Corporate venture capital is a growing dimension of the venture ecosystem as companies increase their exposure and involvement in the startup venture space, in order to develop M&A pipelines as well as to tap technical innovations.
While partnering with an entrepreneurial venture may help companies accelerate the entry of
Over the years, the volume of corporate venture units has increased globally, with corporates across an array of sectors keen to ride on the growth opportunities such ventures promise. Today, many traditional companies are making use of their corporate venturing arms to complement their internal research & development activities.
According to information compiled by CB Insights, Telstra Ventures, the corporate venture arm of Australian telecoms major Telstra, is amongst the most active corporate investors globally. In an interview with DEALSTREETASIA, Mark Sherman who has been a managing director with Telstra Ventures since 2012 (prior to which he had served as a general partner at Hidden Lion Partners and Battery Ventures) discussed the value of corporate venture capital, the different approaches to corporate venturing and the investment strategy of his firm.
What should entrepreneurs be aware of when dealing with corporate venture funds?
Entrepreneurs decide which investors they want to work with based on the value-add the investors can provide. This tends to manifest through revenue bearing commercial relationships, people and connections, and board representation. While valuation, level of investment, terms, brand, platform stability and other factors will be relevant, we believe that value-add will be the primary differentiator moving forward.
Value-add can be broken down into the following broad areas:
- Revenue growth opportunities: Some CVCs have multi-billion-dollar IT budgets, which make them potential customers as well as qualifiers. Having a sophisticated IT buyer invest can be a significant “stamp of approval”. Some CVCs have numerous consumer, SMB or enterprise customers as well as direct, indirect and digital channel resources to connect to potential customers. Lastly, VCs and CVCs often have close relationships with potential customers through previous investments, CIO counsels and industry advisory boards.
- People: VC is a relationship-based industry. CVCs keep a close group of friends of the firm through entrepreneurs-in-residence (EIRs) and use other relationships to evaluate investments and source new opportunities for top executives. Additionally, many corporations have developed functional hiring capabilities around engineering, product, marketing and marcom functions.
- Governance and strategy: VC and CVC groups can have a very positive impact on strategy because of their expertise in particular fields. For example, some groups focus on industry trends, often leveraging networks to advise on strategic product roadmaps and business models. Other groups focus on functional benchmarking and best practices, particularly around marketing, product, UI/UX, etc. Finally, some CVCs and VCs arrange conferences to share ideas, benchmarks and best practices around sectors (e.g. cloud), buyers (e.g. CIOs) or general networking (e.g. cross portfolio).
When dealing with corporate venture funds, entrepreneurs must therefore consider what kind of value-add is being provided by the CVC and endeavour to provide value-add to the CVC at the same time.
How long does the process usually take, from the first approach to closing the transaction?
Our shortest is two months and two weeks from the initial meeting to money in the bank. Our longest is 18 to 24 months, during which we were working with a commercial group that needed some time to assess and develop their future strategy. Telstra Ventures’ process from initial meeting to money in the bank is approximately three months.
We become strategically linked with the companies we invest in. As such, the commercial process can sometimes take longer. Having done this for five years, we have a good sense of the timeframe and can usually provide a good read on whether an investment or commercial process will be fast (three months), medium (four to six months) or slow (more than six months).
What’s the average stake and ticket size that Telstra Ventures deals in?
We have been set up within Telstra to connect our business with world class innovation from lighthouse entrepreneurs. We don’t disclose exact investment amounts, but they typically fall within a range of US$5 million to US$10 million. Since Telstra Ventures started in late 2011, we have reviewed more than 3,500 opportunities, which has resulted in 30 investments totalling more than US$210 million as of December 2015.
This portfolio of companies comes from all over the world – Silicon Valley, Shanghai, Tel Aviv, Melbourne and more – and last year, these companies generated more than US$1 billion in revenue, grew at more than 50 per cent year on year and employed 5,000 people. Our investments have ranged from businesses like Cohere, a pioneer in wireless connectivity, to Ooyala, a leading innovator in video streaming, personalisation, monetisation and analytics, which Telstra ended up acquiring.
Which are some of the emerging areas that Telstra will be targeting in Southeast Asia and Oceania?
Each of our investments is for a minority stake and is designed to give Telstra access to new technologies that we can leverage within Telstra or for our customers, or both. For example, since investing in DocuSign, a world leader in electronic records, we have successfully implemented their solutions internally within Telstra and for several of our enterprise customers.
Some examples include:
- Since late 2014, we have invested in Singaporean-based Near and enepath and made a limited partner investment in the Monk’s Hill Ventures Innovation Fund for startups in Southeast Asia in areas like the mobile applications, cloud, security, IoT and other disruptive areas.
- Investing in enepath allowed us to introduce new solutions to our Global Financial Trading Solutions portfolio. We launched the IP-enabled voice trading solution, Telstra Trader Voice, which provides all the functions of a dealer board using innovative software with cost-effective and utility-based payment models running on Telstra’s reliable, low-latency network.
- While organisations in the financial services industry are now operating with lower IT budgets, Telstra Trader Voice helps firms to leverage IP technology to provide generic voice to support both front and back office staff, assisting with the enhancement of trader productivity, drive agility, the improvement of cost efficiencies and increased security.
- Our investment in Near built on the rapid growth of mobile advertising across Asia Pacific. Near is a location intelligence company that can programmatically send relevant ads to mobile audiences on behalf of advertisers using its proprietary real-time bidding platform. We believe that this probabilistic, data-driven approach brings a lot of value to advertisers, who might also be our clients.
Telstra sees a lot of opportunities in Southeast Asia in terms of technology innovation and entrepreneurship. We recently signed a memorandum of understanding with Telkom Indonesia’s corporate venture arm PT Metra Digital Investama to collaborate on startup investment opportunities in Southeast Asia, especially in the e-commerce, e-health, IoT and fintech sectors.
The launch of startup accelerator muru-D in Singapore, which is currently into its second cohort, is another example. We want to attract the region’s best digital talent, foster local technology innovation and grow the entrepreneurial ecosystem across Southeast Asia.
How do you inculcate risk-taking behaviours in executives, given that corporate executives have a reputation for risk aversion?
Technology-led disruption is the new norm for virtually every segment of the economy. It has profound implications for the way businesses organise themselves, serve customers and develop new products.
One way that incumbent Forbes Global 2000 businesses have responded to the emergence of agile, digital native competitors is by establishing their own corporate venture capital (CVC) arms so they too can engage with emerging technology companies. On that note, the biggest risk is often inaction. The benefit of most corporate venture capital investments is that risks can be taken or experiments made.
CVC offers significant value to large businesses by helping to solve their problem of how to gain access to innovative technology and overcome the limits of existing channels, products, customers, processes and business models. CVC also allows corporates to avoid overcommitting capital or getting locked into lengthy integration programs.
By taking minority positions in a portfolio of emerging technology companies, CVCs allow companies to be more responsive to market changes and share resources and risks with other investors. Corporations greatly benefit from capital leverage. For example, where a startup needs US$100 million to reach scale over five to 10 years, a company’s contribution of US$10 million among a pool of investors gives them 10:1 capital leverage and limits their downside risk to a tenth of the cost of the project.
Clearly, CVC does have some shortcomings – lack of control, some inevitable failures and the time to reach critical scale are all potential downsides. Having said that, for many Global 2000 corporations, the benefits outweigh the negatives and CVC continues to grow.
Is intrapreneurship or exopreneurship a better long-term strategy? What works for Australia?
Even though tools for enhancing innovation are available, it continues to be very challenging for most large companies with a mature business model, operating hierarchy and workplace culture to become truly agile and disruptive. For a host of potential reasons – including the barriers posed by legacy systems and processes, fear of failure or insufficient risk appetite, in-house initiatives that lead to substantial disruption and scale well are rare.
Exopreneurship is becoming increasingly important. It is not that the age of in-house R&D and innovation is dead, but in many industries, you just can’t go it alone any more.
Whether it is the Indian conglomerate Tech Mahindra’s strategic partnership with Cisco on IoT innovations or investments in emerging technology and companies, like Telstra is making through Telstra Ventures and our muru-D accelerator, partnerships are now a key part of business strategies.
Our Connecting Companies research, conducted by the Economist Intelligence Unit, highlights that we are in an era of the “co-corporation”, with 53 per cent of respondents believing that companies must be part of a network to maximise technology trends in the future.
Strategic alliances and creating synergies with the companies we invest in will help facilitate quicker expansion into new markets, as well as accelerate co-development of new capabilities in products and services, and show differentiation to existing segments. This is mutually beneficial and strategically crucial to keep up with the breakneck pace of technological change in the short-, mid- and long-term. We believe that this applies across the board and have no opinion about Australia specifically.
In the case of corporate venturing, what are the three key elements that corporates going into this space have to remember?
Startups are being created at a faster rate than ever before around the world. There’s lots of businesses, at various stages of their development – full of creative people, passionate entrepreneurs and innovative technology, and in need of capital to take their business to the next level. But we have finite resources at our disposal, which means we have to say ‘no’ to more than 99 per cent of entrepreneurs that we meet.
This is a difficult part of the job because we often meet amazing companies who are absolutely worth funding but don’t have the right strategic fit for Telstra.
Telstra Ventures usually invests in later-stage companies that have established their leadership and are planning to scale. We therefore believe that corporates should look for companies that:
- Are led by entrepreneurs who have the drive and ability to build a world class technology company, and who target large, attractive and growing markets.
- Have a revolutionary technology, product or service that has a clear competitive advantage in the market, as well as a sustainable business model with proven commercial traction.
- Have strategic alignment and synergy with one of the corporate investor’s business units.
For a corporate investor, what is the preferred exit event – M&A, IPO or a buyout by management or a PE firm?
For the corporate investor, the preferred exit depends on many factors:
- Market size. If the company has a large market share, then acquisition by the parent > IPO > M&A.
- Competitive position and product fit within the business. If the company can stay resilient against competition, then acquisition by the parent > IPO > M&A.
- Quality and energy of the management team. If there’s a high-quality team with fire in their bellies, then acquisition by the parent > IPO > M&A.
- Predictability of the business model of the business. If the predictability is high, then acquisition by the parent > IPO > M&A.
- Strategic alignment of the business with the parent. If the alignment is high, then acquisition is preferred over all other alternatives.
- Liquidity needs of the parent (M&A > IPO > acquisition by the parent).