The Strategic Value of Early Stage Venture Capital:
Venture capital, and especially early stage venture capital, differs from other asset classes as it not only has financial benefits - potential high returns with low correlation to traditional asset classes - but also additional strategic benefits.
Corporates and other industry groups are attracted to the startup sector as a key component of their innovation strategies. As well as a financial return, corporates are seeking strategic advantages that may include distributed R&D, partnerships, M&A activity and insights into potential threats and opportunities to their core business activities.
"You can systematise innovation even if you can't completely predict it"
(Eric Schmidt - Technical Advisor & Board Member Alphabet Inc.)
To invest in venture capital, investors have traditionally:
1. Managed their own money: this requires larger amounts of capital, access to qualified deal flow and expensive & sophisticated back office resources; or
2. Invested in funds: this means minimal mandate control, limited co-investment opportunity, closed-end fund structure and no investment committee participation
But now there is another alternative:
3. Venture Capital as a Service (VCaaS): this can be a fully outsourced service, or it can be a a platform providing organisations with the opportunity to complement existing, or build new, in-house VC capabilities.
VCaaS delivers financial & strategic (distributed R&D) return, as well as scale, context and focus, providing the client with a pre-screened & de-risked pipeline of qualified late stage startups for direct investment.
Challenges and Solutions:
1. Democratization of Startups & Innovation:
With a lower cost of starting up, technology innovation can occur anywhere.
There are tens of thousands of startups working on any particular vertical’s related innovation globally. Global scouting requires global resources and networks.
2. Early Stage VC Provides Critical Distributed R&D:
The driver for investment in most asset classes, including late stage VC, is a strong risk-adjusted return.
Uniquely, a diversified portfolio of early stage startups delivers both a strong risk-adjusted return and a strategic return - distributed R&D.
3. Asymmetrical Skew of VC Investment Risk:
90% of returns are generated by the top 10% of startups. Early stage VC investing requires a scalable strategy that avoids uninvestible startups and invests broadly in the best 10%.
Employ an option strategy - time is the best due diligence for early stage startups
4. Prohibitive Resource Requirement:
Early stage VC requires small amounts of investment capital but large amounts of resources.
Global reach and regional specialization and contacts are critical in gaining full visibility of emerging technology trends and themes
5. Late Stage Co-investment and M&A Pipeline:
Organizations are generally more willing to invest in a startup once it has demonstrable performance.
A qualified early stage pipeline provides access to deals as well as comparative data to make better informed later stage investment decisions
6. Headline, Moral Hazard & Signalling Risk Mitigation:
Incumbent organizations face a number of acute reputational risks when dealing with emerging startups. It is not uncommon for early stage ventures to:
blame incumbents for failures or for not reinvesting
act in aggressive or unethical ways which may reflect badly on the incumbent organisation
The Strategic & Financial Value of VCaaS:
VCaaS Value Proposition:
Examples of Artesian's Existing Mandates:
Links to Artesian VCaaS Mandate Announcements:
First Australian Clean Energy Seed Fund Launches
Agri-tech venture capital fund GrainInnovate will help boost grains profitability