Building technology companies, Forum

Co Investment: A future core competence for technology venture capital firms ?

Eric Buatois, BGV General Partner shares his perspective on co-investments trends. Limited partners (LPs) in venture funds are eager to be offered opportunities to co-invest with their GPs. But in practice, LPs end up co-investing in very few deals in a typical venture portfolio. The LP community remains very suspicious of co-investment opportunities based on the (ill founded) belief that co-investments are delivering sub par performance and that GPs choose to only show co-investment deals that they could not syndicate otherwise. A recent survey made by Stepstone on a dataset of 400 co-investments made by 97 GPs found that co-investments delivered attractive returns. Co-investment deals generally performed in line with the funds that completed the deal on a gross basis, outperformed them on a net basis and had lower risks profiles. The co-investment market is poised to grow. Since 2008, fundraisings by venture funds have not increased, despite the growth in capital needs of the startup community. For years now, GPs have deployed more capital than they have raised. As a result, GPs now have less capital to invest in individual transactions and are doing fewer transactions. Yet in many cases, they need more capital to secure a stronger ownership in a promising company. LPs have increased in sophistication and are looking for new ways to gain more direct exposure to the venture asset class. Setting aside capital for co-investment enables them to reduce the impact of management fees per unit of capital deployed. In addition, co-investment offers LPs a nimble and flexible way to deploy capital in a very dynamic manner (e.g. on an annual or opportunistic basis) without the need to make long-term capital commitments. Finally it also enables LP’s to improve their fund selection process by discerning which fund managers are the most effective. As a result, LPs work more closely with their GPs and develop a more trusting, win-win relationship over time. Co-investment model is gaining traction within corporations as well. In response to the massive digital transformation trend across all industries, large corporations need to understand and experiment rapidly with new technologies. Sourcing these innovative technologies and making rapid in house implementations is now a board level priority. Yet, plugging into the venture eco system, identifying the right company at the right level of maturity and finding the right team are matters closer to an art than science. Co-investing with a handful of venture firms, which invest in the same industry, in the right geography and in the right sector is one of the very few ways to get quick results instead of buying into a blind pool of investments as a LP in a venture fund. Establishing a collaborative relationship with Venture Funds is critical for:

  • Exchanging deal flow on a frequent basis
  • Performing joint real time due diligence on opportunities
  • Serving together on portfolio company boards
The above ingredients are essential for creating an unparalleled flow of information and to establish a source of competitive advantage for both venture capital firms and corporations in a rapidly changing business environment. Finally it also contributes towards building a solid long-term trusted relationship along with a better understanding of the technology evolution cycle. A venture capital firm that implements a co-investment program with its limited partners and large corporations quickly discovers the similarity of processes and skillsets required. This creates a very synergistic effect, as the critical success factors for both LP and Corporate co-investment programs are the same:
  • Sourcing networks
  • Long term stability of the teams within each organizations
  • Alignment of financial incentives
  • Strategic alignment with the startup’s strategy
  • Transparency
  • Corporate governance
Benhamou Global Ventures has implemented such a co-investment model since several years based on the experience of its partners in the corporate and the venture capital world. With a more flexible business model, BGV has seen an improvement in deal flow, increased flexibility in financing terms, more effective due diligence cycles, greater business partnership opportunities for its entrepreneurs and an improved ability to access different sources of capital.