By EloInsights
- EloGroup partner Jaime Frankel gives an overview of the current Venture Capital scenario in Brazil and points out business opportunities in a period of slowdown.
- He describes how the ability to integrate different strategic innovation vehicles has brought important advantages to companies.
- Frenkel also shares his vision of how investments in AI should be made from a perspective of leverage to solve business challenges.
Open innovation, that is, the move by companies to access the innovation ecosystem and startups to achieve strategic gains and financial returns, is a practice that has been constantly evolving and maturing over the last few years. And it can be done in a variety of ways.
One of them is through Corporate Venture Capital (CVC). In this type of investment, large companies make capital contributions to startups as a way of exposing themselves to new technologies without as great a commitment as an acquisition, for example.
In this interview, which was based on the Corporate Venture Capital 2023 Survey by the Brazilian Private Equity and Venture Capital Association (ABVCAP), EloGroup partner Jaime Frenkel discusses several of the topics that revolve around the theme.
He talks about the current state of the Venture Capital market in Brazil, the opportunities found in the slowdown it is going through, as well as trends in the use of multiple innovation vehicles, and the best ways to incorporate Artificial Intelligence skills into an organization, given the current race around this technology.
Read the full interview with EloInsights below.
How do you perceive the current business scenario of the CVC market in Brazil?
We are going through a Venture Capital market boom from 2019 to 2022. In this process, investment in Brazil was greatly accelerated by international players, who poured billions of dollars into the domestic market. This created an overheating of the market and a “bubble” in terms of company valuation.
Today, what we see is a slowdown in this scenario. Valuations have fallen, international interest rates have risen, and players have reduced their investments all over the world – including in Brazil.
On the domestic scene, we are also facing a significant increase in interest rates, leading to less availability of capital for this type of investment. The result of this is a major slowdown.
However, as some companies have a “delay” caused by years spent discussing the opportunities of making a VC, without necessarily making this investment, there is still a considerable movement in the market playing this game. This keeps the Venture Capital wave moving forward.
Another important factor to consider is that companies invest not only with a financial return in mind, but also for a strategic return. This allows the business to acquire a long-term and more stable outlook.
Corporate Venture Capital for a company is much more than a tool for financial gain; it is also an opportunity for strategic return. With CVC, it becomes possible to test strategies with greater uncertainty and lower commitment. This is because it often is a more agile and cheaper solution than trying to implement a new strategy “in-house”.
The latest edition of the Corporate Venture Capital Survey indicated that, in 2023, there was a reduction in the number of companies setting up their CVCs. But you must consider that the performance today is much stronger than it was three years ago. Although this number was higher, the market did not have such mature players present in the ecosystem.
A lot of people who entered the CVC through F.o.M.O [“Fear of Missing Out”], without knowing much about what they were doing, without a strategic vision, ended up leaving. Therefore, we are left with players who are mature, who have developed a well-established strategic vision and who will guide the next rounds of funds.
Do you see companies using CVC as a tool for transformation? What lenses are most sought after in this process?
CVC is a very appropriate tool for conducting tests before incorporating a new business model into the company’s portfolio – in other words, “testing the water before jumping in”.
This happens with many agribusiness companies, for example, which are aiming to enter the digital world. The technique of precision agriculture, for example, requires a great command of technology. If you do not have this expertise, the way forward may be to invest in companies that work with drone solutions and computer vision to analyze the health of the crop, for example, and, based on this, implement some precision farming process.
CVC as a testing tool addresses exactly those scenarios in which there is a strategic window of opportunity. Faced with a condition in which the company has the potential to grow, but which requires quite different capabilities from the ones it has, CVC stands out because it allows you to conduct these tests in an inexpensive way, in which you only buy a piece of the startup, and with agility.
What has most caught your attention in terms of promising points in development and trends that companies need to keep an eye on?
One thing we have seen companies do – especially those we see as mature and who will be able to use CVC as a strategic tool – is to have a portfolio of vehicles for strategic innovation.
For example, before making a large investment and acquiring a new area, the company wants to test its performance with a small investment. The way to do this is through CVC.
In other cases, such as when the company wants to access a type of solution but understands that the technology is not strategic enough to achieve major growth, what can be done is to establish a relationship with startups in the most usual contracting.
So, the companies that manage to combine these vehicles and based on their strategy, understand the best combination to use them are the ones that will be able to navigate better and with more agility to generate transformation.
How is Artificial Intelligence (AI) doing in this scenario? Are companies interested in startups that develop solutions with this type of tool?
A crucial point is that, if you are not a company whose “core” is technology, buying a company just for its AI capabilities, because it has specialized people and solutions inside, might not make much sense. Now, using AI as a lever to solve your business challenges makes perfect sense.
So what matters is having a sharp vision of what the main transformative use cases are for your business that use AI and using this understanding to guide your investments.
If, for example, you represent a specialized nutrition company, you can look for AI solutions to improve product formulation, discuss digital marketing or improve customer relations through customer service. But this must be done within concrete use cases that are aligned with my core business.
Investing in AI just so you can talk about being involved with AI can be a problem. You can buy a company wanting to acquire this capability, but at the end of the day the bill will not close.
How has EloGroup supported companies in developing their innovation strategies?
Fifteen years ago, when EloGroup was founded, the word “startup” was not commonly used in the market and “open innovation” was a term that was only associated with academia. Early on, we made a major commitment to be close to the frontier discussions and, today, we connect very well with innovation and strategy, to the point where they are elements that converge.
Innovation becomes the component of strategy that looks at your business from the future, not from the pains of the present. We manage to bring this vision to life very well, including through dialogue with the C-levels. This helps to eliminate F.o.M.O. and create a truly strategic vision.
At the same time, we are also evolving a lot in terms of our ability to combine different innovative vehicles. This involves creating a governance system that allows you to translate the strategy into priorities and, based on these priority objectives, define the operation of the vehicles. So, for example, in venture building, we oversee various projects to create, prototype and scale new businesses.
At CVC, we help with the entire fund structuring strategy. At EloGroup, we do not act as managers, but we support the search, evaluation and prospecting of startups. We also work on synergy plans, monitoring the process of aligning investments with businesses.
