|More large firms seeking to invest in promising start-ups But their venture funds face challenges like losing deals to traditional VCs|
If you can't beat them, invest in them. This seems to be the approach large companies here are taking towards disruptive tech start-ups.
A growing number of corporates are dipping their toes into venture capital, setting up investment arms to search for and work with start- ups that have potential to blossom into the next big thing.
Setting up a corporate venture fund might be trendy and good for branding, but it comes with its own set of challenges - corporate venture capitalists risk losing the best deals and talent to traditional venture capital firms and typically also have to answer to more stakeholders, industry players say.
Corporate venture funds here have been steadily ramping up investments in recent years.
The numbers show a growing interest in taking part in the growth of and working with potentially disruptive start-ups in emerging sectors.
"It's very positive that more corporates are getting involved in corporate venture. It helps to raise the profile and importance of start-up innovation as a source of meaningful innovation for large corporates," says Mr Edgar Hardless, chief executive of Singtel Innov8, the telco's corporate venture arm.
Singtel Innov8 has emerged as one of the most successful venture capital investors across Asia since it was set up in 2010.
Since its US$250 million fund started in 2010, it has invested in more than 65 companies in various markets, including the United States, Singapore, Australia and Israel.
Of these, more than 15 have been acquired and four publicly listed. Its most recent portfolio exit was Symantec's acquisition of Israeli cyber-security firm Fireglass.
Innov8 was set up to expose Singtel's business units to new tech trends and help them adopt new technologies, says Mr Hardless, who was previously Singtel's vice-president of strategic investments. "We invest only in tech that's a good fit with Singtel's strategy," he notes.
Companies across sectors have also set up their own funds - ranging from CapitaLand's C31 Ventures, which will invest up to $100 million in areas such as construction, maintenance and customer engagement, to gaming company Razer's US$30 million zVentures fund. This targets companies working on areas such as robotics, Internet of Things (IoT), gaming software technology and e-sports.
'NOT EASY' TO RUN A CORPORATE VC FUND
But operating such an outfit is no walk in the park, as Mr Hardless is quick to point out.
"Setting up and running a corporate VC is not an easy undertaking. It requires a long-term commitment and needs to be carefully thought out," he notes.
"There is no silver bullet to facilitate engagement with business units and start-ups. Start-ups are small and nimble; corporates are much bigger - they need to go through due process and a lot of thinking before committing to anything. There's a little bit of friction."
A good corporate venture fund "must be willing to invest in start- ups that potentially disrupt the corporate", says Mr Chua Boon Ping, chief executive of SPH Media Fund, the corporate venture capital arm of Singapore Press Holdings.
"That is why the most successful corporate VCs operate independently from the corporates. If the corporate VC does not invest, others will and the company will still face disruption," adds Mr Chua, who heads the $100 million fund launched in October 2013.
Attracting and retaining the right talent can also be a challenge.
"While there are many corporates jumping on the bandwagon, not many are setting up a dedicated VC arm and hiring professional managers to run it," notes Mr Chua.
"The right incentives must be there. If not, most corporate VCs will lose their star professionals to financial VC firms. Incentives should be tied to the corporate VC's performance."
Some, including Catalist-listed start-up incubator DeClout, prefer to source for in-house talent. The firm has a $20 million co-investment fund with the National Research Foundation to invest in technology start-ups based in Singapore.
"We believe it is important that most of the corporate venture team are groomed internally... (so) that the team understands the corporate DNA and culture, builds strong rapport and synergies with the business units, and has a deep appreciation and understanding of the businesses in the corporate," says DeClout chairman and group chief executive Vesmond Wong.
STANDING OUT AMONG TRADITIONAL VC FIRMS
On top of these challenges, corporate venture funds could lose out on the best investment opportunities.
"Corporate VCs have always found it tougher to get early-stage deals, which typically seek out seed or early-stage VCs," says Mr Chia Tek Yew, head of financial services advisory at KPMG in Singapore.
"To get access to good deals which are relevant for their business or investment mandate, corporate VCs need to be communicating clearly their scope and purpose of investment. This will help channel the right deals for them."
It means corporate venture funds have to add value to investments in ways that traditional venture capital firms might not be able to - for instance, by offering access to the company's customers or network.
zVentures director Choo Wei-Pin and investment manager Junus Eu say that while traditional venture capital firms focus on financial returns for their investors, corporate venture capital has the additional dimension of "strategic objectives in mind which are aligned with those of the parent".
For their fund, they "always look for strong endorsement from the relevant business units" when evaluating companies, "with a view that there is a good fit with Razer's wider business goals".
The company is "very focused on gamers" and related products such as music, mobile games and movies.
They add that if they cannot bring value to the investee in these ways, they will probably not invest, regardless of "how excited" they are about "the financial aspects of an opportunity".
Having "a strong brand name that resonates in the technology space" also helps bring in deals, they say.
CapitaLand's Mr Ng says the company's global network of more than 500 properties "offers (start-ups) a living lab for ideas and prototypes to be field-tested and validated".
Meanwhile, Supply Chain Angels, the venture arm of logistics company YCH Group, says its deal flow comes from venture capital firms, incubators, advisory firms and networking. "A significant portion of our deal flow originates from the business connections of YCH. We believe that recommendations through business associates or customers are the best sources of deal flow," says Supply Chain Angels partner James Ong.
The $20 million fund is looking for deals related to the sharing economy, IoT-enabled devices, 3D printing, big data and machine learning, robotics and automation as well as fintech - technologies that complement but also "pose a real threat to our core business".
SPH Media Fund's Mr Chua notes: "As long as the corporate VC firms are run professionally and have good relationships with the VC community, deal sourcing is never an issue.
"One of the most common mistakes corporates make is to assign internal staff to run the VC arm. As a result, the VC arm does not have the relationships and network to get good deals. It is also important that corporate VCs move as fast as the financial VCs and also not expect special terms."
DOES EVERY COMPANY NEED A FUND?
It might be tempting to assume that a venture fund should be par for the course among large corporates hoping to take advantage of disruptive new technologies.
But there are many considerations involved and execution also depends heavily on what the company hopes to get out of its venture arm.
"Some corporate venture funds aren't driven by financial returns. In many cases, corporate VCs are set up to help expose the parent to more innovative solutions from outside," notes Mr Hardless.
"Some of the ways we've looked at measuring success include looking at how many start-ups we are exposing to business units... how many successful engagements we have had between business units and start-ups.
"Other metrics are harder to measure - for instance, does it help us improve our brand image, create a competitive edge; does it help us create partnerships that would otherwise have been more difficult for us to form?"
SPH's Mr Chua says some of these aims can be achieved through other means, such as investing in venture capital firms.
"A corporate VC will need time to establish itself and some corporates may not have the patience to wait eight to 10 years to see the results," he notes.
Ultimately, before setting up a venture fund, firms need to have a clear idea of what they hope to achieve.
Mr Hardless says: "Companies need to understand what they want to get out of the engagement with start-ups - a number of corporates have set up accelerator programmes, labs and so on. There are other ways of engaging with start- ups besides setting up a fund.
"I don't think all corporates need a corporate venture fund.
"It boils down to the corporate strategy and how they want to engage with start-ups."