Venture Capital Case in Portugal

Exactly a month ago I was in Portugal joining the UPorto ICC competition. The city we visited was Porto, the second largest city after Lisbon.

The competition started on the third day upon our arrival, followed by a 36 hours lockdown period in the hotel room. Competing with 12 teams from all around the world, we would present our proposal to judges for the first round and then pitch to the board of directors on stage if we enter final round.

The case was about how Sonae, a multinational food retail conglomerate, wanted to up their game in startup space. With €100M investment for a 5-year plan, Sonae IM (Investment Management) team has to devise investment strategy for investing in retail-tech companies. What's particularly intriguing is that it wasn't a purely imagined scenario for the retail giant. There are news coverage about their recent investment. (Sonae invests 110M in retail innovation)

Getting the question right is challenging for this problem set. First, non-disclosed information of start ups limits the accuracy of the financial projection. Then a €100M fund have multiple moving parts for deciding a proper investment thesis. Also, benchmarking performance of an investment arm under multinational conglomerate requires a set of sophisticated metrics to measure the projected impact and synergy. Compounding these factors yield a complicated case to crack. Yet, 36 hours of sustained effort could give us a reasonable grasp of the subject matter. To summarise the experience, there are 3 observations from the case.

1. Prestige matters in the Venture Capital game

In efficient market, investors often enjoy comparable rate of return in the same asset class. But not in the VC scene. Sequoia, as the leading venture capital in Sand Hill Road, has 3 funds that record >40% YoY growth.

Consider Sequoia Venture XI Fund, which in 2003 raised $387 million from about 40 limited partners, chiefly universities and foundations. Eleven years later Venture XI has booked $3.6 billion in gains, or 41% a year, net of fees. Sequoia’s partners stand to collect 30%, or $1.1 billion, while limited partners get 70%, or another $2.5 billion. Look for even more outsize returns from Venture XIII (2010), which is up 88% a year so far, and Venture XIV (2012). The latter two will split the $3 billion or so Sequoia takes home from the WhatsApp deal. Add it up and Sequoia is turning its own partners into billionaires while keeping outside investors purring.


Compared to the industry average, the outsized return is remarkable. The results could be attributed to the disproportionated capital return by a handful of truly game-changing ventures among thousands of startups. Sequoia is known for its successful streaks of past investments and its willingness to help its startup relentlessly. A simplified way to think about this: If you are a founder in the startup with good upside, you would only sell limited shares if you need to raise enough cash to scale your operations. And when you decide to take other investors' offer, you prefer the best and the most helpful ones. The investor-founder dynamics are at play in the decision. Track records and brand reputation often help the top tier VCs to land the grand slams of the year.

2. CVC's metrics are hard to define

Corporate Venture Capitals (CVC) are different from the typical VC. While the latter usually looks for a diverse portfolio that promises solid financial return, CVC eyes for investments that could create values and synergies to the core group. The tech industries have a handful of established players such as Qualcomm Ventures and Google Ventures. GE, Siemens and the case company - Soane, are all joining the active corporate investment scene. When we are cracking the case, one of the most debated topics is how we measure whether the investment is successful.

The companies that Sonae invested in the past, including Movvo and InnovRetail, are aligned with their business strategy and aimed at producing synergies with Sonae's child companies. After talking to the investment manager of Sone IM, I found out that the mindset of CVCs is quite different from what I observed from others. They often want to invest with controlling stake even though they will have to assume more risks. The younger managers will have to push forward plans that involves minority stake only. A recent case in point was StyleStage, a U.S. based ML company for fashion brands. The deal remained undisclosed during our competition because the announcement was made on the day of our finals.

3. Every company tries to be is a tech company

It was inconceivable that a retail player would engage in the startup ecosystem five years ago, but the trend has shifted to new direction. With healthcare and finance industries leading the increased level of engagement, there are a lot of activities from the big corporations to buy out startups. Whether they are successful or not would be another interesting topic to explore.

The two graphs below from CB insight sum up neatly.

CVC Summary 1 CVC Summary 2

At the end, our team entered final and went home with 2nd place. It was truly remarkable to be working with the team and met friends from other countries. In the after party, our team had way too much fun ... which leads to my little detour in Madrid.

Throwback to the good times with the team!

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