In part 1 of this article we compared Corporate Venture Capital activities at SGX 100 highest valued companies versus US Fortune 100 companies and concluded that US companies seem to use CVC much more frequently.
In this part I will discuss some of the possible reasons for this difference.
They are preparing to launch their CVC efforts, but haven’t launched yet
For many companies the best approach to CVC is to start off by investing, not in startups directly but, in VC funds that focus on their industry. As a sizable limited partner they can even request for their staff to sit in on some of the start-up pitches and investment decision meetings. This way the company gets exposure to startups and their staff gain experience in the investment process. Over time this can be scaled up into their own CVC unit.
Presumably there are some, and hopefully many, local companies that have adopted this approach. This means that there will be many more active CVC players in the coming years.
They mistakenly believe they are already doing CVC
The alternative to investing in and learning from an already established venture fund as described above is to assign corporate venture responsibilities to an already existing business unit. Usually it would then be the finance or M&A unit who gets the honor.
On the surface this makes sense but there are a lot of challenges with this approach. One of the core functions of the M&A team is making acquisitions that produce a positive financial and/or strategic result for the company. The M&A team are experts in analyzing all aspects of potential acquisition candidates to minimize risk.
Start-up investing requires a very different approach. Here you take a portfolio view. As a rule of thumb a VC fund gets one big success for every ten investments they make. That one success alone generates enough returns to make the fund profitable. The other investments make little to no returns and most are total write-offs.
It can be very challenging for a business unit that focus on avoiding risk, to simultaneously do deals with a very different risk profile.
Additionally companies that see the most success from their CVC programs are the ones that use it to learn and listen not only to make investments. This type of community engagement does not always come easy to Finance or M&A departments who tend to have a more transactional focus.
The companies that I have seen using this approach usually end up doing very few deals and have little to no ongoing interaction with the startup community. So this approach ends up being arbitrary and can hardly be called a strategy.
Rely on in house RnD or Management foresight
This has traditionally been the way companies have gone about improving their business. The challenge with this approach is that it tends to work better with incremental improvement rather than the kind of disruptive change that we are seeing more and more of today. Another challenge with this approach is that management has limited time to focus on the future. They have a lot of day-to-day issues to deal with and usually focus more on what’s happening the next month or quarter rather than 3-5years down the road.
A decade or two ago it was sufficient to send managers to attend industry trade shows every six months and you would have a good overview of what was new in your field. Those days are long gone. The time from idea to market has shortened significantly. So companies that really wants to stay competitive needs to engage with innovative companies at an earlier stage.
Siam Cement Group (SCG) is one of Thailand’s biggest companies. They employ over 400 researchers. So they have every reason to be confident in their own ability to innovate. Yet they still opted to launch a CVC fund and accelerator to make sure they do not miss out on opportunities. So far they are in the minority of large companies in SEA that has launched CVC programs.
Management not updated on relevancy of Corporate Venture
Although the concept of Corporate Venture is not new a few things have happened in the last few years that have made it a much more relevant strategic option for companies in South East Asia. Firstly the start-up ecosystem in many countries in the region has evolved to a point where there is a good deal flow coming from your local or regional market. Secondly new technology like Artificial Intelligence, block chain and Internet of things will have profound impact on many industries so it is imperative to keep track on how this will affects your business.
This development has taken place rather quickly so many managers and CEO's might not be fully up to speed on how fast things are changing.
There has been a positive trend with more CVC programs launched in the past couple of years. Hopefully this is just the start and we will see more SGX listed company’s use of CVC more closely mirror their US counterparts in years to come. Do you have any thoughts on this matter? Feel free to leave a comment.
Next week I will dive deeper into other aspects of CVC in South East Asia. Stay tuned! Have a great weekend!