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Ankur Kamalia: Corporate Venture Capital (“CVC”) and strategy

18 Dec 2017

Ankur Kamalia: Corporate Venture Capital (“CVC”) and strategy

There seems to be a general trend towards more and more companies staying private rather than going public through an IPO, especially in developed markets. Statistics reveal that, globally, more money is spent on merger and acquisition (M&A) activity than is raised via IPO – and that the ratio has over the recent past, hit a two decade high.

While the magnitude above might seem surprising, it is even more prominent in highly regulated, process intensive industries such as financial services and healthcare, where some of the best-known household names are 100+ years old. Traditionally this has been the case because of the complexity and moat effects these industries provided. However, with the rise of a second machine age characterised by Cambrian explosion of machine intelligence, platforms and crowdsourced intelligence, it has become imperative for incumbents to innovate at a faster pace and collaborate with start-ups proactively.

The new paradigm is one of constant collaboration with a start-up that is nimble and how both can leverage one another’s strengths. This is a theme that I have discussed previously, and my colleague Ashwin Kumar touched on when he discussed our investment in Trumid in July. The key question is what incentives are necessary to elicit such behaviour?

In recent years, corporate venture capital in financial services has emerged as a key vehicle that acts as that bridge. It has become a more important source of funding, especially at growth and later stages in multiple industries, but more so in highly knowledge / data / relationship and regulation heavy fields such as financial services.

Why Corporate Venture Capital (“CVC”) enables long-term thinking and partnership

Aligning a Corporate’s CVC strategy with its business and innovation strategy is a good way of making sure that external innovations filter through the business of the Corporate itself. While realising strategic benefits can be challenging in some environments, this cohesion is critical in order to ensure that corporate capital can truly be value additive in a portfolio company’s cap table. Secondly, it is a way of challenging the ecosystem of the Corporate itself – by bringing in new expertise, new models and new technology, a Corporate can eventually use it as a tool to reinvent itself and make sure it is operating in an efficient manner.

Measures of CVC Success

However, defining the success of CVC solely in terms of strategic value is not without difficulties.

First, trying to measure the strategic value in a venture deal (early or growth) in an objective and comparable manner is tricky, and will often take time to materialise. Second, if you are adopting this approach, there needs to be a strong partnership between the relevant business leads of the Corporate and the portfolio companies being invested in. It is this linkage and connectivity that will drive the pace and success of investments. Finally, alongside the strategic value CVC investments can bring, it is important that there is also an independent financial rationale for making the investment. In many ways, in an environment of [excess] capital liquidity and expanding valuations, a closer cohesion with the longer-term product and technology strategy of a Corporate, can provide a certain element of downside protection for the investment.

At the same time, no one CVC approach is the “only” right approach. A CVC’s approach often evolves with the Corporate’s own strategy. Many of our peers follow the approach of financial returns first and make investments with that as the primary driver. That may be also a reflection of the respective CVC’s journey in some respect or a reflection of the overall market cycle – and not a question of what is right versus wrong.

Ultimately, to make CVC work you need a couple of key factors. The first is clear communication, both internally and with your portfolio companies. Second, you need an environment where you can find partners you can align with and trust. Finally, it is important to define success, but in doing so you need to find a sweet spot between being too broad and constraining in your definition. Defining the right strategic and financial KPIs and tracking these is important to provide transparency to stakeholders, and in determining success.

Strategic Corporate Venture Capital (“CVC”) engagement rules for creating long-term partnerships

  1. CVC is not just about control acquisitions. We invest in promising young(er) companies, but not always necessarily with a view to fold them into our existing business. Often we may not be the right acquisition partner for a company. Thus, when we make strategic minority investments, we do so in order to learn, to collaborate, and to create new markets, products, client segments for the benefit of the broader ecosystem and stakeholders we serve. We do not as a rule; always insist on call options and the like in a term sheet. If we are the right long-term partner and we have a seat at the table, we will have the opportunity to participate in the exit process as an acquirer, as would others.
  2. CVC is not corporate treasury. We are looking to invest in top quality entrepreneurs and businesses, relevant to our strategic agenda that we think will be successful. We are not looking for our portfolio companies to become reliant on the corporate “mothership”. We expect to be a value-add strategic capital provider, often alongside other financial and/or strategic investors.
  3. A CVC process must be well defined. Companies we invest in care about execution certainty and speed of execution. They care about whether you have a well-defined and repeatable investment process, senior sponsorship and the right mind-set. The need for a deeper look at the strategic rationale for an investment often means that CVC’s (including ourselves) are not the fastest in deploying capital. However, having an efficient and transparent process is an important element of effectiveness.
  4. CVC is not like an operating business within the Corporate. Investments are often there on the contrary to challenge the way the Corporate currently does things. This can sometimes lead to conflict between internal interests within the Corporate and the proposed investments. Thus, C-suite and senior management buy-in for a strategically biased CVC and its investments is critical.
  5. A CVC strategy is not static. It is a constant and evolving approach to the changing dynamics of the market. No Corporate is likely to have the same CVC strategy in 10 years’ time as they do today. It is important to have a high level of adaptability.

Ankur Kamalia – Managing Director, DB1 Ventures

Ankur Kamalia joined Deutsche Börse Group in November 2015 to take up the newly created role as Head of Venture Portfolio Management. Prior to joining the Group, Ankur managed an investment portfolio for a family office and for a hedge fund in Asia.

He also acted as a Managing Director at UBS, responsible for strategy for the Global Investment Banking division in London and worked in Corporate Finance/Capital Markets in New York, Hong Kong and Singapore. Ankur holds an MBA from the Kenan-Flagler Business School at the University of North Carolina Chapel Hill.

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