#51: What to Do When It All Goes Sideways?
Hi, I'm Jeppe and welcome to my weekly newsletter on Corporate Venturing, released every week. My aim is to provide a comprehensive perspective on the latest developments in the field and its related topics, drawing from the insights of top management, venture capitalists, founders, LPs, and family offices. I aim to offer valuable information and thought-provoking content that will aid in understanding the importance of Corporate Venturing in business strategy.
In this edition, we delve into the ephemeral nature of Corporate Venture Capital (CVC) entities, whose average lifespan falls short of the 4-year mark. This transient existence prompts a pertinent inquiry: what strategies should be employed when your strategy changes or the venture landscape takes an unforeseen turn?
The initiation of many CVC units often stems from a reactionary need to establish a foothold in the startup ecosystem, rather than from a well-defined strategic blueprint. This ad-hoc approach can lead to multifaceted challenges, as observed in numerous cases over recent years. Particularly during financially turbulent times, these challenges may culminate in the downsizing or dissolution of a CVC. However, it's not all grim; there exist numerous narratives of CVCs that have not only weathered storms but have thrived, crafting financial and strategic victories. Look for example at Eight Roads.
Drawing from personal observations, the transformation of Maersk Growth from a traditional CVC to a model focused on Corporate Clienting—marked by a significant reduction in its investment team—stands out as a pragmatic strategy given their current focus. This model, previously dissected in conversations with Gregor Gimmy of 27pilots , is less capital heavy and focuses on Corporate/Start-up collaboration.
Moreover, the surge in secondary transactions, where corporates divest entire portfolios, is a notable trend. We have seen many of the oil producing companies leave the CVC market selling off their entities but also some of the CVCs within Banking have gone this part or even spun out their teams.
As we've reiterated in past discussions, the foundational structure of a CVC is crucial. Investments made off the balance sheet complicate portfolio divestitures due to the intricate internal processes involved.
A pertinent illustration of the current market dynamics is the unprecedented activity in the secondary market for venture investments, reaching a zenith not observed in two decades. According to a GCV Institute article Hans Swildens, CEO of Industry Ventures, the volume of secondary transactions in recent times is unparalleled, driven by a quest for liquidity amidst a scarce IPO and M&A landscape. Swildens, with a history of capitalizing on post-crisis opportunities, underscores the diversity in transaction types, ranging from the acquisition of entire venture portfolios from defunct CVCs to purchasing stakes in strategic ventures.
This secondary market fervor is indicative of the broader shifts necessitated by market contractions. The narrowing bid-ask spreads, as highlighted by Swildens, reflect a more realistic alignment between seller expectations and market valuations, facilitating an increase in transactions.
The structural setup of CVCs significantly influences their agility in navigating these tumultuous waters. Ventures tied to off-balance-sheet investments face intricate hurdles during divestitures, entangled in a web of legal and procedural requisites. In contrast, CVCs structured as limited liability companies (LLCs) exhibit greater fluidity in transferring assets, a model that many might consider emulating to mitigate liquidity crises.
I strongly advise corporates considering the discontinuation of their CVC operations to explore spinning these out as independent entities to navigate financial cycles more effectively. It's important to note that secondary transactions often result in a significant reduction in value, commonly returning only about fifty cents on the dollar. This potential loss should be carefully weighed against the initial investment made in assembling a skilled team. The substantial cost and effort invested in building a proficient team represent a valuable asset that could be lost if the CVC activities are abruptly terminated
As we gaze into the horizon, it's evident that the landscape for CVCs is evolving, with a pronounced tilt towards structures that accommodate cyclical fluctuations and liquidity challenges. This adaptability will be crucial for CVCs to not only survive but thrive amidst the unpredictable tides of the venture capital ecosystem.
I hope you enjoyed this week's newsletter. If you have any suggestions or contributions that you would like to share with me, please do not hesitate to reach out. I would be delighted to hear from you.
/Jeppe