Interview with Yinglan Tan for The Business Times piece on the Corporate Venture Capital landscape in Singapore.
1. From the standpoint of a VC, what are some key changes in the Singapore corporate venture capital landscape you’ve observed over the past five years? What do you think is driving these changes?
Total corporate venture capital funding in Singapore and within the Southeast Asia region has greatly increased over the past five years. Total investments by such funds increased from US$405.8 million in 2014 to US$5.31 billion in 2017 (published on sgsme.sg, original source from SVCA). A few key factors are driving these trends.
Industry landscapes are changing quickly — startups are quicker to respond to changing consumer preferences and are disrupting corporates with cheaper, better and more competitive services. Corporates are realizing that they need to evolve to tackle the competition from young startups.
The key factor in the tussle between large corporates and young startups is the speed of innovation versus the startup’s scale of distribution. The faster the startup scales its distribution network, the faster the corporate has to innovate and respond with a competing product.
This is also the reason why we are seeing more partnerships between corporates and young startups within each industry. Corporates provide startups with the scale and resources while startups give corporates the opportunity to innovate new products and a channel to tap into previously inaccessible customers. Startups can also be tapped into as a solution to solve internal operational problems faced within the corporate.
One example is how Gojek invested in Pathao, a ride-hailing app in Bangladesh which is pursuing a similar “super app” strategy as Gojek. This investment allows Pathao to gain valuable strategic advice from Gojek while Gojek gains a foothold in the Bangladesh market.
Similarly, Singtel Innov8, Singtel’s CVC arm, invested in Igloohome, a smart lock startup powering Singapore’s smart city charge. Through this investment, Singtel taps into Igloohome’s smart locks to remotely manage its telco infrastructure assets through an access management platform.
2. What do you think are some strengths of corporate VCs that makes it worthwhile for companies to actually set them up, rather than investing selectively in startups or acquiring them?
CVCs provide corporates with a platform to get a foot into the door amidst the disruption which is happening within their industry. Corporates get access to different startups and launch multiple partnerships before deciding whether to acquire the startup if the partnerships work out well.
Aside from the above, there is a case for corporates to set up an external independent venture capital fund (i.e. CVCs) as opposed to funding it internally through their balance sheet. Investments done through the main corporate setup are subjected to slower decision-making processes and corporate budget allocations. Conversely, CVCs have more autonomy to invest into new technologies and business areas. This is especially important in the context of today’s competitive venture capital scene where investor allocations in funding rounds favor VCs who can move fast. Faster funding rounds are also preferred during early stage investments because startups are then able to focus on growing the business.
3. Conversely, what would you consider as the wrong reasons for a company to be setting up a venture arm?
We observed cases where corporates embark on corporate innovation programs without a well thought out process into the objectives and institution-wide changes which are required – cash rich corporations facing declining businesses and desperately trying to buy innovation. In these cases, the CVC serve more of a PR purpose to the corporate-cosmetic initiatives to give the corporate an image of being an innovative and forward-looking organization.
The decision-making process and measured outcomes of the CVC has to be guided by the intended purpose and desired goals – be it achieving strategic objectives and synergies for the corporate or maximising financial returns from the investments.
The acquired startups end up becoming puzzle pieces which do not fit into the overall business. This happens when attempts to integrate the startups are faced with internal pushback by middle management who are concerned with protecting their turf.
4. What do you think are some key pitfalls CVCs need to avoid? Why?
Every CVC needs to have very clear objectives in place right from the outset, whether the objective is to pursue strategic goals and synergies or maximise financial returns from the investments. In the case of the former, the CVC focuses only on investments that will produce strategic synergies with the corporate and places a priority on connecting portfolio companies with internal corporate divisions. Conversely, strategic synergies take a backseat if financial returns are the main objectives. Sometimes, the CVC might even invest in startups which are trying to directly compete with the corporate.
The success of the CVC depends on how well the decision-making processes are aligned to the desired objectives. CVCs are rarely successful when both objectives co-mingle because it is rare that an investment would be able to perfectly satisfy both objectives. Even if they do, the universe of startups that the CVC can invest in is very small and the startup would have to ultimately make a decision to prioritize one objective over the other.
In addition, the incentive structure of the fund managers has to be appropriately aligned to the objectives of the CVC. If the CVC objectives were to achieve strategic synergies, performance based stock options in the corporate become an important compensation tool. Conversely, a CVC pursuing financial returns would have to adopt the carried interest incentive structure more commonly seen in traditional venture capital firms. In both cases, the incentive structure also has to be aligned with the overall compensation structure adopted by the corporate.
5. How do you see the CVC landscape shaping up in the coming years?
We can expect to see more CVCs being set up. The first wave of CVCs in Singapore have been pushed by Singapore GLCs and blue chips in certain sectors like fintech and real estate. Moving forward, we can see this progressing into other sectors like healthcare, logistics and the legal industry.
Corporate investments (both co-investments and lead investments) have grown more than 2.5x from 2014 – 2017 (source from “Southeast Asia PE & VC: Investment Activity” report published by SVCA). With mega deals such as Alibaba’s investment into Tokopedia, we will see more foreign CVCs entering the scene to tap into local startups with significant presence in the region.
Over the years, startups have grown and we have seen the first wave of unicorns emerging such as the likes of Go-Jek and Grab. The next wave of startups are likely to be vertical champions that will push the digitisation in specific industries. As these startups grow in scale towards Series A and B, we will increasingly see more partnerships that will serve to supplement the goals of corporates.
To this end, we can expect that CVCs will increase the scale of corporate innovation initiatives such as accelerator programs and hackathons. The goal here is to build a community which can further bridge the corporate to startups and innovation.
6. What do you think of the trend of loss-making new-age tech companies setting CVCs? Do you think it is worthwhile for these companies to invest capital in CVCs? Why or why not?
We are positive about such a trend to the extent that the strategic and financial objectives have been clearly identified, and the purpose and desired synergies have been well thought out. Also, the managers heading the CVC has to be scouted and key incentives that align the managers to the CVC’s objectives have to be set in place.
Many new-age tech companies raise mega rounds based on the potential behind the large untapped markets in the region. CVCs are a good way to pursue inorganic growth to expand into new markets (new distribution channels, new segments or new business areas) without spending time to incubate a new division from scratch. It is also a way for new-age tech companies to acquire new disruptive technologies from the younger startup.
Author: Tan Yinglan
Contributed by: Allen Chng
Disclosure: Insignia is an investor in Pathao and Igloohome.