“Corporate venture capital funds are seen as the less sexy version of VC,” Paul Ark told an audience. “But global corporate venture activity has been on a tear.”
Ark is Bangkok-based managing director at Digital Ventures, the $50 million fintech investment arm of Siam Commercial Bank. He is also an advisor to Singapore’s Dymon Asia Ventures and sits as an observer on the board of Ripple, the San Francisco digital payments company, which was one of Digital Ventures’ first investments.
He spoke at a Finnovasia event in Hong Kong in February.
Global corporate venture investment peaked in 2015 at $127 billion, but it’s Asia that has seen the biggest increase: citing KPMG research, he says Asia now accounts for 31% of corporate venture investing (not just in fintech), with 2016 seeing $39 billion invested across 1,742 deals.
The past five years has seen the number of companies engaged in venture grow by three times, particularly among the biggest listed corporations, Ark said. “A lot of companies are engaging with innovation directly.” Among the more prominent fintech venture companies active in Asia are CitiVentures, Axa Strategic Ventures, American Express Ventures and Ping An Ventures, along with Digital Ventures.
Getting fintech – fast
Citing KPMG, he said 32% of startup funding in 2016 came from corporate venture; in finance, the figure is 25%, mostly from banks and other big institutions. “Corporate venture is no longer the little brother,” he said.
Companies, including banks, are finding corporate VC a way to acquire technology more quickly and cheaply than developing it in-house. Citing CB Insights, Ark says today corporate venture generates three times the number of patents per dollar invested than in-house R&D. “Corporate venture is a way of outsourcing corporate R&D,” he said.
Corporate VC deal sizes are also typically bigger than those by independent venture funds. “It’s not clear why,” Ark said. “Maybe we go in at a later stage, or maybe we’re dumb money and overbid.” But, he added, “I’m finding value in areas other than a financial return.”
Corporate venture is not just about investment. It can also be about acceleration. In Asia, for example, there are a number of corporate fintech accelerators, which sponsor competitive pitches and may back the best fledgling businesses with seed capital. CIMB, Citi and Siam Commercial Bank are among those with Asia-based fintech accelerators, while banks with in-house innovation labs include HSBC, OCBC, Standard Chartered and Westpac, and the list goes on.
Ark said, “Acceleration is a tough business, but corporates are uniquely positioned to drive the model forward because we have different avenues to generate return other than strictly financial returns.”
Although Hong Kong and Singapore are the region’s financial hubs, with Tokyo, Shanghai and Sydney also serving big domestic markets, corporate venturing is everywhere, Ark says. For example, Siam Commercial Bank is only one of four Thai banks with venture capabilities; collectively they have earmarked $150 million to fintech.
Corporate versus fund venture
Here are some key differences between corporate venture and standalone venture funds:
- Source of funds: VCs obtain funds externally from limited partners or other investors; corporate VC funding is internal, structured as a separate fund or conducted off the parent entity’s balance sheet.
- Fund horizons: VCs are limited, usually to 10 years. Corporate VC is often more open-ended; some are evergreen funds, which may perpetually bankroll certain companies.
- Fund objective: VCs are simply trying to maximize their portfolio returns. Corporate VC will probably have both financial and strategic goals – and strategic KPIs are usually hard to define or measure.
- Value creation: VCs want to exit, either by listing the company or through a trade sale. Corporate VC may do the same, but they are also trying to obtain technological know-how, product implementation, or to acquire a company outright.
- Control preference: Not all VCs want the same thing but typically they want a seat on a company’s board, to be involved in the startup’s management, and help them realize their financial return. Corporate VCs may do the same but they will settle for observer roles on boards, particularly when their true goal is strategic rather than financial.
- Follow-on investments: This varies for corporate VCs by their objective, but often they are not interested in follow-on investments, to the frustration of the startup’s management. Such matters are often impacted by things unrelated to the startup and its performance, such as a market downturn impacting the parent entity’s risk appetite.
- Alignment: There can be tensions between a financial institution and its venture arm, particularly if the parent doesn’t reward the VC team as they’d expect from a standalone venture capital firm. For example, corporate VC managers often don’t get a percentage of the carry on their investments. Corporate VCs are also more averse to risk, and often prefer later-stage deals in proven companies.
Another challenge with alignment is a startup with both venture and corporate venture backers, whose ideas about timing exits and value will clash.
A third is around exclusivity: a corporate VC, unlike a venture firm, probably wants a lock on the technology being developed by the startup, but the startup doesn’t want to turn away revenue from others.
Finally, banks are notoriously slow at making strategic decisions or implementing a technology, whereas standalone venture firms won’t stand in a startup’s way.