What is normal? Early in 2021, when discussing becoming the Chair of the Global Corporate Venturing Leadership Society Advisory Board with James Mawson, I thought that my tenure of giving back to our community would happen during a return to “normal” in the venture capital industry. But in the months since then, as with so many other areas of public and private life, anticipation of a return to “normal” has faded, replaced with an expectation of a “new normal.”
The pandemic surprised us all in so many ways, including by providing strong tailwinds to the venture capital industry. Similar to other significant macro events such as the dot com bubble or 2008 financial crisis, the subsequent time period was ripe with new innovation in technology and business models. However, unlike what happened during and after those events, the pandemic period led to record valuations and record capital invested and committed. During this period, we also saw tremendous innovation in the nature of venture capital itself.
To focus on the role of finance in innovation is sometimes seen as a bit dry or academic, certainly compared to the often-dramatic founder stories of starting a business in a garage and battling the luddites on the path to unicorn status; or compared to the elation and public recognition that comes from the announcement of a new industry-transforming partnership or acquisition involving a portfolio company and a corporate parent. And some might even suggest the topic to be irrelevant for the purpose of corporate venture capitalists.
I beg to differ. When talking to colleagues internally or to senior executives of other corporations about how to understand and be a good partner to startups, I have found the most impactful eye-opening theme to emphasize is that venture capital is an asset class. The elements of this asset class drive the incentives, behaviours, timelines, and expectations of all the players involved.
The game of venture capital has been the backbone of innovation financing for the last 60+ years. Corporations joined the game en masse more recently – let us be generous and say during the past 15 years. To participate, we play by the same playbook, deal structures and rules of venture capital as an asset class.
Thus, to have longevity and access to the best companies with potential to be the best partners for our parents, we must understand how to harness the game for generating financial returns as well as strategic returns. And we need to understand how the changing nature of venture capital as an asset class will change the game for all of us.
When we as CVC’s get together at conferences, such as September’s wonderful back-in-person GCV Summit, we focus mostly on strategic returns and especially the challenges and opportunities of marrying the venture capital world with those of our corporate parents. We are the ultimate translators and diplomats. However, as was evident in the World of Corporate Venturing survey, and in Summit roundtables and benchmarking for the GCV institute, many if not most CVCs are also targeting financial returns. At the recent GCV Summit, when a speaker asked an audience of CVC heads whether their goals were strategic or financial, the participants recoiled against the question, pushing back that it is old guard thinking that this is an either-or question. For most of us, both goals matter. This is especially true given recent trends in CVC structures towards more independent funds or even totally independent single corporate LP funds.
This evolution of CVCs to asset managers has required that we not only understand the nuances of individual rounds or patterns of single company funding arcs, but that we master how to generate returns across a portfolio. Of course, solving for portfolio construction while meeting the strategic interests of a parent company is a deft balancing act.
At the same time, a significant transformation of the venture capital industry is already underway, accelerated by the pandemic. This is impacting the broader game of generating financial returns for all players, from entrepreneurs to co-investors, from LPs to us as CVCs.
Here are just a few trends with which we are all likely familiar from the past two years:
- The increased velocity and reduced due diligence time period for a round resulting from new approaches such as that of Tiger Global
- The switch of funding for some venture capital firms to permanent capital vehicles
- Venture capital firms becoming Registered Investment Advisors
- Existing pre-exit entrepreneurs becoming highly sought-after seed investors using capital raised from secondaries
- New mechanisms for becoming publicly listed
- The need for funds to manage public / liquid assets
And that is before we factor in the completely different mechanisms of funding, governance, corporate structures and immediate liquidity that have emerged in the crypto space – a world that does not yet have a clear role for traditional venture capitalists.
Our world is transforming rapidly. The new environment is demanding ever more of us as professionals, as we continue to strive to fund innovation and to create a role for our parent companies to participate in that innovation by investing in the world’s best entrepreneurs. As a CVC community and in partnership with GCV, we can utilise the Institute, reports, global councils and events to come together to proactively address the meta topics of the big transformational changes impacting our industry and what they mean for us as investors participating in the same game as the institutional VCs and other players.
We have a lot to look forward to in 2022 together as a community: more in person gatherings at the Summit and Symposium, maturation of the global councils, new sessions for the GCV Institute and continued work at the forefront on diversity, equity and inclusion within CVC units and encouraging more diversity on boards. We will continue to advance and promote all of these activities, building on the good work of the Leadership Society Advisory Board and my predecessors as Chair, Young Sohn, Wendell Brooks, and Claudia Fan Munce.
Together, we have an opportunity to scale up the industry from hundreds of experienced, professional CVC firms to thousands this decade. This is the new era of professional corporate venture capital meeting the new generation of entrepreneurs. This is the new normal.
The 2022 edition of The World of Corporate Venturing has recently been published - take a look at the full editorial here. The full publication is available for GCV subscribers to download or read online, and for everyone else to purchase.