$90 Million VC Fund By Chevron

Chevron (CVX), the market leader for operations in the oil and natural gas, released its quarterly report this month. The results didn't please the investors as the company revealed that it had spent more than $10 billion in last three months. What's more woeful is that even after burning through so much of cash, Chevron's share price has been declining. However, there's still hope for the investors as the company has been diversifying its business and may perform better going forward.

Diversification through VC Funded Projects

Venture Capital ((VC)) fund allocated by Chevron through Chevron Ventures Technology ((CVT)), mainly exemplify diversification interest of Chevron, which can be in terms of equity participation or acquisition. CVT is a company with a portfolio of 37 companies from diversified business. Chevron is focused on businesses like Oil & Gas, Alternative Energy, Advance Materials, Communication and Networking and Information Technologies with its VC funding. However, Chevron will need to play its cards right in order to benefit from this growth opportunity as the dot com bubble has put many Venture Capitalists out of business in the past.

Which segment should the company participate as a VC?

1. Information Technologies (Software & Hardware): Down the years, we have seen various acquisitions and tie up in the domain of software industries. Recently, Cloud enabled software companies have been recording impressive revenue growth. Analysts are estimating that the Cloud computing market will grow to $20 billion by 2016, hereby making it a great area for potential growth of Chevron. Some of the software giants like Oracle, Microsoft, SAP, etc have embraced cloud as their primary business model and are reaping the benefit of Cloud computing and the market still has room to accommodate many new companies.

The market for cloud is mainly generated by industries that have started showing interest in migrating application on Cloud. During the early stage of this market, there was some encumbrance due to the security factor. This can be a high risk and high returns of investment if invested in a startup companies. Established or semi-established companies can pose less investment risk but at the cost of higher investment as compared with startup companies.

This sector is generally one of the most preferred sectors by venture capitalist, and the best case to quote is "Silicon Valley" envy of the world emulated from its success and backed by many venture capitalists. Areas that Chevron can invest for a good return is cloud enabled applications, E-commerce (B2B or B2C). The main companies will be startup companies that Chevron can step in as VC with equity participation.

2. Communication and Networking: Another market where prospects are bright is the Telecom industries; mainly wireless communication has witnessed an exponential growth. This segment can also include the security service which again is attaining huge growth. It has been projected by market analysis that by the end of 2013 worldwide investment in mobile devices and network security would cross around $8.99 billion.

The CAGR is predicted at 21% from 2013 to 2020. Chevron's participation in this segment would also reap some benefits and can expect good returns. Some risk for this segment is fierce competition with, the bigger players like Apple, Samsung in the mobile devices and Cisco, Juniper, Alcatel for network and security.

I feel if Chevron's investments in product development or enhancement with established industries it can be a safe bet as the gestation period with an established industry is always less than with a startup company. Brand building cost is also less when it's an established company as compared to startup industry. Joining hands is better than competing especially when the sector is not the core business area of Chevron.

3. Advance Materials: Chevron's interest in funding projects pertaining to advance material does add some value addition with forward / backward integration. What appeals most is the nanotechnologies which is supposed to be the future in mobile devices. If chevron invests in nanotechnologies and clubs it with investment in communication and network companies, the biggest advantage will be forward integration leading to higher margins in the total solution. This means that the gestation tenure for return of investment can be bit low, if the investment is clubbed (nanotechnologies with communication), also two independent revenue segment which can complement each other for revenue generation.

4. Alternative Energy: This sector in which Chevron has been engaged with in the past. The prime motive of chevron VC fund is that, if it assists its existing business of the company then it can be a favorite for Chevron VC fund.

Chevron investment in this segment can be anticipated with better returns, since Chevron itself is in this segment. It can also part with its technical and marketing skill to assist the beneficiary company. It can always be beneficial for Chevron with equity participation with upcoming companies which are still to establish them self. This even serves the prime motive of Chevron, to finance a company that can help its existing business to grow. Under adverse condition, Chevron can also acquire beneficiary companies with major equity share and control the company by embracing it.

Government subsidies and support can also be a key factor for the success of renewal energy projects that Chevron may fund. But hurdles, related with economic clearance from various agencies or even government bodies always delay the gestation period of the projects.

5. Oil & Gas: The prime motive of the chevron VC fund is to assist its existing foray of business. Oil & Gas is the company's primary business, and funding projects in this sector would always help Chevron with backward or forward integration as this being the core business area of Chevron.

However, funding in the upstream business would always be a high risk investment considering the oil resource drying and the hit rate of success in oil exploration falling. Huge investment is always at big stakes while working in the upstream segment and not forgetting the operation risk. Safer investment would be in downstream and midstream, which can be comparatively safe with a better return of investment. Investment in downstream and midstream are comparatively less as compared to upstream business makes it a safer bet in terms of risk of return of investments.

Litigation relevant with oil and Gas projects: The Company has always been in the news for litigation of oil spilling and environment danger. One of the most popular aired litigation was the $19 billion environment litigation in Ecuador. Some of these litigation do damage the brand name of Chevron and in the international market it can face resistance if Chevron plans any sort of JV with the local companies.

Conclusion
I think Chevron should invest these funds into numerous IT companies to maximize its growth potential.