The COVID liberation is around the corner. After months of seeing much of the joy in life – when not life itself – suppressed, an irrepressible feeling of euphoria is set to be unleashed on large portions of the world population by the end of the second quarter. This is being savagely underestimated as protracted vaccination rollout plans, healthcare systems on the brink and rising mobility restrictions are currently sapping the morale of the population.
History will mark the turning point. It will be accompanied by the prospect of two years of strong cyclical recovery fueled by massive pent-up consumer and corporate demand driving global GDP growth to 5% or more per annum. The cyclical tailwind will be extraordinary, sending the stock markets and M&A activity to further heights in a low volatility environment.
Many will get carried away and lose sight of the broader perspective which remains rather sobering. Indeed, once the output gap is closed by 2023, the global economy will return to its ex-growth status as structural weaknesses resurface. Worse, questions about sustainability will plague vast sections of the industrial world. The markets will only find support in financial immortality.
Fortunately, a wind of change can help improve these dynamics. The persistent reference to 2050 in the context of net zero emission objectives seems to be slowly opening a totally new time horizon for a growing number of firms and their stakeholders. Remarkably, 2030 is subtly becoming an acceptable milestone for corporate strategy. Such a change in timeframe would offer an opportunity for industrial technology firms to nurture greater long-term ambition at a higher risk when it comes to innovation as they attempt to boost their growth profile.
But large industrial companies cannot transform themselves into start-ups. Whilst a potential source of inspiration, successful ‘lean start-up’ principles require a degree of speed and agility which eludes mature organizations. More promisingly, large corporates can leverage their industrial know-how, deep domain expertise and access to financing to act as corporate venture capitalists. In fact, corporates participated at a record level in venture capital (VC) fundraising in 2020. I expect that positive trend to continue, with many companies further developing their activities in this domain as they seek to build a long-term competitive advantage in new technologies.
Simply mastering VC skills is not sufficient, though. Indeed, the VC industry has struggled to generate appropriate returns, delivering a similar performance as the broad stock market since the tech bubble burst in 2000 despite incurring greater risk. The objective must be to be amongst the absolute best in the field. In his book ‘Zero to One: Notes on Start-ups, Or How To Build The Future’ (2014), Peter Thiel, a co-founder of PayPal, shares his perspective on the secrets to successful venture capital. One principle stands out: the ‘Power Law’. It states that ‘the best investment in a successful fund equals or outperforms the entire rest of the fund combined [by potentially generating a 10x return]’. With this objective in mind, corporates ought to look for VC investment opportunities targeting an XXL addressable markets, say $100 billion or more by 2030.
As the industrial tech world finds itself at an inflection point, the macro- and microeconomic circumstances could not call for a clearer strategic intent: Now is the time to think big.
Further readings:
‘How Transparent are Firms about their Corporate Venture investments?’ (2018) discusses the lack of transparency with which corporates are handling their CVC activities and the implications it has on accountability
'The State of Corporate Venturing’ (2013) provides a valuable perspective on the objectives, set up and performance of c. 50 corporate venture capital funds
‘What Happened to the Future?’ (2011) in which Bruce Gibney, a proud investor in SpaceX through the Founders Fund, lambasts the incrementalism which has plagued the 21st century and calls for all economic actors across sectors to up their game and vision