Two threats to the corporate venturing industry are emerging in this period of growth - over-exuberance and regulation. GCV talks to EVCA about radical proposals by the European Commission likely to hit corporate venturing in their current form.
As the year draws to a close, the corporate venturing industry has had a highly positive 12 months. New entrants continue to flock to the sector, groups are being more active at dealmaking than they have been since we started tracking the industry in 2010, and there are many corporations that have established well-respected dealmaking platforms.
Yet two threats to the industry are emerging in this period of growth. First, as a number of respondents to our year-end review comment, as does well-regarded venture capitalist Brad Feld in an interview, valuations being paid to get into venture capital deals have looked pricey for years. At some stage it is likely this seemingly exuberant part of the technology cycle will turn to a period of fear.
Yet perhaps more worrying than hand-wringing about frothy investment conditions is that proposed regulation has emerged in Europe, which many market participants, including the largest corporate venturing investor, Intel Capital, have warned could affect the entire corporate venturing community and in turn the wider venture capital industry. The European Commission has proposed in a white paper on competition law that it is notified about acquisitions by corporations of stakes in related companies of over 20% orof above 5% under certain conditions.
In order to catch up on what the industry is doing to combat this regulatory threat in Europe, Global Corporate Venturing spoke with the European Private Equity and Venture Capital Association (EVCA), Europe’s venture capital trade body, which is co-ordinating a Europe-wide response to the proposalby corporate venturing units.
The EVCA says the good news is the proposal could change significantly from the current draft. Michael Collins, public affairs director, said: ”This is not a formal proposal and there is no agreed position from the commission. This means there is still quite some way to go, even should the commission produce a formal legal proposal. It obviously creates further opportunity for the thing to change. Amendments to the text are at a fairly early stage. This is not to play down the significance of the debate, just to illustrate where it has reached in the machine.”
Asked why the proposals are drawn up in language which looks like it would catch all corporate venturing transactions, Collins said: “Look at the perspective of the commission. At this stage of the process it is in your interest to start with some broad proposal and think about a significant extension to the regime. They are looking to capture everything they have thought of and quite a few things they have not thought of, and then will look to knock the rough edges off.”
He added: “I do not think anybody in the commission is looking to kill off corporate venturing or venture capital through the rules. But the cost and burden on that sector in the proposals as they are currently formed are disproportionately high, which is what we are now trying to ward off.”
While European legislation on private equity and venture capital went to the top of the news agenda for the alternative asset manager press through its Alternative Investment Fund Managers directive (AIFMD), Collins said the commission was not viewing the current proposed legislation in such a confrontational light. He said: “This is a very different political climate to that we saw around AIFMD, which had pretty powerful and vocal external support within the parliament. I do not think that is quite the case with this initiative.”
While European legislation is a looming threat, it is likely Europe’s politicians can be persuaded of the negative effect of the proposed legislation on the corporate venturing industry, which is generally viewed positively by policymakers. Collins said: “The next step is for the industry, with corporate venturers directly, and certainly through the EVCA, to continue dialogue with the commission directly.”
It will be worth watching this issue next year as it threatens to stifle corporate venturing in Europe, one of the world’s most important markets. Yet there seems a good chance this European legislation, if and when it comes in, will take into account some of industry’s concerns.
