5 Insights on Corporate Venture Capital with Andrew Gaule

In a recent podcast episode of China Startup PulseAndrew Gaule joined host Oscar Ramos to discuss the exciting world of corporate venture capital. The China Startup Pulse, ran by Chinaccelerator and SOSV, is a podcast designed to give startup enthusiasts from around the world a behind-the-scenes and on-the-ground understanding of China’s startup ecosystem. In this episode, Andrew Gaule, who has over 20 years of experience in corporate venture capital (CVC), delivered five different insights on the current landscape of corporate venture capital.

Insight #1: Corporates are Taking Over Venture Capital

According to Gaule, corporate venture capital, in its purest sense, is “when a corporate dedicates a fund to invest, taking minority stakes — typically less than 20% of a startup. Further along the spectrum, corporates act as limited partners and invest in more financial oriented funds, which are aligned with the objectives of the corporates.” Citing the 2018 Quarter 4 Money Tree report from PWC, Gaule shared that corporates are now currently involved with 25–30% of all venture capital deals around the world. This is a steady increase compared to 2017, when corporate participation was hovering around 20–23% in venture capital deals. In Gaule’s opinion, these statistics accurately reflect the growth of the industry itself, as more and more corporates are realizing the benefits that can be obtained by operating within the VC space. One phenomenon can help explain the surge of corporate involvement in venture capital deals: Chinese corporations are some of the most active corps in VC deals. As China is on the forefront of innovation, it is not surprising that the country’s corporations are leading the pack in CVC deals.

Insight #2: Money Talks Louder Than Strategy

The amount of venture capital deals that corporates are participating in is indicative of the amount of money that corporates are willing to spend on innovation. However, Gaule believes that it is the quality of these deals that should be prioritized; not the quantity of deals closed. Corporates should be aiming to balance their deals between financial and strategic objectives. On one hand, the CVC unit must see some financial returns within two to three years in order to continue receiving funding from their CFO, so they do need to come into different deals viewing exits as a priority in order to increase their assets.

At the same time, they also need to strategically invest in solutions to challenges “that will impact their industries in a number of years down the line.” The corporate will be able to set itself up for greater success in the long run by being multiple steps ahead of their competitors who only invested in solutions for present-day problems. The best way to balance these interests, Gaule states, is to invest for a financial return “in areas that are going to be strategic for the corporate” in the long run. This means that, for example, automotive companies should not invest in casinos or social media, but should invest in artificial intelligence and hardware companies.

Insight #3: Dreaming of an M&A? Don’t.

Gaule points out that corporates too often view their initial investments in startups as routes to mergers and acquisitions. They believe that they’ll eventually be acquiring the company, and will have total influence over the CEO and the daily operations at the startup. Not surprisingly, this causes issues, as both the startup and the other investors most likely have differing ideas about where the company should be heading. Gaule believes that corporates should enter deals with a VC mentality; “they should play their role on the board if appropriate, and support the startup,” and should be open to exits. They should not act like they own the startup from the start. If corporates come in with an M&A mindset, it will be very challenging to manage communication and understanding between the corporate, the startup, and other investors, and the possibility of successful collaboration tends to diminish.

Insight #4: Consultancy Reports Display the Past; Startups Build the Future

According to Gaule, management consulting companies are always looking in the rear view mirror. If a corporate has to wait for a management consulting’s annual and quarterly reports to find out pertinent information on their industries, they’re too late, as they won’t be able to make the correct adjustments and investments in time to remain competitive in a constantly changing world. Instead, Gaule promotes working with entrepreneurs and startups, who are already experimenting with different technologies, business models, and who are creating the future. The only way to get insights into this experimentation and to better understand the future of their industries is for corporates to “roll up their sleeves and to help create the future” with the startups.

Insight #5: China: The One Country You Can’t Ignore

Gaule believes that corporates should absolutely look to China for corporate venture capital opportunities due to the massive scale of new technologies being championed in China. Chinese companies are leading development of technologies in mobile, artificial intelligence, consumer data, and social media; according to Gaule, it’s a place that needs to be watched and collaborated with. In the past, most Fortune 500 companies opened an office in Silicon Valley in order to better understand and utilize the innovation that was being developed there. Now, Fortune 500 companies should have offices in Tier 1, 2, and 3 cities in China, as global companies need to understand China and be active in China in order to stay relevant.

In addition to championing the development of new technologies, China is no longer just a pure manufacturing zone. To benefit from China’s structural and economic transformation, corporations need to understand where China is going to fit into their innovative value chain in the future. In particular, Gaule recommends that the executives from the head offices spend time on the ground in China, for the corporates to better understand the different forces and technologies driving Chinese innovation. By giving their leaders a better understanding of life and tech in China, corporates will have a better chance to leverage new Chinese technology and innovation.

To listen to the entire podcast, you may find the episode on the website, Apple Podcast, Google Podcast, Spotify, and other podcast platforms.

Chinaccelerator would like to thank Andrew Gaule for his views on Corporate Venture Capital. Many thanks to our host Oscar Ramos, editor David and Geep, producer Eva Shi, organizer Chinaccelerator, and sponsor People Squared. For Corporate Innovation enquiries, please contact cateam@sosv.com.

 

Written by Justice Kelly, Corporate Innovation Manager at Chinaccerator & MOX

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