As traditional venture capital all over the world seems headed for extinction, a new breed of risk capital is flourishing. Flourishing everywhere, it seems, apart from New Zealand.
Money allocated to corporate venturing – that’s venture capital invested by corporations – hit record levels in 2011, according to industry magazine Global Corporate Venturing. The top 10 funds alone amassed more than US$8 billion, and committed corporate investors include some of the biggest names in business: Unilever, GE, Intel, and Google, to name just a few.
“The venture capital market is suffering at the moment and corporate venture capital is filling the gap,” says Andre Gaulle, principal of Corven Networks, a UK-based corporate venturing consultancy.
Might we see Kiwi corporations doing the same thing here in New Zealand?
Rewind to the heady dotcom days of 1999 when venture capitalists were enjoying spectacular returns (on paper at least), and corporations were left feeling like Cinderella: stuck at home scrubbing the floor while her sisters partied it up at the ball. So they started setting up venture units or giving cash to external fund managers to invest in promising ventures.
Richard Palmer, a Kiwi who found himself heading up the venturing unit of French multi-national telco, Orange S.A., had a fairly typical experience. “It was an environment where you were always looking for the next big thing – cash was freely available.” Orange was doubling in size every three months and venturing was a way to keep the party going. But then came the crash and just as quickly as it had begun, the first boom in corporate venturing went the same way as the dotcom bubble.
That pop echoed here in New Zealand too, only with a slight lag. TMT Ventures, the ICT-focused $85-million fund backed by Telecom, Alcatel Lucent and Ericsson, started looking for deals in 2001. Carter Holt and Fletcher Building set up smaller funds around the same time (although they were intended to ‘spin out’ internally-generated intellectual property rather than take stakes in stand-alone entities); Carter Holt and Fletcher Building’s efforts puttered out years ago; and TMT Ventures limps on, though no one wants to talk on the record about how it’s going.
The problem with corporate venturing, says Palmer, drawing on his experience from Orange, is that they’re set up in good times but shut down as soon as the market turns sour. He returned home to take up a role at the New Zealand Venture Investment Fund and saw exactly the same situation here as he had in Europe and the US: corporates getting in and out of venturing en masse and perpetuating the cycle of boom and bust that has dogged corporate venturing since its inception in the 1960s.
This time, however, may be different. According to a 2012 study by Boston Consulting Group, a management consulting firm, the average lifetime of consumer industry CVC units has lengthened to 4.9 years in 2012 from 1.5 in 2002. Great news for startups in Silicon Valley, London, or Berlin, but those in New Zealand have more chance of seeing a moa than a corporate investor knocking on their door.
Yes, there are occasional sightings. Meridian had success with a spinout, Powershop, which topped Deloitte’s list of the 50 fastest growing companies in 2011; NZ Post’s venturing unit was identified by Global Corporate Venturing magazine as one of the top performing units in the logistics and supply chain sector. But these successes are examples of corporates investing internally in spinout ventures rather than externally in pre-existing ventures; in other words, they’re not much help if you’re a cash-strapped start up searching for water in the growth capital desert.
Compare this to the international trend for internally managed funds that take stakes in start ups for strategic as much as financial reasons. In the case of Samsung, it’s a genuine strategic instrument – look at its recent investments and it’s clear it's staking their future on clean tech and med tech.
It’s not just Samsung looking out rather than in. In his book Open Innovation in Action, How to be strategic in the search for new sources of value, Andrew Gaulle describes how companies are increasingly searching for innovation outside their own businesses. They accept, he argues, that the world is moving too fast for any one company to cover all the corners from which tomorrow’s killer app might spring. So taking stakes in startups provides them with a window on the hottest innovations and an option to acquire them further down the track.
Palmer agrees, and thinks corporate venturing works best when “it is just another part of their R&D spend”. Take the venturing unit of networking equipment giant Cisco Systems: it’s been a touchstone venture capital fund for more than 20 years now. “It’s a core part of their culture and their recipe for success,” Palmer says.
Corporate venture capital can bring more benefits to a start up than just a cash injection. There’s the kudos of being associated with a successful brand, and the access this brings to channels, customers, specialist skills, facilities, and equipment. The only downside, Gaulle notes, is that startups do need to manage the risk of investment with strings attached, such as exclusivity. Such conditions can compromise a startup’s ability to do business with other companies as well as limit exit options when the time comes.
That said, if both sides have much to gain, why have so few New Zealand corporates and startups rushed to get hitched?
Well, one rather big problem is the lack of corporate capital. At July 31, 2012, the total value of all domestic companies on the NZX was only US$35.3 billion (compared to US$912.5 billion for the ASX). And the few corporates New Zealand does have tend not to be the Samsungs or the Intels of this world – as Brian Gaynor noted in a New Zealand Herald article last year, there are now seven former government-owned or local-authority-owned companies among the 12 largest NZX companies.
Another problem is a lack of local expertise. Corporate venturing is a skill – and one that is rare in this country. A good corporate venture team, according to Palmer, will have a mix of company insiders and experienced venture capitalists – ideally they’ll be people who’ve worked in corporate venturing rather traditional VC. Asked why he didn’t apply his experiences from Orange and head up a venturing unit in this country, Palmer said: “There weren’t any.”
Even if the prospects for local corporate venturing aren’t good, there’s no reason why local startups can’t seek investment from corporations offshore. After all, most corporates have a global footprint and are investing for strategic reasons, so they’re more willing to invest outside of their traditional markets than venture capitalists. Just ask biofuel pioneer LanzaTech, which last year attracted investment from Malaysia-based Petronas Technology Ventures as part of a US$55.8 million funding round.
Maybe there is hope for local startups to benefit from the global corporate venturing boom. At the very least they need to be thinking of corporate venture capital when it comes to fundraising. Because, as the BCG report concludes, “Corporate venture capital investing is back in style, and this time it’s here to stay.”
Carl Beck has worked at, invested in, and exited from a number of ventures and sometimes writes about them too