Posted: 16 Nov. 2017 10 min. read

Valleys of the World: A virtual fund-of-funds approach to frontier investing

I’ve been thinking lately about the accelerating corporate trend of setting up venture funds—and the seeming inevitability of Silicon Valley as the destination for these funds. Sure, some of the world’s greatest innovation stories have emerged from the corridor between San Jose and San Francisco. Sure, the Valley is inundated with unicorns. Sure, there are thousands of promising start-ups there that need financial backing today. All those things may be true, but still I wonder whether there are other ways to invest, innovate, and grow in the venture world—or if doing so really does require making an “all in” Silicon Valley play.

Looking beyond Silicon Valley

Silicon Valley has, beyond a doubt, produced some of the world’s game-changing businesses, and therefore merits considerable investment attention. But asset prices in the Valley are buoyed by steady and significant capital flows, not to mention free marketing in the form of extensive media coverage, and the cost of setting up shop to invest in Valley start-ups makes doing so not for the faint of heart.

That’s why I was excited when I visited Tel Aviv for the first time, in early 2016, and came away with a strong sense of two things:

1. Israel has a fine array of start-ups, with groundbreaking IP—and top talent behind it. In effect, Israel has established its own “valley”—and is justifiably proud of it. But here, asset prices and the costs of investing are noticeably less than in Silicon Valley.

2. There are probably other “valleys” around the world, which do not get the same degree of investment attention as Silicon Valley but also feature great assets, intellectual property, and capital—making them attractive investment opportunities.

That’s my hypothesis: There are many “valleys” in the world. Wherever there are innovation centres fuelled by government incentives and digitally connected talent—places like Tel Aviv, Berlin, Moscow, Bangalore, and even Shenzhen and Beijing—there are attractive investment propositions.

Creating a globally diversified frontier investment fund

So, how does a company get exposed to a fully diversified and globally rich choice of assets that meet their investment parameters—without getting bogged down in excessive and fixed set-up and infrastructure costs?

The challenge is to manage a range of factors that can inhibit an ideal global investment architecture, ensuring that the investing company can secure the best assets available, at the best prices available and an acceptable cost of investing, on a global scale.

Imagine a virtual “fund of funds” (VFOF) approach to frontier investing, where a portfolio of investment funds is created. It’s virtual because we don’t want to get slowed down by all the administrative and legal bureaucracy involved in setting up actual funds. Here’s how it works for our VFOF of the world’s “valleys”:

  • Each individual fund is dedicated to one of the “valleys” we’ve chosen to invest in, and has an allocation designed to give the overall fund of funds risk diversification and reduced investment volatility as well as a truly global investment landscape.
  • The fund percentage is strategically determined based on a combination of factors: strategic ambitions, risk appetite, investment parameters, investment time horizons, asset price trends, the costs of funding, etc.
  • This approach will likely appeal to a corporate board whose questions around “What investment opportunities are we still missing here?” and “How do we mitigate against exogenous risk factors related to a specific market?” are easily answered. Many board members worry about diversification as an important compass guide in any event, as it’s the safest way to guide a business through the complexity of today’s business world.
  • Each fund can then have its own performance metrics, and asset comparisons and monitoring can be done in a relevant fund context.

The real magic, of course, will be in the implementation. Many company executives will say, “We’d love this but just don’t have the infrastructure to do this—it’s why we invest the way we do” or “We have little choice and can’t just wait around, so co-investing with trusted players in established markets, well, what’s wrong with that?”

We’ve been working on some ideas and I believe there is an answer—that creating global investment leverage without significant consequential costs is a real possibility. An illustrative model of what’s involved is presented below. 

 
View or download the image

The magic of the process occurs in the interplay between the theory of digitivity, the Red Queen hypothesis, and a range of future industry scenarios – it’s important to have as much optionality as possible built in.

The VFOF keeps executives focused, boards satisfied, and shareholders confident that they won’t be missing anything too serious. 

Interested in moving forward with the idea? Would you like to share your thoughts? We’d love to hear from you.  

 

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Meet the author

Mark Casey

Mark Casey

Global Leader

Mark has been with Deloitte for 32 years and has worked out of our Dublin, London and Johannesburg Offices.  He has been a partner for 20 years. He has worked across most of the firm’s service areas – assurance, risk advisory, corporate finance and consulting.  His clients are predominantly multi-national and he has developed a strong network across DTT in all major geographies which enables fast access to the right resources. He also served on the South African Board of Directors from 2000 to 2004. He acts as lead client services partner or advisory partner to a number of large, strategic clients of the firm in both the media and telecommunications sectors. Mark also leads the firm’s Technology, Media and Telecommunications industry for Africa and is a member of the global TMT executive, with a responsibility for learning. In October 2015, Mark took over the leadership of the global media sector with an emphasis on using his global network to support our global media clients’ ambitions to internationalise their businesses. Areas of Focus Mark specialises in the provision of strategic, operational and technology enabled solutions to many sectors of the digital, multi-platform media industry, ranging from TV broadcasters to digital businesses such as internet, interactive TV and mobile content companies. He remains active in the M&A domain for internet media companies and in the transformative changes for newly acquired businesses and their back-office evolution. Much of Mark’s time is spent helping companies to internationalise their businesses, dealing with market entry and expansion considerations and identifying partnership opportunities to accelerate their growth.