Corporate Venture Capital – An open letter to South African corporates

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Introduction

I recently read two articles on corporate venture capital (CVC), which made me think about my previous article on VC in South Africa where I make no excuses for the fact that I don’t think much of the SA VC sector. The question in my mind, then, is to what extent CVC exists in this country, and is it possible that SA CVCs can help plug the VC funding gap?

Before I get to that, what, exactly, is CVC? Wikipedia defines CVC as follows:

“CVC is the investment of corporate funds directly in external startup companies. CVC is defined by the Business Dictionary as the ‘practice where a large firm takes an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise; the objective is to gain a specific competitive advantage.’

The definition of CVC often becomes clearer by explaining what it is not. An investment made through an external fund managed by a third party, even when the investment vehicle is funded by a single investing company, is not considered CVC. Most importantly, CVC is not synonymous with venture capital (VC); rather, it is a specific subset of venture capital.

In essence, it is best to think of CVC as a subset of venture capital whereby a company is investing, without using a third party investment firm, in an external start-up that it does not own.”

The SA CVC scene

Sooo, how many SA CVCs do you think a quick Google search found?

  • “No results found for “south africa corporate venture capital
  • “No results found for “south africa corporate vc”

Oh dear. Not a good start then.

I then had a look at the Southern African Venture Capital and Private Equity Association (SAVCA) members’ list to see if I could find any of our corporates listed there. Well, apart from the private equity firms of some of our banks and other financial institutions, I couldn’t find any. Nada.

The trail is not only dead and cold, it is non-existent. But hold on, I hear you say, what about the incubators and accelerators sitting within and without some of our banks. Nope, that isn’t CVC either. For sure they have their role, and bravo to them, but they are not CVCs that actually provide the necessary investment (as an example, and for no particular reason, have a look at Standard Bank’s incubator website).

Besides, where are the large SA corporates, many of whom operate on a global scale? I’m not picking on anybody, but what about the Bidvests and Naspers’ and MTNs of our little world? Is there a reason they aren’t going down the CVC route?

Let’s have a look at those articles that I recently read:

Not The Same: Understanding Corporate Venture Capital Versus Institutional VCs

CB Insights really is a great place to find lots and lots of interesting data and information. This article dated 5 February 2016 was a guest post by Rita Waite (@ritacwaite) where she gave a general background to the difference between CVC and VC. Here’s some highlights from the beginning of the article, I’ll leave the rest to you:

  • The VC ecosystem deployed $74.2bn across North America in 2015, making it the 2nd highest funding year in the last 20 years
  • In 2015 CVC participated in 17% of all North American deals, accounting for 24% of the total VC dollars deployed to VC-backed startups (compared to just a 12% deal participation in 2011)
  • This growing investor type had quickly become an alternative source of funding and support for entrepreneurs raising capital
  • Corporate VCs can be organized as an independent arm of a company or a designated investment team off their company’s balance sheet
  • The goal of a corporate VC is largely the same as an institutional VC: to invest in high-growth companies that drive value for the company
  • Technology and healthcare giants have held a venture presence in the industry for a long time. Google Ventures, Cisco Investments, Dell Ventures, Intel Capital, and Johnson & Johnson Innovation are all marquee names in the space
  • It is the recent influx of new corporate VCs, ranging from convenience stores (7-Eleven) to financial firms and car manufacturers (GM invests $500M in Lyft) that stand out as the new entrants to the market
  • Much of the growth in corporate VC activity can be attributed to the slow economic recovery, driving companies to seek alternatives to traditional R&D to boost growth
  • Corporate venture investments are a vehicle for the company to go into riskier and more disruptive R&D. Since most invest off the balance sheet, it gives the company more scale in R&D than just its P&L  would allow —  while providing companies with access to market and talent not otherwise available

The Great Rise of Corporates for Startup Financing with a Value-ad

Then a few days later this article appeared, penned by Penny Schiffer (@pennyschiffer) from Swisscom Ventures where she shared some observations made by her colleague, Dominique Megret at the Global Corporate Venturing and Innovation Summit, which I have taken the liberty of repeating below:

Quantity: More CVC units, more money, more deals

Corporate VCs are the fastest growing segment in venture capital (VC):

  • From roughly 500 CVC units in 2011 their number increased 3X to over 1,500 in 2015.
  • Over the same period, the number of deals increased from 763 to 1,841 last year.
  • Due to bigger deal size, the money invested increased even more during this time: While CVCs invested USD 18bn in 2011 in total, they did an impressive USD 75bn investments in 2015.

CVCs are becoming ever more important for startup financing taking a growing share of VC financing: As traditional VC funds have an increasingly hard time to raise capital (due to lack of performance outside of the top 20 Silicon Valley funds), CVCs now account for 17% of dollars invested, and there are more than 10,000 professionals working in corporate venturing globally.

Ambition: Financial performance in addition to strategic value

Typically, a corporate would start a corporate venturing activity in order to combine investing into startups with bringing strategic value into the mother company. This strategic value would often be driven by technology scouting and supported by a positive PR effect. For a startup this strategic benefit would translate into a strong interest from the corporate to collaborate.

As CVC units professionalize over time, many of them can prove that the financial return out of the investments is comparable to that of a typical early-stage VC fund. So their implicit mandate might slightly expand: In addition to strategic value, many CVCs are now expected to be financially successful, too.

Evolving mandate of a CVC unit

Why is this good for startups? In the early days, corporate venture capital would not necessarily mean dealing with a professional VC organization. Today, startups can expect from an established CVC that they combine a strategic mandate (Tech scouting and PR) with a strong objective to deliver financial returns and/or create growth options for the parent company. This means stronger financial competence and maturity of organizations: CVCs work more like VCs but with a strategic angle.

Scope: From core business to adjacent and remote areas

In many cases, a CVC unit would focus on the industries and technologies they know best—and in which they can add most value: the core business. Over time, CVC can be expanding into adjacent areas or even into more remote areas. This development may be driven by a portfolio view (i.e., balancing the portfolio by investing into other areas than the core) or a corporate’s ambition to generate growth in new areas.

Expansion of investment focus

Conclusion: Corporate Venturing may be seen as a VC-like source of equity with a value add

CVCs have become a relevant source of financing for startups with their unique ability to contribute strategic value leveraging the corporate parent: Corporate investment teams dedicate time to introducing the startups to the relevant technology platforms or commercial channels, as well as to other industry players worldwide.

We believe that it needs a long-term oriented approach to ensure successful collaboration between a startup and a corporate. CVC act as facilitators of that process.

Conclusion

My concerns re the SA VC scene have been set out before. This little bit of research made me even more concerned. Why is it that SA corporates are just not in the CVC game, at all? Is it red tape or some other direct or indirect fault of the SA government? Well, the SA Chamber of Commerce Business Confidence Index “is at its lowest since 1993”. There is enough anecdotal evidence and commentary in the press pointing a lot of fingers at our current government to make it an easy scapegoat.

This is further not helped, in any way shape or form, not even in the slightest, tiniest iota, by the government’s insistence on the maintenance of exchange controls and making it impossible to export SA developed IP. While this is a topic all on its own, I can confirm we are seeing many South African individuals and companies making every effort to develop IP offshore to escape this nonsense.

So, on the whole then, government is not making it easy for the SA CVC scene to take off. But, I have to ask the SA corporates themselves – is it really so bad that you can’t or won’t think about CVC? I can’t believe it is, despite the very real concerns we all have. I put it to you, Mr SA Corporate, that maybe the government also has a point when it complains that business is not doing enough to build SA. And don’t give me SETA and CSI programs, they aren’t enough and you (generally) don’t manage them well enough.

Prove me wrong, please…

Carpe diem!

 

About vcmaven

I am an experienced investment banker. I provide investment banking advice and access to funding to companies and entrepreneurs
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3 Responses to Corporate Venture Capital – An open letter to South African corporates

  1. james mawson says:

    Naspers is possibly the world’s most successful CVC – early stakes in Tencent, Mail.ru, and a host of others in India, Brazil, etc. MTN uses UK-based VC firm Amadeus to invest in startups through a dedicated fund and did its first African deal a few weeks back.

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    • vcmaven says:

      Thanks James

      You could well be right about Naspers, but interesting that the investments you mention are all outside SA?

      Yes, I recently saw the news about Amadeus and MTN, thank you. We are trying to get into a dialogue with Amadeus on something as I write this.

      Ernest

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  2. Pingback: The SA VC model is broken…. | vcmaven@TaitaCap

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