Boehringer Ingelheim Venture Fund’s (BIVF), the corporate venturing affiliate of the eponymous Germany-based pharmaceutical company, announcement this week to set up an office in the Boston region of the US offers an insight into the future of the industry.
Beyond the international angle as corporations set up across borders to tap into innovation hotspots, just as many venture capital firms retreat back to one location, is certainly one trend.
A second is the attention to why Boston is an innovation centre – because of its universities and research institutions helping spawn the innovative ideas – for the exclusive on Boehringer’s planned move to Boston please check out sister title’s article from October.
But, third, is how corporations are increasingly looking to venturing to aid their strategic impact through mergers and acquisition (M&A).
Martin Heidecker, head of Boehring’er new US office and director of BIVF, was quoted as saying the main goal for the company to commit $130m to back 10 life science-focused start-ups was to invest in companies that can eventually be acquired by Boehringer Ingelheim, After all, back in 1996, Boehringer acquired a minority stake in US-based Cambridge NeuroScience, which was then sold to peer Cenes.
Positive financial returns provide corporate venturing units with staying power to reinvest but showing strategic impact makes it potentially vital. There are plenty of issues about measuring strategic impact but the corporate venturing units that can show other parts of the innovation toolkit, such as M&A, research and development and joint ventures and partnerships, is an important element.
It is great if a corporate venturing unit can help the M&A team select companies with a better cultural fit or where the future ambitions of the selling entrepreneurs are known through a longer-term relationship formed through an investment and potential partnership. The high proportion of failed M&A deals as well as internal R&D that is superseded by the work of an external entrepreneur makes the warning signals or insights into suitable acquisition or research areas clear to see.
Plenty of experienced corporate venturing units, such as US-based Qualcomm, say they are now the first point of call for the R&D heads when deciding if to pursue research internally or partner with others. Integrating into M&A, as groups such as China-based Tencent do, is more challenging.
One corporate venturing unit head despaired that her strategy to find portfolio companies the parent would buy was proving harder than expected. But reframing the argument around what they do buy (or miss) is potentially more valuable.
However, we are likely to see more parent-acquisitions of corporate venturing units’ portfolio companies. Groups, such as US-based chipmaker Intel, have started buying out portfolio companies.
In part, this is driven by what some are calling relatively high valuations for well-managed, growing businesses. Stockmarket-listed trade buyers are in the main hampered by the potentially dilutive effect on their stock from buying these companies at higher valuations, a hindrance many private equity buyers do not face. At $623m, buyout firm BC Partners last week purchased information provider Mergermarket from media group Pearson at about 10 to 11 times its 2013 earnings before interest, tax, depreciation and amortisation – a reflection of its double-digit growth and global reach, according to news provider Wall Street Journal.
And data provider Thomson Reuters said M&A in the technology, media and telecoms (TMT) sector was on course for its busiest quarter since 2000 and the merger of AOL with Time Warner, with Jennifer Nason, global head of TMT at investment bank JPMorgan, quoted in the report saying the fast pace of innovation, increasing competitive dynamics and the potential for increasing capital costs (from rising interest rates) have created a perfect storm for strategic moves.
By taking a stake earlier through corporate venturing, the cost of an acquisition has at least in part been met and hopefully at a lower valuation
The joining up of corporate venturing units into the broader innovation toolkits of companies will increasingly be important next year.