Multinational corporates storm the Israeli market

In Israel, one of the most active venture capital markets outside of Silicon Valley, 2018 was a banner year with $7.5bn of venture capital invested. 43% of the total volume of deals ($3.26bn) involved a CVC. According to IVC, the level of activity of CVC funds in Israel in the past few years has massively increased. From 773 deals involving CVCs in 2012 to 949 in 2018. On average, the rounds involving CVCs are larger, a function of the stage that CVCs get involved in. Anecdotally, I’ve seen CVCs invited to deals from series B onwards, when the startup board is focused on strategic value and international expansion.

According to a recent report by PWC and Startup Nation Central, there are 536 multinational corporates innovating in Israel, out of which 16% (85) are investment led.

Taking money from corporates is not a trivial decision for a startup, especially at the early stage. Also, not all CVCs are equal. Some invest for financial returns, others for strategic value, which might create misaligned incentives. There is also the speed of decision-making (depending on the CVC fund’s structure and investment committee). It is also hard for the startup to assess the signalling risk (taking money from Coca Cola can often mean that their competitors might be turned off from working with the company) or the exit blocking risk in case of strategic investments.

On the flip side, corporates can truly be strategic partners for startups if leveraged the right way. CVCs can sometime open doors to commercial agreements, bring with them brand association and can become great design partners or reference customers, helping the startup cross the chasm and unlock capabilities. More often than not, this happens post series A.

Drivers for the rise of CVC activity

From the corporate perspective, it’s a natural evolution. Corporates with legacy businesses are facing unprecedented disruption from both large tech and startups across industries (“software is eating the world” after all). The CEOs and boards face a few options:

• Try to innovate internally (R&D) – tends to be expensive and depends on their talent
• External growth through M&A – often fails to deliver the synergies and requires deep pockets
• Invest direct into companies – there are various models of doing this. Independent investing arms vs. in-house, financial returns vs. strategic value, standalone fund vs. cap table
• Invest into VC funds – as LPs, for financial return, dealflow and strategic value
• Other means of driving innovation through accelerators, incubators, scouting, etc.

The recent PitchBook analyst note, “The golden mean of corporate venture capital” breaks down additional forces:

• Strategic drivers – “In addition to CVC units, corporations are also forming startup incubators and accelerators to benefit from startup innovation. Because of this trend, we believe CVC has become a core part of corporate innovation as a means of giving companies access to emerging technologies including artificial intelligence (AI), financial technology and biotechnology”. AI is a huge driver of this category: “nine out of 10 companies reported AI investments in a recent BCG survey.
• Financial drivers – “they also found no relationship between cash balances and CVC activity”.
• R&D and capital expenditure spending – “Both R&D and capex spending had a positive relationship with CVC activity in 2018”.
• Cash balances – “The study found no correlation between cash balances and the presence of a CVC program, but our data shows that average cash balances for 27 CVC parents increased by a record amount in 2018, suggesting that cash balances can fuel CVC activity”.
• M&A spending – “Among CVC parents, M&A outflows sharply decreased in 2018”.
• Market value (aka stock price).

“Companies that are perceived as more innovative as measured by R&D spending can outperform their less innovative peers, meaning that forming a CVC unit can be a part of a broader strategy to recategorise a company as an innovator and boost market valuations.”

So, is the sentiment towards CVC investors changing too? As an example, in 2013 Fred Wilson vowed to never have a corporate investor in the syndicate (he later apologised). USV has since co-invested with GV, Capital G, Samsung Next, BDMI, Hearst Ventures, Qualcomm Ventures and others in more than one deal each, so the jury is still out.

In the words of James Mawson, CEO of Global Corporate Venturing: “As with any potential investors, entrepreneurs need to make sure they ask corporate venturers the tough questions for how they can help them in their five primary needs of capital, customers, product development, hiring and, eventually, an exit. The best investors will have the track record and clear path to success for their portfolio companies. Together, they and the entrepreneurs can make the world a better place but only if both sides have their eyes wide open.”

This is an edited version of an article first published on VC Cafe

Reflections from an ex-CVC in Israel

Avram Miller, co-founder, Intel Capital

Several months ago, I was contacted by a contributor to Forbes, com, Gil Press. He was going to spend some time in Israel, where I live (mostly) and wanted to interview me about corporate venture capital. Frankly, I was surprised that at this point in my life, anyone was interested in interviewing me about anything, so I agreed. Also, I am writing a book about my time in technology, so I thought it might be helpful in clarifying some of my own thinking. We spoke for about 90 minutes. I found it enjoyable and indeed, useful.

I think his article was pretty well written and researched. However, it wandered away from the topic a bit. It turned out to be more about me than about corporate venture capital. I have mixed feelings about that. On one hand, I am happy that our discussions took Gil there because it makes me feel that people may be interested in my book. But I am uncomfortable when so much of the accomplishments of Intel Capital in the early years focus on me personally. It was a team effort. While I played a significant role, we certainly could not have achieved such success if it was not for Les Vadasz, who was my boss and partner, as well as so many others that played significant roles. All that will be clarified in my book, I hope.

The dangers of having a personality

I recall when in 1996 USA Today published a profile on me with the heading: “For Intel, he is a one man think tank.” There was a lot of anger amongst the management of Intel about that, and I could appreciate that. I often joke that I was one of the few Intel executives with a “personality.” What I meant was that I was one of the few that was an extrovert, comfortable with public speaking and interacting with the press.

Fred Wilson is quoted in the article as thinking that “corporate venture capital is dumb.” He believes corporations do not benefit from being minority investors. He says that if you want an asset, “just buy it.” Fred has been a VC most if not all of his professional life. I am not sure he understands how large corperations actually work. In any case, I disagree with him.

There are two primary reasons for a corporation to have an early-stage investment group. The first and what I believe the most critical reason is strategic. Investing in early-stage companies and even interacting with venture capitalist provides a window into future markets and technologies. The second is financial. Corporations have certain advantages that venture capital funds do not have. I believe done right, the early-stage investing can not only pay for itself but also subsidise other activities that focus on the future, such as an advanced development group which I also believe is needed by corporations. Investing in early-stage companies by a corporation can give them a window on acquisitions.

Intel’s objectives in venture

At Intel we had established three objectives for our early stage investing; 1) grow the current Intel business 2) provide strategic insight that would positively influence the development of Intel’s strategy and 3) get a significant return on our investments. We succeeded in the first and last objectives and failed on the 2nd, which, sadly, was the most important, in my opinion. The financial returns were critical because it meant that we did not compete with other intel organisations for funds. We generated our own investment capital very early in the development of Intel Capital. The financial returns were also an indication that the business we invested into were successful, which was an indicator of their contribution to our first objective of growing the existing market. Unfortunately, we had no impact on the long-term strategy of Intel. I still feel bad about this and often think what I could have done differently.

Intel capital was well integrated into Intel as a whole. The senior people like Les Vadasz and I were compensated primarily on the success of Intel as a whole and not on the performance of Intel Capital. I am aware that many corporations set up their venture groups like a captive venture fund. I think this is a mistake because it separates the members of the venture group from the corporation they serve. Such groups will become primarily financially focused. In this case, I would agree with Fred Wilson. One problem that comes from not running the corporate venture group like a normal VC is compensation. The people in the organisation can make far more money assuming they are talented if they leave and join a VC firm. This created a certain amount of undesirable turnover. But, fortunately, we had no problems recruiting people to join Intel Capital.

I can’t really comment on the existing corporate venture groups including Intel. I just don’t have enough information.