Corporate venturing has been described as "the most misunderstood part of venture capital and most VCs fear or despise corporate venturers".
At the inaugural Global Corporate Venturing Symposium in London last month, however, the speakers laid to rest a few fears for an audience of peers, entrepreneurs and VCs and set out the opportunities for the industry in the current Golden Age as innovation becomes increasingly global and crosses sectors.
As one delegate said: "Corporate venturers can play offence, not just defence. We did not default on commitments to deals as VCs did when their LPs [limited partners in funds] were caught by the credit crunch or if they are caught in the wrong part of the fundraising cycle. We also can help portfolio companies with introductions round the world."
His peer said the challenge remained in helping VCs and entrepreneurs express and get comfortable with their understandable concerns about corporate venturing’s alignment and transparency, "such as are they dealing with the decision-makers, will there be continuity of individuals and strategy and will they play with portfolio company boards?"
He added: "Our strategy has morphed in the trade-off of strategic and financial returns and three to four years ago we began managing more for financial reasons with strategic important but ancillary. Other groups have gone in the opposite direction."
Yavuz Ahiska, serial entrepreneur behind DuPont Pixel Systems, Visioprime and 3Dlabs, said he liked teaming with corporations "as there is a lack of expertise in VCs".
He said corporate backers could help the entrepreneur, such as by having dedicated lawyers check intellectual property patents.
As the global economy emerges from the credit crunch, others were quick to point out the trend for corporate venturing was positive.
One speaker, talking under Chatham House rules, said: "The trend has been up over the past decade after the dot.com shake-out for two main reasons. First, and most important, product complexity has increased. This has encouraged the use of investing to expand into new areas.
"Second, financial – cash balances at companies are at an all-time high, for example Apple has $60bn in short-term investments. Investing in something with better returns [than the 0.4% yield on US Treasury bonds] and that offers strategic value is a good use of corporate cash, especially versus five to six years ago when Treasuries earned 5% to 6% and so the relative advantage was less clear-cut."
But veterans of the last peak were worried that the froth from some social media deals would infect senior managers and lead to overinvestment. A speaker said: "The fact that $2bn to $3bn is invested now by corporate venturing units versus $16bn at the top [in 2000] shows there is a better balance and spread of firms and deals being done, but I suspect corporations will again get carried away by the latest tech-boom tide. However, there is greater expertise in corporations now and forums such as this to discuss and help raise the bar."
Corporations have developed their innovation strategies over the past decade and especially in recent years. Andrew Gaule, founder of H-I Network, said corporate venturing was a "way to look into other people’s boxes but key is how to get to the entrepreneur in an organisation".
He added: "If corporate venturers are scouting bees, then will the waggle dance be understood in the hive and acted upon?"
Gerald Brady, managing director at US-bank SVB Financial Group, which lends to nearly three-quarters of technology and life science entrepreneurs and most VC firms, said Apple had been one of the few companies to listen to the disruptive innovation challenge and say "it is okay to cannabalise your revenues, with the iPhone affecting the iPod as a good example".
Martin Kelly, a partner at IBM Venture Capital, which commits to third-party VC funds rather than invests directly, warned: "It is difficult to kill your own children and there are so many corporate antibodies in an organisation it is often easier to do M&A [mergers and acquisitions]."
Kelly added that IBM had moved five or six years ago from invention to innovation "as we got better at understanding what disruptive innovation means".
It had been said that IBM did not release products, they escaped, Kelly added, but IBM remains the only one of the information technology (IT) leaders from the 1970s to survive as successive waves of innovation changed the industry. Part of that survival had come from keeping close to entrepreneurs.
Mike Brown, partner and co-founder of AOL Ventures, which invests in early-stage media businesses, said: "AOL has been through a number of transformations in the past 10 years and realised it had become irrelevant to entrepreneurs. AOL Ventures, therefore, is a way for them to reconnect and help the brand, mergers and acquisitions and become legitimate again."
But the war for talent is not confined to the social media and consumer internet sector.
Kelly said IBM had set up SmartCamp as a competition "to get more talented people to look at big issues, such as designing the city and climate change, not just games and social media".
He added: "By being global we can find entrepreneurs working on anti-counterfeit pharmaceuticals in Africa and there are 20,000 start-ups in the Z-park in China off one university."
Chris Coburn, executive director of Cleveland Clinic Innovations, which invests and helps spin out intellectual property from the Ohio-based hospital group, said the pace of innovation and change in the healthcare sector was gaining on the complexity and speed in IT.
He said: "Healthcare provision is fracturing and reassembling in new ways, so the question becomes how can corporate venturing help. Health is 10 years behind in IT but catching up."
David Phillips, managing partner at SR One, drugs company GlaxoSmithKline’s (GSK) corporate venturing unit, said his team had taken on incubating and spinning out internal ideas recently to encourage innovation. This was leading to "joined-up portfolio management" in business development for GSK.
Phillips added: "A good example is epigenomics [controlling which genes are turned on and off] where we have internal R&D [research and development], business development with partnership with third parties [such as Cellzome, which gained $45m in upfront payments] and strategic investment in Constellation Pharmaceuticals."
SR One led the second round of funding for Constellation in June last year and Phillips said as the SR One unit was independent it was positioned to invest alongside VCs but, especially now in early stage, found it was teaming with corporations in the majority of deals.
Phillips said for all parties, building the corporate venturing unit’s reputation was vital. He said: "If you have a reputation for walking away from portfolio companies you are in trouble. So we try other things, such as divesting assets or glueing them together with others so we can hang in there."
Stuart McKnight, managing director corporate finance adviser Ascendant, agreed it was a "bad signal if strategic investors do not reinvest 12 to 18 months after joining a consortium and makes it harder for the entrepreneur to get money, so we monitor corporate venturing units to see if they are short or long-term investors".
Danny Truell, chief investment officer at Wellcome Trust, a £15bn ($25bn) medical endowment formed from shares in one of the original firms behind GSK, said the importance of long-term investing was growing. He said: "The eighth wonder of the world is compound interest and the original £700,000 endowment has grown to £15bn with our £8bn given away, a 30,000-times return.
"Our aim is to give away £3.5bn over the next five years. Key to doing this is diversification, liquidity and inflation, and so it is dangerous not to be in assets growing real assets."
As a result, 85% of Wellcome’s assets are in securities growing real assets, such as hedge funds and equities, and the other 15% is in what he called "sex and violence", such as venture capital, as the endowment had no liabilities.
Truell said Wellcome invested around four cross-sectoral themes of scarcity, the new world, ageing and the move from a service to a knowledge economy. Truell was one of the committee members behind the Switzerland-based nonprofit World Economic Forum’s influential report into longterm investing.
This report (see April issue for full coverage) found the pool of long-term money from traditional sources, such as defined benefit pension funds and banks, was shrinking, which meant "finally, the playing-field is very attractive after 20 years" for other investors, such as foundations, family offices, sovereign wealth funds and corporations with a long-term view, Truell said.
He added Swiss chocolate maker Nestlé "has a 10-year plan and then at the end they say ‘that worked well, let’s do it for another decade’ and spend time on ideas such as neuroeconomics. As a shareholder, we encourage that sort of thinking."
He said companies, such as Unilever, were spending time looking at their shareholder bases to encourage longterm investors to own their shares in order to encourage investment in R&D and innovation, such as through a corporate venturing unit. He said he also liked companies that used corporate venturing to "join the dots for an organisation as it is increasingly important to transfer ideas and ensure they are learnt".
Truell ended the event on an optimistic note for innovation: "I am excited by generation Y-Not – our generation took all the assets and they are just getting on with it and building new types of jobs."
In this new world of innovation, therefore, corporate venturing plays an important role as handmaiden to innovation and the birth of the future.
To see the supplement on the evenings Banquet with Best Practices click here and for photos go here