June issue editorial by James Mawson, editor in chief
There is a video online of two buck antelopes fighting before the tussle is broken up by the arrival of a lion, representing corporates rivalling each other while being unaware of external forces. It raised a few knowing laughs at last month’s GCV Symposium in London, from the corporate venturers trying to alert their C-suite and business units about the issues swirling around the parent company.
These issues are affecting management – 17.5% of CEOs at the world’s 2,500 largest companies stepped down last year, a record in the 19 years of consultancy PwC’s survey of corporate leaders, and corporate venturers have to cope with management change to provide a consistent platform and team supporting entrepreneurs. By now, more than 200 corporate venturing units have more than a decade’s experience, so the overall experience in the industry has never been better.
This wisdom will be needed. Trade rules are shifting, with protectionism and mercantilism rearing their heads. Nascent issues could also surface around whether loss-making venture-backed companies offering cheap goods could face the same extra tariffs that, say, steel has done in the past. The use of data gained by Chinese and US companies from users in other countries is something the next president of the EU could well look at.
All this can, however, be an opportunity for CVC leaders. As risk factors increase, so do their responsibilities to act as scouts for their parent companies.
Speaking at the symposium, Max Fowinkel and William Janeway, respectively managing director and special limited partner at private equity firm Warburg Pincus, discussed how corporate venturing funds could make returns in a more difficult economic environment, and of institutional investors moving away from supporting cash-burning businesses, such as ride-hailing services Uber and Lyft, in the wake of their initial public offerings.
Janeway said the “distinct investment environment” is entering a second decade of real risk-free interest rates of negative-to-zero levels. He said institutional investors still dominated the investment space, and their need for return was driving models of behaviour that have never been seen in professional venture capital.
He added: “It has created this extraordinary environment where startups not only have the opportunity to burn humongous amounts of cash, but when tested, as electric carmaker Tesla is being tested right now, have no plausible path to positive cashflow from operations.”
Due to low interest rates and the assumption that they will always be able to raise capital even without positive cashflow, Fowinkel said companies could get away with saying they did not expect their business to be profitable for a long period of time, and suggested that some were taking that assumption for granted. “We always look to make sure we do not get into funding a company based on the assumption that someone else is going to fund the company in the future, because it can go wrong,” he added.
Janeway said: “It does not matter where the venture starts, everyone needs to have an evolving, working and operating plan as to how we get positive cashflow.” He told the audience the risks of this environment are actually “very positive” for corporate venture capital and venturers could maintain the continuity of a strategic investing process.
More recently, said Janeway, startups had predominantly been purchased by corporates, as opposed to taking the IPO route. “In that environment, corporate venture capitalists’ roles as scouts for market research and for entrepreneurial talent can be an asset that transcends the financial return to be delivered to the corporate.”
Tony James, eminence grise at private equity firm Blackstone, looking back on 2007, said: “Because when everything feels good and you cannot see any problems, historically you have been near a peak. It is not that you see problems coming. You never see problems coming at that point, or no one would be giving you 10-times leverage.”
He added: “There are no clouds on the horizon. What you see is too much exuberance, too much confidence, people taking risks that in the last 145 years would not have made sense. What you say is, this feels like a bubble.”
Next month’s issue will have a special data report on the past five years’ record-breaking period of large rounds of at least $100m that have driven the innovation capital ecosystem and corporate venturing’s role, and considers whether a turning point has now been reached. Insights are most welcome to jmawson@mawsonia.com.
