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Five steps to create value and innovate the economy and society through Venture Capital

Andrea Di Camillo, Managing Partner at P101 | October 8th, 2020

VC creates value and can act as a driving force for Italy’s recovery. We have always said so, but during the Covid-19 emergency evidence was there for all to see, since the emergency urged all well-established businesses to embrace digitization. We experienced this with P101: between May 21st and June 5th – in full lockdown and mostly via videocalls – we closed two important deals. Both had an almost unprecedented feature in the Italian landscape. That is, on the side of the buyer there was a big corp. These are not yet exit-deals, as P101 is still a stakeholder, but they are a step towards future exits. The first deal is arranged as a third funding round for Milkman, with Poste among the investors. Its core is the construction of a newco which, by incorporating Milkman’s technology, will offer advanced and hi-tech services to Poste’s customers. The second deal is a minority investment by Campari in Tannico, aimed at developing industrial and sales channels synergies between them.

The value of Vc-backed startups

VC-backed startups are companies that have above-average growth rates: the most updated report by PwC on the impact of VC and PE on the Italian economy shows that the annual turnover growth rate of VC-backed startups is 5.2% and the average one of other companies is 1.9%. GDP growth rate is and 0.7%. Compared to the overall landscape of Italian companies, the EBITDA of these startups is 6.1% higher that that of other companies and their employment rate stands at +4.7%, compared to the average zero point something.

However, the value of a VC-backed startup is not so much in its numbers, rather in its potential as a big corp’s growth amplifier or cost reducer. This is how development is ultimately created. VC-backed startups succeed for a variety of underlying reasons.

Access to information

First of all, Venture Capital funds, thanks to their vertical skills, analyze thousands of companies and startups every year: this enormous work (that is hardly perceived from the outside) allows us to have an overall idea of the changes that take place on many supply chains, of the origin of some innovations, and of many other contextual aspects that allow us to make a reasoned investment selection. This means that our selection is more effective because, in fact, we have access to all the key information.

Human capital

Furthermore, the selection of a business is always linked to the value of the entrepreneur that founded it. To have a good idea is a necessary but not sufficient step: entrepreneurs must be able to make it happen and must have all the qualities they need to succeed, because, in the words of Elserino Piol, “the entrepreneur makes the business“. VCs can therefore be seen as “talent scouts”. Also, they play an equally decisive role as “coaches”. Indeed, they can both select good investments (scouting) and also help new companies grow (coaching). To achieve this goal, VCs don’t just need to invest money, but also to start a path with the company, to accompany it towards an exit deal.

Not just finance

In the pre-investment screening and due diligence process, a VC fund manager identifies the qualities that can add value to a business. Furthermore, it has a fundamental role in contributing to the internal organization of the company, from the point of view of human resources and processes. VC-backed companies professionalize faster and more effectively, both at the top and middle management level. The network of relationships that naturally revolves around a Venture Capital firm represents a luggage of decades-long relationships to which startups can have access.

You need to be patient

VC ability to create value is expressed over a medium to long time horizon. And this leads to the third reason behind a startup’s success: a long-term project, at least 5 to 7 years. This is also behind one of the most interesting characteristics of Venture Capital as an asset class, namely its decorrelation to equity or bonds and the fact that it’s not sensible to the shocks of the stock exchange. But above all, its long-term prospect allows VC and its invested companies to focus on medium to long term growth, instead of hasting towards the year-end results, as large corporations often do.

Correct mistakes and move flexibly

Venture Capital funds look for entrepreneurs who have method, gives them the resources they need and lets them work. Each Poste and each Campari could build their own Milkman and their own Tannico in-house at a sustainable cost. But, again, it’s not all about the money. It takes outsiders to do this kind of innovation and you need to accept that part of your company will lose money for some time, while doing research. It is much easier to work on innovative ideas when you’re free from the constraints of a large company. For corps, the value of a startup will then be measured not by its turnover, rather, by the cost or organization optimization that its technology will bring. This also explains and justifies why start-ups valuations become so high: innovative companies bring the future to corps, and that is valued on a very different scale.