Big business helping small business

Private Equity and its close cousin Venture Capital have seen enormous growth over the last few decades.  One of the most important of those changes has been the emergence of large corporate venture arms.  For the most part, these are in-house venture capital businesses that reside within the walls of large public companies.  The original purpose of these vehicles was truly risk mitigation.  Tech companies originally invested in companies they thought might be disruptive so that they had some control as those technologies improved or matured. 

Energy companies similarly got involved in renewable experiments that could help them either provide the next wave of energy, or at the very least, tell investors that they were looking for carbon mitigations solutions.  This happened across many industries, but something that may have surprised some of these corporations is how meaningful these corporate ventures became on their balance sheet.  Many of them were shocked how successful they have been, and it has started to create a number of difficulties for corporate CFOs.  

First and foremost, valuation is a difficult game when your assets are private.  It’s part of why we love private markets, but for a public company CFO, often times, this sort of valuation is well outside their training.  What’s worse, reporting from private investments rarely comes at a time that would be aligned with public company reporting standards.  The result of course is that public companies may not be reporting appropriate balance sheet numbers or income statement adjustments that happen below the line in a timely manner.  When these were tiny, this wasn’t such a big deal.  Companies like Alphabet, Meta, Microsoft, Verizon, etc. in aggregate represented more than 20 percent of the venture capital market at the peak in 2021. 

As you might imagine, while those valuations were climbing, there weren’t a lot of questions being asked of public company executives.  But as the market has been coming back down to earth, declining venture portfolios are starting to take chunks out of balance sheets and earnings, and many public investors just aren’t having it.  

So, what happens when big companies with big investments outside of their core operations get called out by investors?  THEY SELL!!!!  This is happening as we speak, but selling venture assets is no easy task.  First off, these assets are likely bespoke with relatively few obvious comps, so the number of buyers is likely limited.  Second, venture capital generally survives on the idea that one successful investment in a portfolio of many will justify mistakes or losses in others, so the assets they’re looking to shed may not be high quality. 

What will this mean to the public companies?  Frankly it’s likely to mean fairly heavy losses after rushed sales.  The struggle in VC continues, but each stage of the cycle gets us closer to the bottom.  While we certainly don’t wish for any investor to take losses, these types of rushed sales often mean great opportunities for those with stronger hands, better structures, and more patience. 

Source: The Wall Street Journal


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