification, committed capital and more powerful governance than episodic investments by business units or corporate development teams more rewarded for M&A.
As William Birdthistle, director for the division of investment management at the Securities and Exchange Commission, told the ICI Investment Management Conference at the end of March: “To paraphrase the historian Francis Fukuyama, the investment company – or at least the collective investment vehicle – might represent the end of finance. The fund as a financial concept appears to have won, for now.”
And out of the ashes of the impending devaluation crisis, post-globalisation could come the seeds of better decision-making about which companies to back to build the portfolios in these collective investment vehicles.
The blockchain or Web3 could offer better decision-making using the wisdom of crowds through voting technology and algorithms than available historically. In which case, and along with the sums seeding innovation across the spectrum from healthcare to climate change, finance and communications, the massive sums invested in startups and new ideas since the golden age of corporate venturing ended about five years ago will not have been wasted. Like a phoenix emerging from the ashes, it will bring forth the opportunities to make the world a better place.