Mideast corporates need to get into venture capital

Change — not the long-term gradual kind, rather the type that can be measured on a minute scale — is the undisputed reality of our times. It is the dizzying momentum of a race to stay ahead of the curve that dictates the agenda of corporates — and nations — as they endeavour to stay relevant and strive to be the best.

The winds of change sweeping across countries such as the UAE and Saudi Arabia have captured the attention of the world, with governments launching transformative national plans that embrace digitalisation, demonstrating the incredible potential of these countries as technology-driven growth hubs.

Yet, large corporates in the region have not been as quick to harness the power of technology and implement effective digital transformation strategies, despite the region’s consumers being among the most tech-savvy.

Established businesses today need a long-term perspective of their relevance and impact. Given their decades of experience, do large regional companies realise that they are uniquely positioned to channel fresh purpose and vigour into start-ups, which are increasingly becoming key enablers of innovation?

Do these companies consider themselves ready for disruption in the face of an increasingly digital future?

As with all great challenges, necessity leads to invention. Today, this urgent need for business sustainability is gradually leading to the growth of Corporate Venture Capital (CVC) units — arguably one of the most effective ways to revitalise the start-up environment.

CVCs have been in play for over a century now. One notable early example from 1914 is DuPont’s investment in a then six-year-old automobile start-up, otherwise known as General Motors, to complement its paint and artificial leather businesses. By 1920, the GM investment accounted for half of DuPont’s total earnings.

So, while CVCs in themselves are not a new phenomenon, they are witnessing a resurgence of sorts. In the past five years alone, the number of globally active corporate venture investors has increased three-fold.

Today, 75 of the Fortune 100 companies are active players in the corporate venturing space, led by the likes of Google Ventures (Alphabet), GE Ventures, Intel Capital and Salesforce Ventures. Significantly, CVCs represent nearly a quarter of all venture deals in the US, and 30 per cent across Asia.

Many businesses are increasingly engaged in their own venture capital activity as a matter of survival. If you started a company in the 1960s, its average lifespan would be about 60 years.

Today, it is down to a mere 15 years. Simply put, 40 per cent of the current Fortune 500 companies are likely to be defunct in a decade. Companies need to innovate or perish, reinforcing the cold truth that change has never moved this fast before, and it will never be as slow again.

At their core, CVCs are about marrying the experience of a larger enterprise with the innovative capabilities of a start-up. Corporate investors look to leverage innovation being driven by start-ups with an eye towards stimulating development of complementary products and services, gaining a window on novel technologies, or even identifying new market opportunities.

Furthermore, most CVCs are led by a mission to make strategic, long-term investments, unlike institutional venture capital funds that on average have a lifespan of 10 years. For start-ups, this presents a more resilient and patient source of capital.

Corporates can act as strategic financial investors, providing the backing and credibility of a recognised business, as well as access to their own markets.

While the number of globally active CVCs is on the rise, in the Middle East, where venture financing has been driven largely by investments from VC funds, CVCs are yet to be properly directed to benefit our start-up community.

In the UAE, for example, of the 10 most active VC investors in the past five years, only two are corporate venture capital investors. In comparison, three-quarters of the Fortune 100 companies have a dedicated CVC team.

This is a significant missed opportunity, especially as the MENA region continues to see an entrepreneurial surge. We are clearly at a juncture where large corporates need to enter the fray and play a more assertive role in strengthening the start-up ecosystem and driving the next wave of innovation and growth.

At Crescent Enterprises, CVCs are a crucial part of our long-term strategy as we prepare for tomorrow’s business environment. Our CVC arm, CE-Ventures, plans to invest $150 million in early to later-stage start-ups over the next three years.

In the last nine months alone, we have invested in eight start-ups across a broad range of sectors from medical technology, artificial intelligence, and cybersecurity to food e-commerce and automated industrial drone technology.

In addition to reinforcing our role as strategic investors combined with operational expertise across a number of key sectors, these achievements enable us to support global start-ups that can transfer and induce disruptive technologies and know-how relevant to the needs of our region.

Equally significantly, we are now investing in developing home-grown entrepreneurs, who can potentially put the MENA region on the map as technology-creators, rather than simply technology-adopters. Eventually, we believe these efforts will foster the innovation that is critical to addressing some of our greatest challenges today.

—

As published in Gulfnews on May 9, 2018