Singapore Press Holdings (SPH) last week announced the sale of its one-third stake in 701Search to Norwegian telco Telenor for some US$109 million. SPH said that the deal marked an attractive opportunity to realise its investment in the South-east Asian online classifieds operator, and added that it will continue to invest in the digital business.
This puts the spotlight on corporate venture capital (CVC), the investment of corporate funds directly in external startups for financial and strategic returns. The SPH Media Fund, for instance, is a S$100-million CVC fund set up in 2014 to invest in tech, media and commerce startups.
While 701Search is not a portfolio company of the SPH Media Fund – it was established in 2006, with SPH Interactive International, Norway’s Schibsted Classified Media and Telenor as partners – it typifies the same idea of financing a small venture, growing it, and flipping it for a profit.
CVC funds really began to proliferate in Singapore in the past five years. They include Singtel Innov8 (with a fund size of US$250 million), CapitaLand’s C31 Ventures (which will invest up to S$100 million) and DeClout Investments (with a S$20 million co-investment fund with the National Research Foundation).
Last year, this column pointed to a “wayang on disruption”, where large local enterprises are – one after another – carving out CVC funds and proclaiming to want to disrupt themselves by partnering startups. The same column suggested ways to distinguish companies that are genuinely reviewing disruption from those that are jumping on the CVC bandwagon just because others have.
There is one more important differentiator – to know if a CVC fund is set up for success, look no further than at the person running it. He or she, known as the CVC fund manager, is tasked to identify and evaluate innovative startups, and decide whether and how much to invest in them.
First, it is a promising CVC fund if the fund manager is offered (by the company) a performance-based compensation scheme. This usually comes with carried interest incentives that are standard at private venture capital firms. A carried interest is a share of the profits (typically 20 per cent) of an investment paid to the fund manager in excess of the principal amount.
Why are such incentives important? Simply put, they motivate fund managers to do their job well. Some 90 per cent of startups fail. Picking a startup from that elusive 10 per cent and then selling it for a profit or taking it public requires exceptional due diligence, astuteness and market knowledge – all of which fund managers should work hard to achieve.
Lamentably, the contrary is true at several local firms. Fund managers at these firms are offered compensation through a fixed salary and annual bonuses that are tied to the parent company’s performance. With no carried interest incentives, what’s in it for them to do their job well? Not much. A competitive compensation scheme, on the other hand, will help to retain good investment talent.
Secondly, it is a promising fund if the fund manager is an external hire with venture capital experience and established networks. Experience is useful because the real test for CVC funds lies in avoiding “losers” and this can only be achieved with industry experience and the right skills. Networks are helpful because they cut the time needed to get access to good founders and ideas.
For these reasons, companies should think twice about promoting an internal employee to the position of CVC fund manager. Such an individual may lack real market experience and networks, or be too accustomed to the company’s way of doing things and not be able to offer fresh eyes on innovation.
Thirdly, it is a promising fund if the company grants the fund manager full autonomy on investment decisions. This means that he or she can invest in companies at his or her own discretion, and not be restrained by the company’s core business or financial performance, or priorities of its other departments. Full autonomy signals a long-term commitment on the company’s part to CVC.
Last but not least, it is a promising fund if the company lays down sound key performance indicators (KPI) for its CVC fund manager. An example of meaningless KPI is “x number of deals in a year”, which is a reality at a few large local enterprises. Not only will such a KPI drive fund managers to rush to secure deals in an overly tight time frame, it demonstrates a short-term attitude towards CVC.
Venture capital is a long-term game. For companies that are looking for growth, venture capital is a good source of innovation to power it – both financially and strategically. CVC can pay off in the long term, but only if companies treat their fund managers right.
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