March 2020 issue editorial by James Mawson, editor in chief, Global Corporate Venturing
Daren Fonda’s article last month in Barron’s, Venture Capital Attracts the Corporate Crowd, rightly asks why corporate capital is flooding in as deal activity and valuations may be peaking.
Data from GCV Analytics’ Kaloyan Andonov for the article, with interviews held at the GCVI Summit in Monterey at the end of January, shows search engine provider Alphabet’s multiple corporate venturing units, such as GV (formerly Google Ventures), CapitalG (formerly Google Capital) and Gradient, and chip and data company Intel’s corporate venturing unit had invested in nearly 1,000 companies each in the past decade.
The simple answer for many is there is cash on the books -–$22 trillion across all corporations – and the rate of return for the better performers is better than the cost of capital at 6% to 8% for many.
Allied to this comes strategic opportunities to identify opportunities and risks from entrepreneurs. The US government is taking a close eye on this with a review – so far limited to takeovers – on how the big tech companies are potentially affecting competition through buying or squashing competition.
Although nowhere as obvious as Microsoft’s tactics in the 1990s – Michael Lewis’s book, the New New Thing, has some great examples on how it put pressure on then-nascent internet browser Netscape to let it buy a stake – corporate venture capital (CVC) could be drawn into the battle lines being formed as part of the so-called techlash.
This creates both strategic opportunity and risks for the industry.
If CVC remains a financial-only exercise in investing for returns it remains vulnerable to the next economic downturn. If cash falls then chief financial officers will turn to areas with assets – like CVC – or dry up its source of capital to do deals. The example of General Electric remains salutary.
Possibly the most vulnerable sector and region in such a downturn will be Germany as the country’s Federation of German Industries (BDI) business association has warned of a prolonged recession this year in the industrial sector, which has already endured six consecutive quarters of contraction.
The association, quoted by Reuters, said: “With the production slumps in China and the quarantine measures taken by individual countries, it is becoming clear how vulnerable the export-oriented and internationally-organised German economy is.”
Germany’s corporate debt has risen at more than double the rate of its gross domestic product of about 3% since the start of 2018, according to the International Monetary Fund (IMF).
Globally, the IMF’s global financial stability report has a simulation showing that a recession half as severe as 2009 would result in companies with $19 trillion of outstanding debt having insufficient profits to service that debt, according to the Financial Times, which warns: “This financial engineering is a recipe for systematically weakening corporate balance sheets.”
The golden age for CVC was clearly the first half of the 2010s with the opportunities to invest for returns before a downturn hit.
Now, there are fewer such obvious trades from a micro point, although the staggering lack of attention to how intellectual property and intangibles are managed and valued is a macro tailwind as public and private capital markets continue to converge.
But the real opportunity for the industry comes from being seen to help more clearly the largest innovation tools most corporations use: their mergers and acquisitions/corporate development and research and development departments.
Already about two-thirds of the CVC units directly help their M&A teams, while the efficiencies born in big pharma from multiple bets across internal and external drug R&D has been clear for decades.
Shining a light on how to set up a corporate venturing unit for best practices, build a team and support it for years is the true example set by Alphabet, Intel and the 600-plus other CVCs with more than a decade’s track record.