Global corporate venture capital (CVC) deals reached “historic highs” in 2018, according to CB Insights. In other words, business giants around the world are spending more on innovative newcomers than ever before.
There are two ways CVC funds can be set up: Either as an independent arm of one corporation or a dedicated unit within it. In both cases, the purpose is to invest in external companies to participate in their future financial gains and to help them grow by creating synergies between the newcomer and the established business.
Traditional, independent venture capital (VC) firms, by contrast, aren’t affiliated directly with a single large corporation. This has its own advantages and disadvantages, which we’ll get to later.
CVC deals in 2018 were up by 32% from 2017 and the total amount CVCs spent on startups went up by 47% in the same period, CB Insights found. Last year, 264 brand new CVC firms invested for the first time. That same year, CVC firms spent USD 52.95 billion across 2,740 deals globally, and Asia scored 38% of them.
On this continent, most of the activity takes place in China, Japan, and India, where startups-turned-stalwarts like Tencent and Alibaba are gaining momentum along with traditional players such as Japan Airlines and Dentsu, who are just entering the scene.
However, one of the largest CVC-backed investment in 2018 took place in Southeast Asia: Toyota pumped USD 1 billion into Grab’s Series H financing round, alongside Yamaha (USD 150 million), Hyundai (USD 250 million), Microsoft, and many others. Grab called its deal with Toyota the “largest-ever investment globally by an automotive manufacturer in the ride-hailing sector.”
The growing appetite of CVC in the digital sector is a phenomenon that affects startups from San Francisco to Jakarta. Corporates are doing it because they don’t have much choice.
Second time’s a charm
2018 wasn’t the first significant spike in CVC investments in the tech era.
The first boom happened in the late 1990s. But the economic tide turned and only a few of the early internet startups delivered on their promises. Harvard Business School professor Henry Chesbrough describes what happened next as a “pattern of advance and retreat.” Around the year 2000, corporate investments a plummeted some 80% in just 12 months.
Today, startups once again threaten to upend and disrupt traditional industries—with incumbent businesses realizing that they have to evolve to be part of the digital landscape. This time, it looks like CVC is here to stay.
This is especially true for Southeast Asia, where the top conglomerates have traditionally controlled large swaths of overall business activity. But in this era, some of the conglomerate’s advantages are fading. Investing in and striking deals with emerging digital leaders is a way to stay relevant.
“Corporates [that develop CVC arms] tend to fall under the category of incumbent businesses which are operating in a maturing industry, looking for new avenues for growth,” says Nicko Widjaja, the CEO of MDI Ventures, the CVC arm of Indonesia’s largest telco, Telkom Group. These giants know they’re ripe for disruption by newcomers. “With Telkom Indonesia, it was no different,” says Widjaja.
“[Telcos] are operating in a maturing industry; voice calls and SMS have been going down significantly in the past decade and have been replaced by Skype, WhatsApp, Blackberry, etc. Additionally, mobile phone and SIM card penetration in the country has reached nearly 100%, thus limiting further growth.”
Meanwhile, VC funding for startups in Southeast Asia hit an all-time high in 2018. It was an inflection point where saturated industries were met with a tidal wave of hungry digital disruptors.
CVCs finally laid down longer-term investment strategies for what was previously seen as a risky playing field, Widjaja explains.
“Entering the digital space is inevitable for corporate firms,” Willson Cuaca, founder and managing director of an independent venture capital firm, East Ventures, points out.
“However, let’s put CVCs into two categories: those that belong to traditional businesses such as family-run businesses, conglomerates, and telcos and those that are part of digital companies like Tencent, Alibaba, Google, and Microsoft. The majority of CVC firms in Southeast Asia belong to the former and I believe they have been beneficial to the overall startup ecosystem here.”
CVC firms—especially the ones linked to traditional businesses—tend to be more strategy- than finance-driven compared to traditional VC firms. Rather than focusing on the potential financial gains from an investment, they look to invest in products or companies that complement or improve their corporation’s existing divisions.
It’s something that MDI Ventures terms the “Bits by Bricks” concept, where existing “bricks” (corporates) can support “bits” (startups) in their growth by linking them up with the existing corporate network, infrastructure, and assets.
“What [we have] that startups lack is massive amounts of underutilized assets. Partnerships with us may result in the activation of these assets. For example, what Telkom Group has in abundance is telecommunications infrastructure, which is a critical requirement for the new age currency: data. Through data, incumbent businesses are able to operate more effectively and increase their average revenue per user,” says Widjaja.
CVC firms that over-emphasize the synergy value creation aspect of their investment can ultimately lose sight of maximizing the value and growth potential of their startups.
MDI Ventures says this realization led to a shift in focus. “Our portfolio companies’ financial health and success are now our main priority,” Widjaja says.
The intent is to generate larger financial returns in the form of capital gains for MDI Ventures based on a mutualistic partnership—beyond just writing a check, the firm provides its portfolio companies with “value-adds” that help strengthen their position in the market.
“We give startups access to market by opening Telkom’s doors for our startups to gain access to our network and resources, a growth engine where they can go to market with Telkom as a partner or gain Telkom as a customer, and corporate development activities which include activities such as hiring, business development, legal support, and so on,” says Widjaja.
Among the startups that have benefited from MDI Ventures’ investments thus far are homegrown Kata.ai, which partnered with Telkomsel and another subsidiary to create a customer service chatbox, as well as Wavecell and Codapay, which gained access to distribution channels for their products through a number of Telkom’s subsidiaries.
Avoiding conflict of interest
If CVC firms provide such big upsides for the startups they back, the stage seems set for them to sideline traditional VCs who have historically held the upper hand in startup financing, yet East Ventures’ Cuaca doesn’t necessarily agree.
“Whether it’s a traditional VC or CVC firm, what is key is the mindset and culture—it’s all about value creation, and whoever brings the most value to the table will survive. CVC firms have some advantages in the sense that they allow startups to leverage their existing assets, networks, and financial muscle as well as their operating experience. But traditional VC firms bring their own set of benefits to the table as we have a more independent mindset, less conflict of interest, and are able to move with more velocity and decisiveness,” he says.
East Ventures avoids investing in competing businesses to have less friction and create more cohesiveness, Cuaca explains. And he points out that traditional VCs can also provide startups with networks as they work with prominent family offices, founders, and high net worth angels that bring many connections and valuable knowledge to the table.
“Our managing partners also have experience running startups ourselves in addition to the helicopter view of the Indonesian and Southeast Asian startup ecosystem that our vantage point provides,” says Cuaca.
Widjaja agrees, admitting that the amount of corporate compliance along with low risk tolerance and a rigid investment spectrum can make it difficult for CVC firms to be as nimble as their VC counterparts.
“Our investments have to fall in line with the parent company’s strategic direction which may not always align with the current trends and nature of the startup industry,” he says. “The CVC firm’s parent company is usually part of the Investment Committee or is the committee, which can make it quite difficult to get investments approved.”
Some CVC firms invest off of the corporation’s balance sheet, Widjaja adds, which makes the process even more rigorous as each investment requires a capital call from the parent company’s finance department. The people in it may have less knowledge of the startup and venture capital space.
Still, their differing advantages mean there is a place for both types of VC within the Southeast Asian startup ecosystem—and they can work together.
So far, most prominent investors tend to prefer the traditional VC model, because it is seen as more tolerant to risk and more flexible in its operations, says Widjaja.
Making bold, risky bets and getting into a deal fast can lead to the types of returns that put VCs on the Midas List. Writing a check within hours of meeting a founder for the first time is a cherished trope in the world of VC—whether it reflects reality or not.
CVCs may seem slow by comparison. “We have only had two exits—both in 2018,” Widjaja says. “[But] these exits have proven that liquidity for a venture such as ours in Indonesia is not impossible or a myth.” He credits these successes to MDI’s shift in focus from “synergy first” to “financial returns first.”
Widjaja welcomes the idea of working with VC firms in the future to drive growth across the ecosystem. “Working with prominent and legitimate investors, regardless of whether they’re a traditional VC or CVC firm, provides validation for our own investments.”
East Ventures itself is a success story for VC and CVC partnerships in Southeast Asia. In March 2018, it launched a new venture capital firm EV Growth together with Sinar Mas’ CVC arm SMDV and Yahoo! Japan Capital. While East Ventures’ focus thus far has been on early stage startups, EV Growth will leverage on its partners’ collective strengths to raise Series B funding rounds and beyond. It has made five investments to date, with the most recent being a USD 45 million Series B investment in Singaporean cashback startup Shopback, in addition to earlier investments in Sociolla, Moka, IDN Media, and Warung Pintar.
Still, being selective is crucial, and East Ventures only brings on board limited partners who are willing to be fast and think progressively. It’s a philosophy that it also holds when working with CVC firms.
“The positioning and vision of both the VC and CVC firm will determine their strategy and how well they operate [together]. That’s why it’s important that when East Ventures engages with CVC firms we ask them: ‘What is your objective to invest?’” Cuaca says.
“CVC firms must understand trends before they disrupt their businesses, and understand how to leverage on and maximize their existing assets in this digital economy. Strategically, they can help startups with testing labs via their traditional assets. However, this will only work if CVC firms really understand the velocity and product development cycle of the startup.”
The CVC boom of the late ’90s may have been a short-lived phenomenon, as the digital sector was not yet mature and traditional industries still had room to grow without radically changing their ways. This time around VC, startups, and CVC have no choice but to collaborate to keep pace with digital transformation. The corporates are here to stay.