World of Corporate Venturing 2021 editorial by James Mawson, editor in chief, Global Corporate Venturing

The motto IN GOD WE TRUST was placed on US coins largely because of the increased religious sentiment existing during the Civil War in the 1860s, according to America’s Department of the Treasury in its official history.

It is tempting the day after Joseph Biden’s inauguration as the 46th US President to explore what more profane sentiments are now rising in America and the world.

Tackling global missions

Increasingly, the US and other countries are leaning into innovation to tackle global challenges or missions. There is little altruistic about this drive but a recognition that businesses and societies that can tackle or serve global needs will be the potentially the largest or most profitable.

A generation conditioned by the global potential of the internet and mobile communications have developed a mindset to tackle the billion-people needs ideally with something that is needed to be used at least twice a day – the so-called toothbrush test used by search engine provider Google when exploring deals.

While attention over the past year has been dominated by the coronavirus and its covid-19 disease, attention increasingly is on climate change, human health, financial services and information and communication technology (ICT) advances, such as in artificial intelligence (AI) and quantum computing.

Online retailer Amazon last summer started a corporate venture capital fund equipped with an initial $2bn focused on technology investments to reduce the impact of climate change, while software provider Microsoft said it would invest “$1bn over the next four years in new technologies and innovative sustainability solutions”.

That these are not even the largest of the corporate venture capital fund launches last year, according to GCV Analytics, reflects the scaled-up ambitions of the industry which led or backed hundreds of large, $100m+ rounds.

The tech titans are joined by industrial and energy incumbents to the fossil fuel economy that drove the 20th century. Investment bank Goldman Sachs said spending on renewable power will overtake that of oil and gas drilling for the first time this year as electrification replaces petrol as the motor for society.

Global Corporate Venturing’s Global Energy Council chaired by Lisa Lambert, chief innovation officer at utility National Grid and president of its National Grid Partners corporate venturing unit, will tackle the topics around the energy transition and shift from molecules to electrons.

The sister Global Health Council will tackle similar seismic changes underway in helping people live longer, better lives.

Covid-19 brought renewed attention on vaccinations to inoculate against viruses and the related challenge to develop and maintain antibiotics against bacteria.

Entrepreneurs and innovators at startups, such as Moderna, and universities, including Oxford, were again at the forefront in tackling the coronavirus but required global manufacturing and scale often in partnership with incumbents, such as Johnson & Johnson, Pfizer, Bayer and Astrazeneca.

Rolling back illnesses and infirmities associated with ageing and tackling the mental health “epidemic” are increasingly of interest to all but handling inequalities of access within and between countries will be increasingly be of focus.

The digital technology revolution promises to change the drug development, diagnosis, patient experience and where and how it is paid for.

Artificial intelligence (AI), thanks to Google’s DeepMind unit, has already broadly solved one of health’s grand challenges – to model in three dimensions proteins – and all industries will be affected by the continuing developments in AI and the broader ICT sector as general purpose technologies.

Semiconductor chips at five nanometres in scale after Samsung and TSMC entered volume production last year promises greater speed and effectiveness but disruptive opportunities will be created through quantum’s qubits to tackle challenges far beyond classical computing’s capabilities.

Add in the blockchain and distributed ledger technologies (DLT), photonics and the cloud people are increasingly confident on handling everything from the largest to the smallest scale.

This is the exponential age where ideas build off each other between and across sectors and countries.

The technologies will even shake up all parts of the financial economy, including how innovation capital is provided to entrepreneurs and returns shared out.

Scaling capital to abundance

Finance is the classic fungible good. Of the $1.37 trillion invested in the 2010s, VCs contributed less than half based on a proxy of the $553bn in funds raised by them, according to Pitchbook.

Corporate venture capitalists (CVC) were involved with more than half of the deals by value – driven by SoftBank’s near-$100bn first Vision Fund, according to GCV Analytics, although the firm’s investment pace slowed last year as it struggled to close its second fund at the target $108bn.

Along with other non-traditional investors, such as private equity firms, hedge funds, mutual funds and sovereign wealth funds, however, CVCs helped push more money to later-stage deals.

A glance at the 40-plus, $100m venture rounds last month alone and the majority of participants were non-traditional investors. VCs followed on where they could but were more rarely lead investors.

These trends are both part of the blurring between public and private capital markets.

As data provider Pitchbook noted: “As VC firms have pushed for companies to grow faster and remain in the private market longer, non-traditional investors realised they were losing out on valuable growth by waiting until companies completed an IPO [initial public offering].

“Rather than wait, these investors quickly moved to recapture a stake in that growth, investing in private rounds in a part of the venture market that did not previously exist. Now, larger and more mature companies remain in the private markets.”

But with private markets effectively as liquid as public ones, entrepreneurs increasingly can look to decide their future owner of choice. Last year’s relaxation of direct listing rules in the US, so companies can raise capital in an IPO as well as list existing shares, or the spectacular growth in special purpose acquisitions companies (SPACs) to take private companies public through a reverse acquisition as well as a global record $500bn of primary and secondary issuance of shares through more traditional methods indicates a capitulation of sorts to the febrile valuations seen in private markets.

Pitchbook in its 2021 US Private Equity (PE) Outlook said: “Price multiples in both public and private markets have been elevated for some time, and we foresee no reason for this to change in 2021.

“The S&P 500 now trades at a cyclically adjusted price-to-earnings ratio (CAPE) of 33 [on Yale professor Robert Shiller’s analysis] due to a plethora of factors including monetary easing, widespread risk-on appetite, and the emergence of large growth-oriented companies that trade at high multiples of revenue, let alone earnings.

“On the private side, the median EV/Ebitda [enterprise value divided by earnings before interest, tax, depreciation and amortisation] multiple for buyouts was 12.7x through Q3 2020, tying its record high….

“Buyout funds are increasingly targeting growth-stage technology companies that tend to trade at a much higher multiple of earnings than the traditional PE target. For example, software specialist Thoma Bravo acquired UK-based cybersecurity firm Sophos for about 46x TTM [trailing 12 months] EBITDA in January 2020, an eye-popping figure that is becoming less infrequent.

“Many of these internet-native businesses have seen bottom-line improvements from the accelerated move to a digital economy during widespread lockdowns.

“Even if pricing stays the same for most businesses, a higher proportion of buyouts taking place in sectors such as software and biotech should boost the proportion of deals taking place in this pricier range.”

Private equity firms setting up growth and venture units to be eyes-and-ears on disruptive industry trends that might affect multiples and returns on their core buyout assets will be a strategic complement to the returns from the VC bets themselves.

Similarly, hedge funds, mutual funds and sovereign wealth funds (SWFs) benefit from the insights about entrepreneurs and investors but relatively few have joined up their thinking to explore how corporate venturing and intangibles are deciding between the winners and also-rans in their region and public portfolio, although there are promising signs this is starting to happen.

As Cathie Wood, CEO of fund manager Ark, wrote in the Financial Times last month: “Any company not investing aggressively in one or more of five major platforms of innovation will lose its way. In harm’s way are companies that have engineered their financial results to satisfy the short-term demands of short-sighted investors.

“Those that have leveraged their balance sheets to buy back shares and pay dividends are at particular risk as they will have less balance sheet flexibility to invest in response to the technological shift.”

K-shaped corporate venturing

The leveraged balance sheets and dividend and share buybacks limited the ability of a number of corporations to keep investing creating a K-shaped pattern in the data prepared by Kaloyan Andonov.

On the upside, a record 2,126 active corporate venturing investors in 2020 were involved in a high of 3,450 deals worth an estimated $129bn as CVCs belied fears they would be first out of the market in an economic downturn.

That the levels were reached was due to a record number of new CVCs doing their first deal and some covid-winners increasing the value and volume of deals they struck last year to take advantage of the others’ retreat. Looking at the GCV annual survey of more than 150 respondents, more than a quarter were increasing allocation to venture as a result of covid-19.

On the downside of the K were about 1,000 corporations that failed to invest last year that had done a deal in 2019.

The stretched balance sheets of some corporations allied to institutional desire to access experienced investors – last year saw a more than doubling in CVC-backed exits to $120bn almost matching money committed for the first time – has created the opportunity for an increase in spinout or independent funds. This hybrid venture fund tries to marry the competitive advantage of ties to a corporation with the financial discipline of a venture investor.

Just as institutional investors bet on multiple VC funds to build diversification, so corporations are stepping up multiple corporate venturing and innovation strategies from direct investing through in-house and more independent units to VC fund commitments.

Covid-19 accelerated the opportunities for institutional and related strategic investors to come together to back an established management team and also free up the pipeline to source investors.

In a nice summary of some VC industry changes over the past year, VC Semil Shah said: “Throughout 2020, the world of venture capital witnessed its own cauldron of change….

“AngelList unleashed Rolling Funds, a software innovation to abstract away the procedural and administrative complexity of raising and managing small venture capital funds, while empowering limited partners to move in and out of funds like SaaS [software-as-a-service] subscriptions. An evolution on AngelList’s SPV [special purpose vehicle] product, Rolling Funds also empower angel/operators to not only scale up their early-stage investments, but also to create a wider on-ramp for aspiring private investors to get their feet wet.

“[Finally], a new wave of ‘solo capitalists’ emerged as VCs, raising and deploying at scale driven by a single figurehead. Back in 2010, this type of model would be an anomaly and likely not pass institutional committees; fast-forward to 2020, and it’s one of the most intriguing disruptions to the venture capital stack.

Professional development

Recruitment and retention of quality managers in turn becomes vital to show consistency and track record. Rather than using CVC as a space to park elderly managers before retirement or rotate staff in and out every few years, the use of professional development training, such as the new online GCV Institute being launched in partnership with BMG Group to complement the existing GCV Academy, will be required.

Corporate venturing units have again been ahead of the industry in its diversity and inclusion figures with a majority of the GCV Powerlist, Rising Stars and Emerging Leaders awardees last year coming from non-white, male backgrounds.

The industry’s relative robust health reflects well both on the past generation of leaders, such as David Gilmour who wins the 2021 GCV Lifetime Achievement Award, who built the CVC platforms and trained the next generation of Rising Stars and Emerging Leaders, such as Meghan Sharp, who replaced Gilmour as global head of ventures at oil major BP late last year. But coping with covid requires a thoughtful approach to network development through the Institute aumni association and online platforms, such as GCV Connect powered by Proseeder and the GCV Digital Forums.

Damien Steel, managing partner and global head of ventures at Canada-based pension fund Omers, in his review said: “New VC talent [has been] severely hampered by lack of networking opportunities.

“This is the observation that concerns me the most for our business. Global lockdowns have severely limited the opportunity to bump into someone and hear about something interesting.

“Associates and analysts at venture funds have been hardest hit by this lack of serendipity. It will probably delay their network building by a year. The smart ones realise they are all in the same boat and are getting very comfortable at cold reach outs to other associates, and to founders, to build networks….

“While I don’t believe many of us will go back to traveling as much anytime soon, I do expect conferences start up again late next year. Personally, I miss face to face networking and look forward to returning to my favourite coffee shops!”

The focus on seed funds as a natural funnel for deal flow will continue as will the use of data.

Network effects encourages persistence and the 500+ CVCs with more than a decade’s track record are increasingly benefiting while all investors are looking at digital platforms and algorithms to help source entrepreneurs to approach. The GCV Connect powered by Proseeder deal management and connections platform will now include challenges set by corporations to identify startups who can help with their technology needs.

As Steel said: “VCs are leveraging data more than ever. Yes, we might have lost all of those important opportunities to meet founders, hear whispers about hot new companies, meet potential co-investors, but it has led to some innovative thinking in our businesses/ sector and many funds (including ours) are looking to AI [artificial intelligence] to help shortcut insight to the hottest new companies.

“Arguably this has happened far quicker as a result of the pandemic and will certainly endure. Good investors have also turned to data to help bridge the gap in diligence created by an inability to meet founders.”

Adding value in the new climate

Again, the shift to finding good entrepreneurs is coming back to value-add. The traditional support a startup looks for include capital, customers, product and service development, hiring and an exit.

Over the past year the so-called techlash of regulators and authorities limiting permission-less innovation alongside geopolitical restrictions on investments, particularly from China to India and the US, and tariffs between the US and Europe among other regions have caused entrepreneurs to look for more help in these areas. Multinationals are natural partners to understand what societies will permit in future.

The freedom to test, however, remains a primary factor in how we will find our way. The cancel culture or orthodoxy of what is permissionable to test or explore has been a chilling factor on debate and discussion. As Foreign Affairs noted: “Voters are motivated ‘less by economic self-interest than by cultural values’. Politics is ‘now close to a religion — or is intertwined with religion’.”

Physicist Richard Feynman’s eloquent lecture series in 1963 correctly identified that new ideas struggle in an environment that encourages conformity and a reliance on tradition.

This closedness caused by geopolitics and mercantilism as well as societal norms and values will have limited short-run impact on technologies developed but is more pernicious in the spread and underpinning of science at a critical time.

Finance has been the source of funding and has reached effectively zero cost fuelling the past decade’s unprecedented near-$1.5 trillion investment in innovation and technology.

As Union Square Ventures’ managing partner, Albert Wenger, in an interview with Climate Tech VC said: “We are 20 years past the Industrial Age because society is no longer held back by a scarcity of capital. Without financial constraint, we can build new machines, buildings, and infrastructure rapidly – if we put our minds to it. What we are lacking is intentionality and attention.

“The next age, which I call the Knowledge Age, is all about the scarcity of attention. And exhibit A is the climate crisis. We are not paying enough attention to it.”

The same is true in other areas. The primary drivers of human evolution have usually been new, ie cheaper and more abundant, energy forms; living longer, better lives; and more powerful and egalitarian information and communication technologies, such as 5G, AI and semiconductors and quantum computing. All these areas are increasingly in focus, according to our GCV annual survey respondents

What we choose to invest in now will decide our future but in innovation we trust.

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