Originally posted on LinkedIn October, 2017
Fred Wilson of Union Square Ventures hasn’t been shy with his comment that “corporate money is dumb money”. With minimal success stories told in the corporate venture capital (“CVC”) model; this critique has sparked conversations among the business community, and made its ways to the shores of Asia at the recent PE-VC Summit.
CVC on an up-trend: including Asia
As reported in KPMG’s venture pulse report, the number of global active corporate investors has tripled between 2010 to 2016, with 75 of the Fortune 100 taking an active role in corporate venturing. CB Insights further confirms that a considerable increase has been seen in corporate venture investment participation, with the first half in 2017 showing corporate VCs contributing some $13.3Bn across 798 deals. In the Asian tech context, corporates now contribute some 40% of capital, financing entrepreneurship to a large extent.
But “Corporations Have Never Been Good in Corporate Investing”
Wilson argues that corporations should buy the asset and not waste money on minority investments with a lack of control scenario. He bluntly states that the startups that agree to “dealing with the devil” bank on corporates overpaying; or simply can’t raise money anywhere else.
Picture by DealStreetAsia: (L-R)Ayala Corporation’s Head of Business Development & Innovation, Michael Montelibano,
To this, my panel speaks almost in unison in that despite the bad reputation corporates have (think: the dinosaur image), as discussed at length with Intel Capital and GE Ventures leading the pack, organizations continue to benefit from having their “ears on the ground” on new innovation, enhancing their core business revenues by creating new sources of value, viewed with a long-term upside creation lens. Hardless shares through the 7 years journey of building Singtel Innov8 that he has seen true value – where the corporation gets the speed, agility and creativity of the startup whilst the startup, in turn, gets the scale, insight, and channels available to a large organization.
But of course, there is no shortage of challenges, especially where metrics for success are still pre-dominantly built to follow the corporate. Similar to my past experience in Sime Darby, Montelibano shares honestly that “An issue we grapple with is running our health tech business which is ‘very VC’ within our healthcare hold co which is very corporate. This is where there is sometimes a clash in terms of corporate governance, return expectations.”
Abdullah adds that corporates need to move beyond a minority investment model to that of a “venture-builder” where Axiata Digital continues to actively build new companies opportunistically. Whilst investing in areas core or adjacent to the corporate parent’s interest is an age-old requirement, the disruption of business models mean that this may stretch beyond what would be expected decades ago (think: ride-hailing apps for auto-manufacturers). CVCs should scan the broad landscape “beyond typical lines of sight”, more like a lighthouse, and building solutions on future trends.
So, now what?
It remains to be seen how firms like Ayala Corporation, and other older corporates in Asia will continue to disprove Wilson’s judgments and critics’ views that the crash of CVC is looming. At the very least, a consistent takeaway is that structuring a CVC for success, i.e a separate entity with an allocated fund (not from the balance sheet), a separate and robust decision-making and approval process, and importantly continued commitment from management to see through returns would be key.
Our brick and mortar businesses are being disrupted every day, and perhaps, the view of R&D in the new world mandates CVC as the backbone for innovation growth.