Editorial: Venture's innovation challenge · Articles · Global Corporate Venturing
GCV Asia Congress 2018
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8 June 2018

Editorial: Venture's innovation challenge

Next week I am due to give a short talk in Sofia, Bulgaria, I’ve been preparing some draft notes so would appreciate comments and feedback before the talk - jmawson@mawsonia.com

Author: James Mawson, Editor-in-chief

The European Commission has today released its draft budget for its next financial period to start after 2020 with its draft plans for about $100bn for innovation funding (nice analysis by Science Business here).

Next week I am due to give a short talk in Sofia, Bulgaria, which is currently president of the European Union’s council, as part of its Innovation Week organised by Tech Tour, as a follow-up to the budget on: How can we provide appropriate finance for breakthrough innovation?

I’ve been preparing some draft notes so would appreciate comments and feedback before the talk - jmawson@mawsonia.com

Venture capital, ie independent firms raising money in closed-ended funds of limited time spans from institutional limited partners such as pension funds and life assurers, has been the short-hand way over the past 75 years to describe providers of finance to fast-growing businesses. This shorthand reflecting a cottage industry of lifestyle managers investing in buddies from the same university or small pond of lookalikes is now effectively dead.

Pitchbook data presented at the GCV Symposium last month identified European VC deal count for 2018 amounted to 571, a fall of almost 50% year-on-year, although 2018 was actually on track to be the same level of capital invested as in 2017. Pitchbook added that, in terms of microfunds, “we are seeing fewer raised, which also goes to show the lack of smaller deals happening”.

Venture capitalists are notoriously a competitive lot, however, and some few dozen, primarily US and Chinese firms, have successfully scaled their firms into something resembling a business themselves – as gauged by thought-leaders, such as Hermann Hauser, partner at Amadeus Capital Partners, perhaps by the number able to invest $50m in a round.

Hauser, a backer of six unicorns – companies worth at least $1bn – in the Cambridge, UK ecosystem, at a Science Business webcast this month said the relative lack of venture investors able to invest $50m in a round in Europe was one reason why the continent was so “terrible” at scale-ups.

A decade ago just getting a total round size of $50m was considered impressive but with the paradigm shift of Softbank’s near-$100bn Vision Fund and the scaling-up of ambitions from corporate and government investors this decade to turn innovation capital from a parochial, cottage industry into a global, larger industry.

To date, ie over the past 12 or so months, the Vision Fund has invested $29.7bn in 24 companies, according to SoftBank’s most recent financial report, while research firms Hurun and GlobeData estimated Tencent and its affiliates made upwards of $30bn for its investments between 2015 and 2017.

In the corporate venture capital (CVC) industry itself here had been a 2.6x increase in the number of deals recorded by Global Corporate Venturing (GCV) Analytics since 2011, in comparison to a 6.7x rise in cumulative dollar value over the same period. GCV Analytics recorded 2,362 deals in 2017 adding up to approximately $112bn, up from $93.3bn generated from 2,222 deals the previous year.

And whereas, two-thirds or more of VCs invest only in their local country, according to Pitchbook, about half of the CVCs seem to contribute capital in more than one geography, according to GCV Analytics.

However, innovation capital is of course, broader than these two players. We are finally seeing the fruits of the “remarkable cultural shift” at universities to encourage entrepreneurship among students and faculty, which was “not to be underestimated,” especially alongside the growth of serial and experienced management for startups, according to Hauser. GCV’s sister paper, Global University Venturing, tracked more than 50 fund launches targeting the sector over the past year and more than 2,000 spinouts globally over its first five years of publication.

There is no apparent constraint to the number of ideas or startups – Hauser in his speech said Europe now had more than the US – or capital as governments finally start turning serious attention to innovation finance.

The European Commission alone plans €100bn for its Horizon Europe innovation budget for the seven-year period from 2021, according to a speech by Guenther Oettinger, commissioner for budget and human resources at Science Business, while, according to The Wall Street Journal last month, China is close to finalizing a $47bn investment fund that would finance semiconductor research and chip startup development. 

Werner Hoyer, president of the European Investment Bank (EIB), at the same Science Business event described how a €21bn commitment to the European Fund for Strategic Investments in 2015 was leveraging this total to “near” its target 15-times by crowding-in institutional investors.

And, although there are still debates about the best mix of grants, loans and equity (see chart) to offer innovative ideas from traditional sources, the rise of alternative financing instruments, such as cryptocurrencies is adding more fuel.

Block.one at the end of last month raised the equivalent of $4bn - eclipsing even the world's biggest initial public offerings on stock exchanges this year – in the initial coin offering (ICO) for its pre-launch product, Eos.Ios. The next 10 largest ICOs besides Block.one have raised an aggregate $3.65bn-equivalent over broadly the past 12 months, according to New Alchemy.

Still, with the fundamentals of the so-called triple helix (industry, universities and states) innovation capital ecosystem in place to support the translation of idea into society the questions become more about the speed of evolution and how to professionalise the constituent parts.

In this era, and while the technologies and projects are interesting, shifts to entire models are usually more important.

Mariana Mazzucato, professor at University College London and whose report, Mission-Oriented Research & Innovation in the European Union - A problem-solving approach to fuel innovation-led growthwas described by European Commissioner Carlos Moedas as "a valuable vision at a crucial point in the drafting of the next EU research and innovation programme.

“Her report provides clear insight in how research and innovation missions can create impact with societal relevance and how to design and implement such missions. I believe this will be another important step in the evolution of how we invest in research and innovation at the European level.”

In it, Mazzucato talks about the structural issues around setting “missions” out of societal challenges rather than fixing existing problems and then using hundreds of bottom-up experiments to fulfil the goals set over the long term. Choosing who is in the room setting the goals to maximise impact and building capacity and picking the willing and holding those in charge accountable then becomes important and a systemic shift from the cosy club/cartel of mainly white males picking their lookalike entrepreneurs that has characterised much the past era. Risk, return and impact becomes the measuring tools.

Increasingly, the future of innovation capital is being shaped by the complementarity or collaboration between these different types of service providers to the entrepreneurs rather than competition as the sophisticated, thoughtful ones turn their attention to acting like a client-facing industry and offering the support the startups and scale-ups are looking for in their five primary needs: capital, customers, product development, hiring and an exit.

Hauser’s best practices in tech transfer in the UK and work leading the nascent European Innovation Council will help focus on supporting excellence and this seems the right goal.

Innovation capital, whether from corporations, impact investors, VCs, angels, universities or governments, is a service industry. What defines the best service professionals is their attention to customer needs – entrepreneurs’ desire for cash, customers, product development, hiring and an exit – and network to find and work with the best clients and peers.

As the 450 corporate and university venturers and other innovation capital experts, representing about $2.5 trillion in aggregate annual revenues, attending the latest GCV Symposium last month found, the data showing the rise of the industry is clear. But getting ahead of the data to collaborate and syndicate to help make the world a better place by going beyond capital in their support of portfolio companies remains a challenge.

A relentless focus on excellence is the only solution to attract and retain the best investor and portfolio company talent, identify and work with the ideas and entrepreneurs that will most meaningfully impact the world and shape and grapple with the antibodies trying to unfairly reject them. This rather than braggadocio of cheque sizes is the only truly valuable calling card.

In this enlightened endeavor, truth springs from argument among good friends, as David Hume once said.

Capital type

US ($bn)

Europe ($bn)

1 Loans

312.6

792.2

2 Corporate R&D*

214.2

179.6

3 Family and Friends**

207

93.5

4 Public R&D

115

57***

5 Venture

33.1

7.4

6 Government guarantees and sponsored loans

30

73.4

7 Crowd****

9.5

3.3

8 Angel

19.2

6.1

9 Securitised loans

5.6

40.1

Total

940.2

1252.6

Sources: 1, 3, 6, 9 Boston Consulting Group, 2 European Commission, 4 National Science Foundation (NSF) Higher Education Research and Development (HERD) Survey, 5 Ernst & Young using Dow Jones Venturesource, 7 Massolution‘s Crowdfunding Industry Report, 8 EBAN, 9 OECD. Global Corporate Venturing analysis.

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