Could corporates turn their backs on venture?

ECI's James Stewart
21 November 2011

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As difficult economic conditions hit financial and corporate investors alike, some large corporates may be tempted to neglect their venture arms. But this could prove disastrous for investee companies that need support.

In 1822, just before the Congress of Verona convened for what proved to be the final congress meeting, the Russia ambassador died. Metternich, the Austrian Foreign Minister commented "I wonder why he did that?".

One could be forgiven for asking the same question of CEO's investing shareholders' funds into early stage in-house venture funds. The performance of corporate venturing funds is, to some extent, difficult to judge - some may not produce the same level of reporting as required by independent funds and, to a greater extent, they may be viewed as peripheral to the core activity of the corporates out of whose heads they sprang.

Therein lies the rub. In a bull market, large corporates may spread activities to embrace greater growth opportunities. The old chestnut of corporate venturing quickly rears its ugly head and, inevitably, funds are formed. The reasons are numerous but generally fall into the broad strategic arena of "seeking to obtain greater operational and commercial leverage". However, any reasonably intelligent senior corporate executive can easily invent a dozen reasons and, in a bull market with a racing share price and available money, there's not really enough people around to care. The dot-com boom was an obvious example, where a plethora of corporate funds were formed; but like monsters too vile to spare they died a very sudden death when the market collapsed. The problem - in a bear market corporates draw back and re-consider their core business and resources. Why devote precious executive time to a small peripheral activity which is proving a distraction to the core business? And small venture led investments, unless they are nurtured and cared for, can become very difficult - especially where a further cash investment may be marginal but the reputational damage is potentially very much greater and far outweighs the original commercial benefits the investment was intended to achieve.

The frustration for a corporate venture backed management team may be considerable. Hanging around waiting for a corporate who is clearly not interested in following its investment is probably like waiting for Godot. Similarly, who within an aggressive political corporate structure in a downturn, is willing to stick their necks out to save a very marginal investment - tout commence en mystique et finit en politique.

So how can this be avoided? Perhaps a possible solution is for corporates to have a greater dialogue with their pension funds. If the corporate is demanding greater venture exposure, then it should work with an LP to find a GP who has the sector experience and track record fit for purpose. Alternatively, review venture portfolios more aggressively and look for those investments meeting strategic goals and objectives - a well-worn practice in biotechnology, healthcare and technology but surprisingly rarely adopted by consumer services and industrial corporates.

If the European economy continues to head towards stagnation and a double dip, expect to see a few corporate venture funds slowly disappear from the annual corporate returns - and expect secondary market investors to be gearing up for potential portfolio acquisitions"

James Stewart is a director at ECI Partners.