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The State of Corporate Venture Capital
Today: No such thing as killing two birds with one stone; ‘Thumbs Up/Down’ for last week.
The Agenda 👇
Is CVC doomed or is it thriving?
Evernote (soon) reborn 😮
Fundraising as an engagement tool
Daniel Ek funding moonshots
Trump will lose, unless…
Ending article 230
TikTok: We’re all out of popcorn
We all know the popular saying about killing two birds with one stone. The problem is, it rarely works. The engineer in me always perks up when I hear someone bragging about one measure that might solve two (or more) problems at once. But my years of experience with policymaking have rendered me skeptical: I’ve seen too many people tinkering with the tax system in hopes of solving problems such as reducing the inequality gap, promoting green energy, or creating more jobs.
I tend to always say that the tax system has one primary goal: funding the government. Other goals should be pursued separately: to reduce inequalities, build a better social insurance system; to tackle climate change, implement a sound industrial policy; and to create more jobs, radically upgrade the proximity services industry.
The idea that you can’t really kill two birds with one stone explains why corporate venture capital (CVC) is such a mixed bag.
A few weeks ago, I was listening to the very interesting conversation below between Thomas Kristensen, a principal at LGT Capital Partners (an alternative asset manager with $60B under management), and Carlos Espinal of London-based accelerator Seedcamp. [Disclaimer: I’ve known Thomas since he led LGT’s investment in my firm The Family two years ago.]
Here’s Thomas about why LGT Capital Partners’s clients are interested in venture capital:
You get the opportunity for outsized returns, if you do well. You also get an insight into what type of business models are being disrupted, and what new technologies are emerging to threaten your existing business models and businesses. And in general, you probably get a little bit more exposure to what you might call a technology trend or an innovation trend. Most private equity firms have rather limited technology exposure, so if you want to include in your portfolio exposure to really new innovation, venture capital is typically the best way to do that.
Indeed, as I remarked on Twitter a few days ago, this argument is one we hear a lot in the CVC world. Supposedly, large corporations allocate small amounts of money to venture capital investments because they’re interested not only in the “outsized returns”, but also in the intel that being present in the cap table of an innovative company supposedly provides.
And you can see why my personal alarm is ringing here. When Thomas mentions a plurality of objectives, it makes sense: without a doubt, his job at LGT is to deploy capital, mitigate risks, and generate returns, so that’s the primary goal—and if his clients can collect some intelligence in passing, well, that’s a nice addition. A corporation, on the other hand, is supposed to make money via its core business, which would leave CVC with only one residual goal: gathering intelligence about these mysterious “technology trends” 🤔
Yet is that really what CVC managers think, that their job is not to make money but to collect intel? At the very least, that’s exactly how VCs are pitching their next fund to potential corporate LPs: “As an LP in our fund, we’ll brief you every week on the latest technology trends” 😅 Alas this approach leaves most of those corporates in the danger zone of not knowing exactly what goal they’re pursuing. Here’s what Fred Wilson of Union Square Ventures, a longtime CVC sceptic, wrote back in 2008:
[Here’s] the big problem with corporate structures for venture investing. One time gains in corporations don’t make anyone rich. Wall Street ignores the gain. The company can’t put the gain into the pocket of its management. So it just doesn’t matter very much.
Corporations have other motives for doing venture capital. But those motives aren’t particularly well aligned with the founders, managers, and financial investors. So there’s always tension in a corporate venture investment and it’s not always healthy.
As for me, my experience with large companies makes me skeptical about the “collecting intel” argument. When you're outside the business world, you have this impression of it being somewhere where nothing is left to chance, people working long hours getting the details, collecting and processing information before they reach business decisions.
The reality, as you probably know, is more mundane. A large company is a complex machine that's much bigger than the sum of its parts. Experience compounds and processes are well-oiled, which means that information flows rather well regardless of the personal skills and clout of the individuals that work there—provided, of course, that it serves the core business!
And that’s the problem with CVC. More often than not, it’s a relatively new thing within a large corporate organization, which means that there isn’t an experience curve yet on collecting and processing intel from shares taken in innovative ventures. Some manager, having just led a new investment, might be working hard at gathering and processing intel up the stream. But for lack of familiarity with those new things that are happening elsewhere, the info doesn’t really make its way to the big decision makers on the inside—even less so if they’re at the top of the organization.
As a result, the primary goal of collecting intel is often lost along the way, and with frequent personnel turnover at every level of the organization, it always ends with someone asking loudly if that weird CVC arm over there is making the company any money at all. And it all goes downhill from there.
From a corporate perspective, either the CVC arm is generating high returns and the successful managing team, fed up with being ignored and poorly paid relative to the money they’re bringing in, will ask to be spun off. Or it's not that successful and at some point someone will order the entity to be liquidated or sold.
From a startup perspective, let's just say CVC investors are tier-2 by design, because for a startup having Incumbent A in the cap table almost instantly rules out being acquired by Incumbent B down the road. In turn, this narrowing of exit options will complicate further fundraising and growth. Also, would you pick an investor that’s there to gather intel rather than returns?
If you follow this line of reasoning (CVC falls victim to conflicting goals and encounters problems from both the LP and the startup perspectives), a logical ending to the story would be that at some point CVC will disappear altogether:
It was necessary for spearheading the startup ecosystem. In the absence of proper venture capitalists, corporate investors in the early days provided the necessary capital for the first generation of tech entrepreneurs. You could say the first CVC deal was Fairchild Camera & Instrument investing in Robert Noyce’s Traitorous Eight to found Fairchild Semiconductor. But as then-investment banker Arthur Rock has explained many times since, it was for lack of better options (or any other option, for that matter).
Once the rise of venture capital firms made corporate investors less critical, it was still customary to practice CVC at the margin. Several factors were at work, like excess cash (“What do we do with all this money on our balance sheet? Why not start a CVC arm?”), the fear of disruption (“Maybe if we invest in up-and-coming competitors, they’ll be nicer to us”), and the idea that it takes investing to gather intelligence about what’s going on in the world, your geography, or your industry. In short: a bonus, not a necessity.
And yet, what is actually happening is that CVC seems to be on the rise! It can be seen in various dimensions:
A thorough writer about CVC is Eze Vidra of Remagine Ventures, a firm that counts several corporate investors as LPs. Have a look at The takeover of Corporate Venture Capital.
Tech companies are launching their own CVC arms! Google was a pioneer in that regard, with the launch of Google Ventures (later GV) in 2009. Have a look at Dan Primack’s Scoop: Inside Google's Venture Capital "Machine". Then, more recently, we’ve heard about several prominent players in the tech industry joining the party: Amazon (with a climate focus), Stripe, Facebook, Wix (another article by Eze), and Carta.
In a way, Western tech companies are only catching up on their Chinese counterparts. In China, large tech companies dominate the local VC industry, as detailed in this 2018 article by The Economist: Alibaba and Tencent have become China’s most formidable investors.
What’s the rationale for tech companies launching venture arms? I see several interesting motives:
Some of them clearly have excess cash. As Peter Thiel once said (in his famous “smackdown” with Eric Schmidt), “the day you issue a dividend, you’re admitting that you’re no longer a technology company”. If they want to preserve their image as the most innovative companies out there, giants like Google and Facebook had better reinvest their cash via a CVC arm rather than starting to pay dividends to their shareholders.
Others might want to help fund an ecosystem of friendly startups that, in time, could become a strategic lever to expand the scale and scope of their own operations. That’s clearly the rationale behind Stripe, Wix and Carta doing CVC investments.
One thing we can count on is that these tech companies, being tech companies, will eventually reveal CVC done right—not “we have to appear as if we’re doing something about this thing called tech”, but rather as part of a strategy of continuously reinventing and challenging themselves, in the mood of Jeff Bezos frequently reminding everyone that it’s still Day One at Amazon. I actually think acquiring startups is a better approach to that effect than having a CVC arm:
Acquiring startups also matters for larger tech companies, and indeed incumbents as a whole. It’s the way for them to snatch up key value held in startups: the technical talent, the sense of urgency, the radical model of execution, the intimate knowledge of the market, and the sustained growth that is so critical for surviving in the evermore competitive Entrepreneurial Age.
Here’s another hypothesis, however: that we’re quite late in the process (everyone is into CVC these days), and maybe it doesn’t make sense for a corporation to invest in startups anymore. About that, Venkatesh Rao just sent a very interesting issue of his Breaking smart newsletter that suggests we’re about to switch generations in management—going from the fourth generation of what he calls “the entrepreneurial era” to something else in which CVC could take a back seat:
We can already predict that fifth-generation business will look at least partly like fourth-generation warfare, 2003-20. In other words, like Syria or Ukraine. Just as non-state actors shape fourth-generation warfare, non-business entities will shape fifth-generation business. This includes culture war groups fighting for social justice, climate action nonprofits, governments administering post-Covid recovery funds, and so on.
Quite a lot to ponder! What do you think will be the consequences for corporate venture capital? Also, do you know of best practices when it comes to CVC?
😀 Evernote. As you know I’m a heavy user, having clipped 42k+ articles in my personal database since I started using it in 2012. My assumption has long been that the company was undergoing a slow death, and so I was delighted to read this: Evernote’s CEO on the company’s long, tricky journey to fix itself.
🙂 Our portfolio company Fairmint just launched their new product to enable business owners to fundraise on a rolling basis while turning their company's equity into a compelling community engagement tool. (Here’s my past article about Capitalism Today: Customers as Shareholders.)
😏 Daniel Ek, the founder and CEO of Spotify, just announced he was committing €1B of his personal fortune to funding “moonshots” in Europe. It’s been universally acclaimed as good news for Europe, which I agree with. However, I’m skeptical about the whole deeptech bias.
😐 Peter Zeihan, author of Disunited Nations, just sent a newsletter with strong opinions about the imminent US presidential election. In short: Trump is f***ed, unless Biden’s age shows in the debate and voters have second thoughts about trusting such an old man with the presidency.
😒 More fragmentation: the limited liability of online service providers has long been a cornerstone of Internet regulation worldwide. But now the country that invented it (spoiler: it’s the US) is backing down, which creates an opening for every nation to get creative with regulating online speech.
😖 TikTok. As Connie Loizos wrote in StrictlyVC: “Drops popcorn, falls asleep”. That’s because the end of the Trump/TikTok saga is nowhere in sight. Have a look at Justice Department opposes TikTok’s request for injunction in new filing. (Also Facebook played a role, until they lost control of the whole thing.)
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From Normandy, France 🇫🇷