Corporate venturing in a turbulent age

A fascinating feature courtesy of Tony Askew, co-founder and partner of REV Venture Partners, who spoke with Global Corporate Venturing about how the media industry has evolved since the corporate venturing unit was launched in 2000. Insights provided by Askew included how its co-investments with In-Q-Tel have helped the unit, while he also explained the group’s aim was to stay three to seven years ahead of everyone else.

But while being ahead of others is an advantage, this only works if the unit and corporation can last this intervening period to them reap the benefits. If the parent has to go into reverse and seek sources of capital from its operations, then the longer-term play of CVC can become vulnerable to an asset sale.

Many corporate venturing units, however, have been increasing assets under management over the past decade as corporations allocate more capital to the area and more deals are generally struck than exited in any given year. This can create a challenge in that it is of a size that warrants a potential sale if the parent needs cash but too large to meaningfully be acquired in the secondaries market.

General Electric, for example, has this year considered spinning out its corporate venturing operation, GE Ventures, to sell its portfolio consisting of stakes in more than 100 companies. Chip and data company Intel had reviewed its portfolio a few years earlier after Wendell Brooks took over but decided the assets were best kept and sold on deal-by-deal basis.

With hundreds of millions of dollars invested across a range of sectors that had been relevant for GE before the healthcare-to-industrials conglomerate started to be broken up it is a prize asset of portfolio companies.

But buyers of secondaries fall into two types of camps, those wanting to back an established team with a good track record, such as Harbourvest’s commitment to Telstra Ventures in Australia last year, or those looking to buy assets at a discount to present value. In the firesales after the dot.com crash from 2001, these discounts could be steep and sometimes funded with vendor loan notes just to remove a liability from the balance sheet.

GE Ventures’ team is already starting to break up, with a range of talented investors starting to move to other firms, that limits the first option but finding a deal that meets buyer and seller’s views on valuations is tricky.

GE Ventures, while finding new deals hard, is still sensibly doing follow-on investments, such as telegenetics firm Genome Medical’s $23m series B round this month, to retain stakes and support entrepreneurs whose business had nothing to do with financial issues in the power unit of a large corporation.

Still, if GE as a storied corporation around for more than 125 years can be caught out in buoyant economic conditions then if or when a downturn does strike or other units are caught by disruption being able to work through an generalised exit strategy will become important.

In innovation, there are often post-mortem parties for ideas that were tried and failed as a way of destigmatising failure. These are good but pre-mortem analysis of factors that can cause failure are even better.

The challenge is even if the CVC units recognise the issues, such as balance sheet investing without committed capital, management in large firms can be overconfident in their own prowess and avoid putting in place sensible safety measures that can limit damage to their CVC teams, portfolio companies and their own balance sheets if they cannot exit privately-held, illiquid assets when they want. Dogmatism on such points is often the first signal of a lack of flexibility and innovation that can catch out the parent in other ways.

GE Ventures’ current travails are the warning sign as this age of turbulence begins that the industry generally needs to do more to be ready for a generalised downturn.