Rolling the dice on tech and digital investments

Updated: Jan 11, 2019

For corporate organisations, a healthy M&A pipeline is important in a dynamically changing market environment, where speed of capturing opportunities has a strong bearing on future value creation. Is your company considering an investment or acquisition in new technology companies? What are your key considerations - tech, capability, products, market, synergies, customers? How do you ensure you deliver tangible realisable value from the investment?

#investment #acquisition #VC #unicorns

Let's start with a pop quiz

If your hardy 20-year old business today had $10Mn of spare change, would you:

1) give it back to your shareholders

2) invest in inventory, perhaps for a rainy day

3) drive sales of your core product to more marginal customer segments

4) experiment building and selling something altogether different from your core

Would your answer change if:

1) historically you had always, almost without fail, given back the $10Mn to your shareholders

2) your core product is in decline and expected to accelerate

3) you had tried some experiments that failed in the past

4) you were inclined to believe that winner takes all dynamics in tech are real and unyielding

Just as importantly, what are the primary motivators behind the choices you make?

This hypothetical example underlies the conundrum playing in the minds of many CEOs and senior leaders in large corporate organisations. Tensions are building up with shareholders who are keen to maintain status quo on dividend payouts, while business realities are suggesting a bleaker future outlook, and challenger businesses are fast gaining traction and dominance. Before going into a discussion on digital investments, we feel it is important to frame this as the starting point context for many incumbent businesses, and investment decisions should not be made in total isolation of it.

Philip Green | Chairman, Arcadia Group

“Good, bad or indifferent, if you are not investing in new technology, you are going to be left behind."

Scoping the discussion: strategic investments to unlock value from existing assets or move into high potential adjacencies

There are many ways to dimensionalise objectives and approaches of a business' investments into technology. Ranging from VC-oriented objectives which tend to be purely financial, to corporate VC and balance sheet funded private equity deals where synergies are often a central part of the thesis. Our philosophy is that pure financial objectives are better suited to pure-play VC funds, as those funds have the ability to (1) develop a portfolio breadth that cannot be matched by corporates (unless you are Google!), (2) they have the financial resources and internal capabilities to scale up businesses to meet a >10X returns expectation over the investment horizon, and (3) they have been doing just that for umpteen years so are just better at it.

Corporates on the other hand lack these starting points, however what they do have typically is a rich asset base of existing products, brands, distribution channels, and customers; which ideally they would like to build into the investment thesis of any one target. Our focus in this discussion will be this starting point.

Be wary of the risks

Of course we would start with a health risk disclaimer.

In the tech and telecom crash of 2000, these two sectors lost about 70% of their value. To put that loss in perspective, after a 70% decline, you’d need a 233% gain just to break even. In a healthy investment environment that would take well over 15-years to recover.

In just the last 3 months (as at 10 January 2019), versus their 3 month peaks, Apple has lost 30% of market value, Facebook 10% (after bottoming at 20%), Netflix 12% (bottoming at 36%), Tesla 9% (bottoming 21%), and Twitter 10% (bottoming 29%).

Scott Galloway | L2 inc. and Professor at NYU Stern

"If you look at the valuations, the number one player has more than the valuation of the next five or 10 combined... When I was starting companies in the 90s, there was sort of three or four companies that were doing okay. Now it really is winner-take-all."

Buy or build?

While this is an age old question that goes beyond consideration of tech investments, it is not always clear what the answer is from company to company.

Buy or build?

While this is an age old question that goes beyond consideration of tech investments, it is not always clear what the answer is from company to company.

Strategic or financial rationale, which one best suits your company?

In t

Monitoring execution and realising synergies; an effort in futility or a must-

Often, once a company makes investments in number of minority positions,

Valuation methodologies are ever evolving

Valuation methodologies have undergone distinct evolutions over the last 20 years. While PE ratios and are still used for publicly listed stocks

Invest from balance sheet, or pursue alternative approaches


Warren Buffet

"Rule number one: Don’t lose money. Rule number two: Don’t forget rule number one.”

Corporate venture capital to wet feet and diversify bets wider

Some large corporates have internal corporate venture funds that drive investments into new adjacencies. Google Ventures, Comcast Ventures, to name a few. While their mandates can waiver between strategic and financial objectives their intended purpose is to find opportunities to synergise with the rest of the holding, either by leveraging assets, markets or products

Internal incubators and accelerators as a longer-term value play

XX There are companies that directly operate their own tech investment and acquisitions.

Marc Andreessen

"Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not."

Externally supported accelerators (Techstars)


Get moving



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