CVC2.0 Demonstrating Added Value to the Corporate Bottom Line

Transcription

1 CVC2.0 Demonstrating Added Value to the Corporate Bottom Line Jaideep Raje Managing Consultant Lux Research June 2, 2016

2 Agenda CVC1.0 State of the Union So, why change? Reflections on CVC2.0 2

3 Contents CVC1.0 State of the Union So, why change? Reflections on CVC2.0 3

4 Minnows no more: CVC is ascendant in the entrepreneurial ecosystem $40 $35 $30 Since 2010 CVC $ 31% CAGR CVC deal count 16% CAGR 1,018 1,204 1,408 1,299 1,600 1,400 1,200 $ ,000 $20 $ $ $5 $0 $6 $8 $11 $9 $8 $9 $13 $12 $16 $30 $37 $ * Capital Invested ($B) Deal Count *As of 5/25/2016; Source: PitchBook 4

5 Minnows no more: CVC is ascendant in the entrepreneurial ecosystem 25.0% 20.0% 15.0% 13.2% U.S. CVC activity 23.5% 20.6% Over the past 20 quarters, the CVC participation in U.S. VC deals has risen roughly 12% per quarter 10.0% 5.0% 0.0% 6.7% 2011 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q1 % of Deals with CVC Involvement % of Dollars from CVCs CVC groups participated in 23.5% of deals and accounted for 20.6% of dollars deployed in first quarter of 2016 in the U.S. Source: PwC/NVCA MoneyTree Report, Data: Thomson Reuters 5

6 Minnows no more: CVC outstrips VC in Industrial/Energy and Biotech focus Retailing/Distribution 3% Consumer Products and Services 3% Medical Devices and Equipment 3% Financial Services 4% IT Services 5% Computers and Peripherals 2% Media and Entertainment 10% Semiconductors 1% Healthcare Services 1% Telecommunications 1% Software 33% Total U.S. CVC in 2015 $7.8 billion Industrial/Energy 16% Biotechnology 17% Source: PwC/NVCA MoneyTree Report, Data: Thomson Reuters 6

7 Minnows no more: CVC is spreading beyond the usual suspects Traditional powerhouses (top 10 most active CVCs since 2010) 1. Intel Capital (395) 2. GV (314) 3. Qualcomm Ventures (189) 4. Salesforce Ventures (141) 5. SoftBank Capital (115) 6. Caixa Capital Risc (109) T-7. GE Ventures (95) T-7. Comcast Ventures (95) 9. Cisco Investments (94) 10. Samsung Venture Investment (93) In 2015, 264 CVCs completed at least 1 deal (up 91% from 138 in 2005) Source: PitchBook 7

8 Minnows no more: Bigger deals, bigger press Global CVC Activity, $60.0 $51.9 $50.0 $40.0 $30.0 $32.1 $20.0 $10.0 $ Capital Invested Mean ($million) Pre-money Valuation Median ($million) 8

9 Minnows no more: CVC exits are keeping pace with investment activity $ $ $35 $30 $25 $ $15 $10 $5 $ $11 $12 $19 $10 $7 $12 $33 $15 $20 $39 $23 $ * Capital Invested ($B) Deal Count *As of 5/25/2016; Source: PitchBook 9

10 Contents CVC1.0 State of the Union So, why change? Reflections on CVC2.0 10

11 Glib dismissal of CVCs as dumb money is passé, but some criticism is still legitimate If corporates are getting back in the market, it s a market top! They are usually not great market timers in that they get in at the top, then get frustrated and sell at the bottom. That is the historical pattern of most corporate VCs. CVCs are notoriously fickle either its strategy du jour or change of the guard. Its misalignment of financial interest or lack of accountability at times, CVC even invest in competing portfolio companies to gain access to technologies. 11

12 Let s take a look at CVCs raison d être 12

13 Lux-IBF CVC Survey: All respondents emphasize strategic over financial goals Most corporate venturing organizations have both financial goals and strategic goals. How would you rate the relative importance of each for your firm? Strategic goals are paramount (though of course we can't just lose money) Strategic goals are primary, financial goals secondary Roughly even balance between financial and strategic goals Financial goals are primary, strategic goals secondary Financial goals are paramount n =40 0% 5% 10% 15% 20% 25% 30% 35% Percent of responses Source: Lux Research and International Business Forum s Future of Corporate Venturing Survey,

14 Timeframe for deal impact spans a wide range, but most commonly within 2-5 years When do you expect your deals to have a commercial impact on the business? 60% 50% Estimated total percent of deals: 15% 23% 25% 21% 17% 40% 30% 20% 10% 0% Next 18 months Next 2-3 years Next 3-5 years Next 5-10 years More than 10 years n =40 Almost all deals Most deals Some deals Almost no deals Source: Lux Research and International Business Forum s Future of Corporate Venturing Survey,

15 CVC s value in providing strategic growth options to the parent company is suspect In its first 5 years of prolific investing, GV has only sold 2 portfolio companies to Alphabet (ka Google) Identical to the number of companies it has sold to Yahoo and Cisco Systems Intel Capital has only sold 7 of its 259 exits to Intel Sold same number to Cisco Systems and very similar number to Microsoft Johnson & Johnson Development Corporation (JJDC) has only exited two portfolio companies to Johnson & Johnson (while selling several to numerous other major pharmaceutical and medical devices companies, including competitors, such as AztraZeneca, Amgen, Merck, Medtronic and Pfizer) Average rate of successful exits to a corporate VC investor s parent is 3% CVC is a terrible incubator 15

16 How do you measure impact on corporate strategy? CVC see more JDAs, fewer exits and acquisitions How often has your venturing program seen the following positive outcomes, compared to expectations? Successful exit of portfolio company Acquisitions of promising start-up companies Promising joint R&D or JDAs Products commercialized with portfolio companies Why do you need a CVC unit for a JDA? Strategic decision about growth opportunities Entering new businesses or product categories Hiring of talent n =40 Source: Lux Research and International Business Forum s Future of Corporate Venturing Survey, Much less often than expected About as often as expected Much more often than expected 16

17 A fickle partner? CVCs might be acting against self-interest 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, ,915 55% 60% 1,056 66% % 66% Total Deals Exit % Exit % by Number of Follow-ons Looking at the all pre-2010 CVC investments: CVCs only invest once in about 73% of cases, despite the likelihood of exit improving with follow-on investments Of these 1-time investments, nearly 2/3 rd have been in the 1 st or 2 nd round 80% 70% 60% 50% 40% 30% 20% 10% 0% 1,600 1,400 1,200 1, % 57% 59% 63% 63% 66% 65% 70% 60% 50% 40% 30% 20% 10% 0 0% Successful Exit Unsuccessful Exit Success Percent Exit % by Entrance Round *As of 5/25/2016; Source: PitchBook 17

18 A fickle partner? Corporate culture = flighty CVC CVCs come in with about a decade of experience, and stay around 5 years and then move out, not up How long do individuals at your company typically spend in a CVC role? What is the typical subsequent career path for individuals after they leave CVC roles? Percent of responses 60% 50% 40% 30% 20% 10% 0% < >5 yrs n =36 R&D management Product / line of business management Strategic planning and finance Leaving the company Other Source: Lux Research and International Business Forum s Future of Corporate Venturing Survey, % 20% 40% 60% Percent of respondents 18

19 CVC1.0 Here s what s broken The design of CVC today dooms the average CVC unit to the perilous fate of the 3 Ms: Missed targets Missed opportunities Mad partners 19

20 Contents CVC1.0 State of the Union So, why change? Reflections on CVC2.0 20

21 CVC is ascendant, but Source: <link, link, link> 21

22 A sustainable CVC unit: Where does venturing fit in the portfolio of business growth drivers? New business Novelty Corporate venturing? M&A Core/ familiar business R&D Tech scouting Business development Early-stage Lab Development stage Mature Scale 22

23 CVC is fundamentally attractive to entrepreneurs Source: VC characteristics valued by entrepreneurs (Upfront Ventures) 23

24 The innovation funding ecosystem is evolving Angels Institutional VC Corporate venturing Growth equity Government funding Innovation Public markets Impact investing Superangels Incubators Micro-VC and emerging venture managers Crowdfunding Innovation competitions Sovereign wealth and direct investment LPs 24

25 CVCs are decidedly skeptical on other funding sources 100% 80% 60% 40% 20% 0% In the next 5 years, what will be the most important sources of funding for emerging technologies relevant to your company? n = 38 High importance Moderate importance Low importance Not relevant Source: Lux Research and International Business Forum s Future of Corporate Venturing Survey,

26 So, here s what CVC2.0 should look like Focus only on a clear strategic goal: Find and de-risk early-stage, new business opportunities Build connections for the CVC unit into the company that allow it to thrive New business Novelty Core/ familiar business Early-stage Lab Corporate venturing? R&D Tech scouting Development stage M&A Business development Mature Scale Percent of responses How long do individuals at your company typically spend in a CVC role? 60% 50% 40% 30% 20% 10% 0% < >5 yrs n =36 What is the typical subsequent career path for individuals after they leave CVC roles? R&D management Product / line of business management Strategic planning and finance Leaving the company Other 0% 20% 40% 60% Percent of respondents 26

27 So, here s what CVC2.0 should look like Do the obvious stuff consistently: Align corporate venturing strategy with your overall corporate strategy and strategic foresight to solve the evergreen problems of your customers (of today and tomorrow) Invest early, stick around, and build a mechanism to see it through to the exit Ignore the hype If everyone else is already funding it, you probably shouldn t! Take enough advantage of what you can do that s different. If a different form of nimble capital can get the job done, your money is likely better spent elsewhere 27

28 Thank you Jaideep Raje Managing Lux Research B.V. De Boelelaan 32, 1083 HJ Amsterdam, The Netherlands