Strategic clarity essential

The media relations person at a large investment unit sponsored by a corporation’s balance sheet last month asked what it would take for the enterprise no longer to be seen as a corporate venturing unit.

The slightly flippant answer I gave was: “Don’t take money solely from a corporation and have its name as part of your name.”

But there were two deeper and more interesting points in this situation than the child-like desire to be seen as something without actually having to be like it.

First, this corporate venturing unit investing hundreds of millions of dollars per year had a specific media rela-tions person – indicating that how the firm was perceived and communicated with the outside world was important for getting deals, hiring talent and in communicating back to its limited partner (investor) – and the desire to be “different” had left the unit vulnerable to pressure from venture capitalists about what others perceived or thought it should be doing.

The two, naturally, go hand in hand, as there is little point having a person try to influene the outside world if you fail to take on board what the reaction is and think about what it means for yourself.

And as the corporate venturing industry starts a new year within its golden age, this small example is one that is becoming increasingly pertinent as the number of units and the amounts under management continue to soar.

The challenge for corporate venturers is to be open to the outside world and, often through using capital directly by taking shares or debt instruments or indirectly through fund commitments, find the best and brightest entrepreneurs doing interesting things and then have the parent organisation listen and respond to that outside world and the opportunities and threats it offers.

Just looking at one side – pitching to the start-ups or fitting into the business units – probably fails to bring into focus the value of being the powerbroker in the middle.

This will certainly be an increasing issue for the years ahead as competition for the best entrepreneurs increases.

But meaningful results will come only if the parent busi-ness is able to capitalise on the spectacular rates of inno-vation emerging around the world.

These are challenges identifiedby those surveyed for this Global Corporate Venturing Outlook issue (see page 11) and something that truck maker Volvo, the most influential in the transport and logistics sector, has been grappling with in its rebranding (see profile, page 22).

Three billion more people are expected to become internet-enabled over the rest of the decade and ideas are being developed and transferred across sectors. There is fundamental change in the three sectors that affect human development most – communications, health and energy.

This is a unique opportunity and threat to incumbents but is also lifting more people out of poverty faster than at any time in history even if there might be consequences for global growth rates.

Masaaki Hirooka’s paper, Innovation Dynamism and Economic Growth, is mentioned by Joaquin Vila-Belda in his latest blog as pointing out that: “Quite often innovations generate serious difficultiesfor the industries that they are threatening. These difficulties begin when the innovation is still at its initial stages and is a long way away from becoming really productive and efficient. As a result, productivity reductions are experienced for some time and, in the case of global innovations, this may lead to an economic downturn.”

Global gross domestic product (GDP) is growing at a steady 3% this year, according to the World Bank, after an estimated 2.5% last year and further increases are predicted for 2014. This implies real GDP will double in less than 25 years, or a generation, which is spectacular.In this mix, corporations are recording record profit levels.

Main stockmarket indices are rising in aggregate but to levels that mask the rapid turnover of companies from being successful to also-ran, or of entrepreneurs to the top ranks of large businesses.

Byron Wein, vice-chairman at alternative asset management Blackstone, predicts “a profit margin squeeze and limited revenue growth [will] cause 2013 earnings for the Standard & Poor’s 500 to decline below $100, disap-pointing investors … Companies complain of limited pricing power in a slow, highly competitive world economic environment”.

Volatility at parents affects corporate venturing units’ survival and puts pressure on them to show more immediate returns than venture-backed entrepreneurs can necessarily deliver.

This leads to often-dramatic strategy shifts, through acquisitions and divestments. News provider Fortune, using Thomson Reuters data, said global mergers and acquisitions amounted to $2.6 trillion last year and up by 2% over the previous year, as spin-offs and divestitures made up 47% of the total. And global buyside private equity totalled $321.4bn.

News provider Economist, in its World in 2013 supplement, identifies this year as one for the “return of the giants” as “conglomerates, out of fashion since the 1980s, are roaring back”.

The supplement in a main leader argues: “[Corporations in the west] had flourishedin an era when there was little risk capital available and when established companies could use the profits from their ‘cash cows’ to fund more adventurous businesses. As banks and venture capitalists become more risk-averse, those methods will return in 2013: the 500 biggest American companies are sitting on more than $1 trillion dollars in cash. In 2013, they will increasingly take some of that cash and invest it in ventures that may be some distance from their core businesses.”

This consequence of the credit crunch roiling markets since 2007, combined with relatively stable global economic growth and fundamental changes in industries through innovation are perfect conditions for corporate venturing to thrive during its golden age if units can survive and demonstrate a positive impact on both their corporate parents and entrepreneurs.

Tactically, positive exits to return cash to the parent and avoid being seen as a drain will be important factors, an issue not helped by declining numbers and valuations of trade sales in the US.

Acquisitions of venture-backed companies fell for the second consecutive year last year, to 435 in the US, with a weak fourth quarter of 95 exits, according to a study by US trade body the National Venture Capital Association and Thomson Reuters.

But at a more strategic level, showing impact to the parent in protecting existing business lines or finding new sources of growth will be more important.

These are the tactical and strategic issues we will be discussing at our next Global Corporate Venturing Symposium and Awards during the week of May 20 in London, to which you are all invited. I look forward to seeing you there.

And taking Global Corporate Venturing through the next few years as the industry grapples with these challenges and opportunities and continues to develop will be a new editor – Toby Lewis.

As well as editing the Global Corporate Venturing Powerlist 100 supplement last year, Lewis has been our Madrid bureau chief and news editor at this title and my previous publication at Dow Jones. I will become editor-in-chief to oversee this title and Global University Venturing as well as a third publication now under development in the same field of innovation equity and debt.

Thank you for all the help, news and feedback over the past three years since founding this publishing company, and I hope you will continue supporting us as Lewis takes the reins.

Most read on Global Corporate Venturing in December 2012:

1 Powerlist: Ralf Schnell

2 Powerlist 100

3 Powerlist: Arvind Sodhani

4 GCV December issue

5 Powerlist: Monty Bayer

6 Powerlist: Mark Read

7 Google vs Intel in 2012 reviews

8 The Big Deal: GE’s intricate InSightec operation

9 Powerlist: Shin Nagakura

10 GE hires Dolbec for software fund

11 German state fund looks overseas

12 Powerlist: Hilton Romanski

13 EVCA creates expert group

14 Gaule’s Question Time: ABB

15 Powerlist: Bill Maris

16 The Big Deal: Amantys

17 Drucker forum reflects on future

18 Powerlist: Martin Murphy

19 Powerlist: Girish Nadkarni

20  Software eating the venturing world