If until a couple of years ago it was associated with R & D entrepreneurship within companies or the purchase of nascent businesses. Now it is the turn of the corporate capital venture (CVC). More than talking about ecosystem, today we think about Ebitda in innovation.
Claudio Barahona gets up from the chair as soon as the interview begins in one of the Wayra halls in Providencia. And, down in hand, enthusiastically graphs on the blackboard what is happening in the relationship between large companies and startups. A growing approximation to the corporate venture capital (CVC), where a company buys a share of less than 50% in a venture that already has a business of an attractive size and participates in its directory. And that represents a more sophisticated stage of a link up to a couple of years associated with the traditional scheme of internal R & D or mergers and acquisitions.
The reason for a company to become a corporate venture capital
Why does a company become a corporate venture capital? First for survival and long-term strategy. Then for returns and short-term business generation. Such as the resale of products or their internal use, that affects Ebitda this year. And finally, a return on investment. This is according to Barahona. Who is a country manager of Wayra Chile, the open innovation hub of Movistar, and director of the Chilean Association of Venture Capital (ACVC).
He further stated that, “Today a large company has multiple threats. For example, being commodities, because all large companies are now value-added, technological. Then you have the new players, the GAFA (Google, Amazon, Facebook and Apple). Which means that in all industries someone is threatened by an actor that did not exist 10 years ago. And then you have what I call everything is global. Your competitor is no longer the warehouse of the front, now it is global. These three things force you to a reinvention. No company today has a future in 20 years if it is not reinvented. There are probably industries that are doing it faster, such as telecommunications.
Wayra invests between US $ 100 thousand and US $ 200 thousand for a participation that on average reaches between 6% and 7% of a startup. This is enough to have a seat and vote in the directories of the ventures. These are operations under the motto never alone, that is, they are never alone, so they are co-inverted with others. It has an established budget but in exceptional cases more resources can be requested from the parent company in Spain.
In 2018, Wayra achieved around 3.5 million euros in business generation in Chile and the goal, set globally. Which is to reach the order of 90 million euros in the country within five years.
Barahona explains, “We are thinking of investing in three or four companies this year, similar to 2018. The challenge is not so much to invest in companies this year, but rather how I grow the companies I invested two years ago. Our challenge is more about the existing portfolio than the one I’m about to capture. The profile of the current partners are B2B (business to business) digital and innovative technologies in areas such as cybersecurity, data, cloud computing, Internet of Things, price comparison in transport or remote management of industries.”
Space to grow
Masisa is another example. The portfolio of inverted startups billed US $ 2.2 million in 2018 and is expected to double in 2019. During the past year, it invested in six companies and a similar number is projected for this year. Thus, it would reach a portfolio of 16 to 20 companies. The budget depends on the opportunities that arise and is leveraged with strategic partners such as UDD Ventures and Dadneo. Which allows it to multiply the investment by three and diversify the risk. The foci of investment in CVC are companies that are developing technologies in construction materials, transformation and constructive solutions.
According to José Catalán, Masisa’s corporate innovation manager, historically they are talking about an annual amount close to US $ 1 million early-stage investment. In 2019 and 2020, they want to multiply this investment through partnerships with venture capital firms from Latin America and the United States. Since they understand that they need to enter series A and B to have a significant impact on a company like Masisa that bills more than US $ 600 million.
Catalan says , “In my experience, companies have always connected with entrepreneurs and startups. But have seen them as potential suppliers and in a business context where there was not as much uncertainty as today, which is why they did not share the risk. In recent years there has effectively been a change in this relationship and it is natural in the generation of a process of corporate innovation to move from calls. Also boot-camps in early phases, which is low risk and generally executed by external consultants, to a CVC type relationship”
He adds that, nevertheless, a link through CVC depends on the degree of aversion to risk of the company and estimates that there are still very few that are investing or doing it in a concrete way in Chile. In their experience in Masisa and in the area of design, architecture and construction in Latam, which is the industrial sector where they operate. There is not a very strong and high valued startup deal flow, so they do not generate Ebitda immediately or for they and less for Masisa.
More incentives are sought
The world tends to that big companies through funds or directly buy companies with greater development. Since they look for firms that are close to their size for the transaction to be relevant, says Andrés Meirovich, managing partner of Genesis Ventures and director of the ACVC.
One point as a country is to stop talking about the ecosystem and to do it about industry. The difference is that an industry generates transactions. When a company treats innovation seriously, it is when it seeks to generate transactions that increase its Ebitda, either by increasing sales or by lowering costs. If there are no transactions this only happens to be RSE, causing much damage to the great contribution that startups have in a country.
The Association has recognized that thanks to the efforts of the State through Corfo and through programs such as Start-Up Chile, the development of incubators, accelerators, angel investor networks and the financing of early stage projects has been encouraged. But it is still very difficult to raise resources for later stages. So successful cases such as Cornershop, The Not Company or Levita Magnetics look out of Chile to raise financing rounds.
The ACVC has proposed that the development of the corporate capital venture should consider measures such as that pension funds. And institutional investors can invest in local private investment funds, without the restrictions currently in force. Or that there is a greater facility to offer investment funds of venture capital to foreign investors.
The mood and forward perspectives are favorable
“We see a growing interest in corporate venturing in the country, especially between retailers and banks. There are several objectives behind these investments, like, access new high-growth businesses, enable distinctive experiences for clients, and acquire talent and digital capabilities, “says Andrés Anavi, partner and managing director of BCG in Chile.
Through Engie Factory, the energy company is also dedicated to the CVC and the Company building, and maintains that the return can be seen in terms of strategic projects carried out jointly with other ENGIE Latam companies, new insights in existing markets and the opening of New markets.
“Although we started with the idea that ENGIE would be the only investor in the startups of our company builder, this year we have come to the conclusion that it is beneficial, both for us and for startups, to have smart money from other investors helping make the business grow. So, this year, several of our startups found co-investors while others are in the process of attracting external venture capitals by 2019, “says Lode Verdeyen, CEO of Engie Factory, at the start of a report on activities.
He further adds, “The corporate venture capital model has to do with the concern that large corporations are not always right and that talented and determined entrepreneurs can disrupt markets in their entirety, even globally”
Also published on Medium.