“The four most expensive words in investing are: ‘This time it's different’,” according to legendary investor and mutual fund pioneer Sir John Templeton.
But sometimes they are. When the causes behind decision making change then the results will be different.
Twenty years ago at the peak of the dot.com bubble, when the price to earnings ratio for the Standard & Poor’s 500 index stood at 30 and profitless companies were able to float and see first-day price rises, it felt like a new paradigm had arrived.
Corporate investors rushed in to reap the financial rewards from being associated with the new economy, but reversion to mean in P/E ratios meant that a few years later most of the hot corporate money had left venture investing behind.
However, the core ideas of open innovation and creative destruction remained. A decade later as the world emerged from the global financial crisis, corporations such as General Motors, Tencent, Alphabet (then just known as Google) and hundreds of others collectively made a decision to invest in or work with startups for more strategic as well as financial reasons.
Hanging over them all remained the core question of whether they would cut and run or stay engaged when the next economic downturn hit.
The initial data from the first half of the year therefore, is a crucial litmus test.
It appears strategy trumps financial decisions even if corporations individually have to cut their cloth depending on how much investing they can afford or want to do on a monthly or annual basis.
Record numbers of corporations made their first investments in the first six months of 2020, according to Kaloyan Andonov’s analysis at our GCV Analytics unit.
Three-quarters of all deals were new investments, with a quarter as follow-ons to support existing portfolio companies. Even though deal volumes were down slightly and deal values more so compared to 2019, investment and exit activity remains significantly higher than in 2010 when Global Corporate Venturing was founded. It is certainly better than my expectations that perhaps a fifth of CVC units could close.
And more importantly perhaps, the professionalism of the industry is also far higher. As one angel investor in a startup that just raised its first money from corporations and other venture investors in two tranches in the past six months said: “There was no adjustment in terms or value. The corporations didn’t try and insert clauses.”
Supporting portfolio companies, striking new deals, backing entrepreneurs rather than tying them up with strings shows an impressive maturity for the industry.
The long-term staying power of all investing is determined in a downturn, and managing the fear and greed-induced economic cycles is important as well as keeping an eye on the data.
The current P/E multiple is 22.5, which remains high after a bull quarter on stock markets. How this takes into account the economic fallout from the Covid-19 pandemic remains an issue for the next year or more but, for now, corporations have answered their first question of reliability.
