Many people talk about innovation these days but few dare to talk about how to fund it. In this article I hope to tackle some options focusing on corporate venturing.
In its simplest form, corporate venturing is the investment of corporate funds directly in external, early-stage companies to secure financial and strategic gains.
Before I dig deeper and explain why I am bullish on this asset class, especially when it is applied to the Afri-can investment landscape, I believe innovation can come from anywhere, but it needs to be supported with the right managerial operational infrastructure and effective viable business models – usually these are values embedded in larger companies.
I set out to prove this theory in 2007 when I noticed a gap in the healthcare first-aid market for a brand of skin-toned plasters and bandages, or band aid as our US cousins prefer to call them. I was immersed in the world of innovators changing how things worked, and driven by the need to serve the underserved. This led to the creation of Ynot-Plast, and later Founders Hive – it was a life-changing journey to see how small ideas could transform our society.
Over the past few years I was blessed to be involved directly and indirectly in fostering this notion of entrepre-neurship in large and small companies as a strategist entrepreneur, but my focus remains on how we fund these ideas. I have come to the conclusion that a missing piece is fostering innovation through corporate venturing.
About 43% of global companies have a chief innova-tion officer or someone tasked to deal with innovation and keep the competition at bay. The reality is different because these internal teams tend to be slowed down by internal bureaucracy and will never catch up with kids who are spending their weekends at hackathons, building and iterating their products.
Another method that has become ubiquitous with today’s buzzwords has been acceleration and incubation as a way to tap into young people with great ideas that could prove to be the disrupters of tomorrow. Large companies have invested in many of these batches through their associa-tion with the venture capital community, largely in the US and Europe, where YCombinator, Seedcamp, 500 Startups and Techstars have a roster of all main corporate venturing funds co-investing alongside them in B and C rounds.
At this point it is worth noting that while corporate venturing has elements of venture capital, it is quite different. Private venture capital (VC) is a singular pursuit. The gen-eral partners (GPs – fund managers) of VC funds assess and invest in high-growth-potential businesses by deploy-ing funds raised from external investors, known as limited partners (LPs).
They hold the committed capital in a fund, typically for 10 years, disbursing returns gained from the sale of invest-ment businesses both during and at the conclusion of the fund’s lifetime. The sole objective of such a fund is finan-cial return.
Corporate venturing differs in a number of ways. First, corporate venturing activities may involve the GP or the LP role – some corporations do both as part of their activities, as will be explained later. Second, while the sole objective of a VC fund is financial return, corporate venturing performance is likely to be assessed on both strategic and financial metrics.
Corporate venturing is not an isolated phenomenon, but an important part of a broader trend that is transforming the role of research and development (R&D). According to some commentators, the rise of a new model of busi-ness innovation and the challenges posed by increasingly globalised markets for technology are forcing corporate decision-makers to reconsider their innovation strategies and practices.
To increase returns on innovation, corporations are complementing internal R&D with open initiatives, such as intellectual property (IP) licensing, academic partner-ships, innovation consortia, open-source platforms and VC investments.
Corporate venturing is one of the fastest-growing strate-gies for remodelling the closed, linear approach to corporate innovation into an open, collaborative model with new R&D partners, especially in Africa.
Corporate venturing entails the origination, financing and development of new business ventures. Driven largely by the need to enhance in-house research and development capability, venturing allows large, established corporations to identify and capture the strategic value of emerging technology and entrepreneurial ventures.
One of the main advantages of taking an investment from larger corporations is that they are often not hamstrung by the vagaries of the term of life to which LP struc-tured funds are subject – most have a 10-year lifespan and have to wind down and liquidate investments, which can lead to a forced exit at an inappropriate time.
While this may also apply to the investment arm of a corporate venturer which has structured itself as a more traditional LP, a larger cor-porate investing on its own balance sheet will not be required to exit or liquidate its investments at the end of a fixed period. A corporate venturer could, therefore, take a more flexible approach to the timing of an exit, and look to effect this when it is in its best interests to do so.
While a more traditional VC would usually be looking for an economic exit, whether by way of a sale of its minority stake to a secondary investor, trade sale, initial public offering (IPO) or a redemption of preferred shares, a strategic corporate venturing investor may be more focused on acquiring the company once the technology has been proven, following R&D, or once the com-pany has reached a certain level of market penetration or profitability.
Given the fast pace of current technological develop-ment, corporations are usually forced to make acquisitive decisions over a much shorter timescale, and therefore may at the outset have one eye firmly on acquiring the company over the short term and wish to adopt a flexible structure so that they can implement the acquisition at their time of choosing.
Corporate venturing in Kenya
If we look closely, corporate venturing has been applied in Africa in various countries to varying degrees and was behind one of Africa’s most noted recent success stories
in the telecoms and financial sector. M-Pesa – a mobile phone-based money transfer and microfinancing service in Kenya – has been a resounding success, but it would not have been without the backing of Safaricom by its parent Vodafone. It is a shame it was not invented by a Kenyan.
When Paul Makin and Nick Hughes pitched the concept at Vodafone in the UK in 2004, Vodafone quickly real-ised the potential of the concept and decided to match the £1m ($1.65m) funding provided by the UK government’s Department for International Development (DFID) to deepen financial penetration for the unbanked and develop the concept further.
The service was launched in March 2007 aimed at Kenya and Tanzania. The business failed to find a suitable partner in Tanzania but identified Kenya’s entrepreneur-ial culture as conducive. The DFID funded the pilot and Vodafone funded and sustained the live service. Vodafone still owns the IP and is fully licensed to Safaricom.
Continental drift
The tide is turning, corporate venturing is growing again and it is Africa’s turn. In July 2012, Intel Capital, the chip-maker’s venturing arm that makes equity investments in innovative technology start-ups and companies worldwide, invested in the South Africa-based Rancard alongside Adlevo Capital.
According to a CB Insights study, global corporate venturing deal activity in the third quarter of 2013 was at its highest level since the beginning of 2011, 18% more than the same quarter of the previous year and 46% higher than the same quarter two years previously.
On the funding front, corporate venturing dollars hit a five-quarter higher. In the third quarter of 2013, corporate venturers participated in 140 deals representing total fund-ing of $2.1bn. The average corporate venturing deal size rose in that quarter to $17m, taking to its widest for five quarters the gap between the average corporate venturing deal and the average VC deal. With the VC asset class shrinking, the large balance sheets of corporate investors are becoming increasingly important in the VC ecosystem – corporate venturers participated in deals representing just under 30% of overall VC funding.
Google Ventures tops the list of most active corporate venturing investors in US-based companies in in the third quarter of 2013, followed by Intel Capital, Samsung Ventures and SAP Ventures. Only two healthcare corporate venturers, Johnson & Johnson Development Corporation and GlaxoSmithKline’s SR One were among the top 10 most active, according to CB Insights.
It is fair to note that 90% of all corporate venturing deals are done in the US and Europe. The US leads at 70%.
Regulation in Africa has a crucial role to play, the corporate venturing model has flourished mainly in China and Russia recently because state regulations have enticed large companies to invest a certain portion of their profits into young, innovative companies. A similar scheme was run in the UK from 2000-10.
Africa’s venture capital and private equity industry is still in its infancy. The following figures are based on captured data and may not represent all transactional activity in the area. The data should also be seen in the context of overall African merger and acquisition (M&A) activity for 2012, which gives an indication of the increasing appetite for the continent among corporate and other investors.
African M&A activity in 2012 amounted to $32.7bn in 183 deals, up 4.1% in deal value. Fourth-quarter deals of $15.9bn were the highest since 2010. Foreign investment into Africa accounted for 67% of total activity, which continues to show the attractiveness of the continent for outside investment.
In terms of size, 15 deals were in excess of $500m. A majority (168) of the 183 deals were in the $5m-$500m range. The larger deals are dominated by transactions in energy and infrastructure as well as financial services, sec-tors that have traditionally attracted the more significant investments, although the largest reported deal at $3.2bn was France Telecom’s acquisition of a 63.64% stake in Egyptian Company for Mobile Services.
Increasingly consumer-driven sectors such as consumer goods, retail, telecoms, agriculture, financial services and utilities are becoming more prevalent.
As more western and intercontinental African companies seek to expand into Africa for strategic and financial pur-poses, corporate venturing will become a crucial element in investment and will spread to such areas as healthcare and commercial agriculture.
Given the large investment currently going into infrastructure projects across Africa over the next 10 years, corporations will need to respond to rapid urbanisation, and through corporate venturing, mutually beneficial partnerships can be created.