Panel on how can firms deal with a globally-distributed, cross-sectoral innovation landscape?
James Mawson: We now turn to our next panel which will be moderated by Andrew Gaule. I shall do a quick introduction of Andrew, who will then introduce his panel which is on: How can firms deal with a globally-distributed cross-sectoral innovation landscape? Andrew probably needs little introduction to most of you. He runs Corven Networks which he founded about 12 years ago. It is truly a tremendous thought repository and network to allow you to follow up and understand in a little more detail in a private off-record environment some of the war stories around how to improve and deal with some of the challenges you face day to day. I have come to rely on Andrew’s thought leadership for many of my own articles. He runs “Gaule’s question time” in our monthly magazine as well, where he interviews some of the best thought-leaders outside. I shall now turn it over to Andrew who will lead what is truly a great panel.
Andrew Gaule: Thanks very much to James for the introduction. Another great symposium, building on the Global Corporate Venturing great journal and knowledge within this space. The panel discussion we have today is entitled: How can firms deal with a globally-distributed, cross-sectoral innovation landscape? In the first panel, Martin Grieve talked about Unilever and how over 50% of their turnover now comes from emerging markets, so being globally distributed is very important. Justin Adams, in his presentation, talked about the crossover between different sectors which is occurring. Therefore, that is the focus on which the panel will be giving their insights from their organisations.
Stephen did texting from your phones but we are going to be a little unusual in that, immediately after we have had the brief introduction from your team so that you know where they are coming from, we are going to ask for questions from the floor. We would rather focus on the issues that you believe in and that you are raising. I would like you to run round with your introductions please.
Chris Haase (Adviser to Chief Strategy Officer, Royal Dutch Shell, sitting right middle): It is a pleasure to be here today and an honour to be with the other members of the panel and with colleagues, and with many friends who are in the audience. I am the principal business adviser for the CSO of Shell, who manages approximately $1.2 billion of R&D around the world, covering the whole aspect of Shell’s R&D both in the upstream, downstream and future energies.
Since reorganising in 2009 when Shell’s R&D was functionally driven, Shell has now focused it’s R&D efforts around 30 or so technology platforms, which are very tightly integrated to our value chains. As such, our Technology Platforms are managed very much like independent businesses, with their own decisions, they own returns and their own dynamics and business drivers. Those technologies that we pursue are loosely grouped into core emerging and enabling technologies based on the amount of time and direct linkage with our business. However, that is just not enough and Shell has been very active for decades in the area of corporate development, particularly work with venture capital. We have multiple limited partner holdings, and one of my colleagues here – Russ Conser in the back – runs Shell’s 14 year old GameChanger and a seed stage innovation fund, which is directed around bringing transformational technology into our business. That gives you a high level introduction into the perspective that Shell will take, and I look forward to discussing that with the panel later.
Michael Boshammer (Portfolio Manager T-Venture, sitting right): It is also a pleasure for me to be here today and to be part of the panel. I have been working for T-Venture, the venture capital arm of Deutsche Telekom, for more than 11 years. Overall, we have a fund volume of more than €700 million and are investing globally in start-up companies to make sure that both criteria – the strategic impact as well as the return on investment – are part of our investment strategy.
Nagraj Kashyap (Head of Qualcomm Ventures, sitting left middle): I run Qualcomm’s venture capital group. Why I believe I was recruited to this panel is because I also report to the CTO and manage some of the early stage projects coming out of the R&D organisation on the business side. We have seen a huge amount of synergy we can talk about on how venturing and early stage R&D can work together, which has been a very successful model for us. Qualcomm Ventures started in 2000, so we have been around for 13 years. If you do not know Qualcomm, it is a small $100 billion cap company that does mobile chips, so anyone who has a good Smart phone here is likely to have our chip in it. If you don’t, then you should go and get one!
Mark Felix (Managing Director, Dow Venture Capital, sitting left): I work for Dow Venture Capital based in Zurich, Switzerland. For those of you who are not familiar with us as a corporation, Dow is one of the largest chemical companies in the world, and we participate in so many industries and applications that it is hard to think of an application where we do not have some sort of contact.
As a corporate venturing group, we have gone through various incarnations but we have been around since 1993, so that is quite a strong heritage. Right now, we are very strategically focused, and we only make investments where there is either a strategic relevance to one of our existing businesses, or a business that the company is seeking to create. We currently have six investment managers. I have been with the company for 24 years and joined the venture group about a year ago, so there is a depth of experience within our venturing organisation.
From an organisational standpoint, we are aligned in parallel with our venturing business development teams and our licensing teams, which I believe brings some value because those people have exposure to creating new opportunities, new markets, new technologies and we can align our activities and our licensing activities as a consequence.
Andrew Gaule: To break with convention, I am going to ask our audience first for questions or perspectives relating to this topic, so do we have any questions yet? Will you please state your name and your organisation. We shall group some questions together.
Susan Hill (London School of Economics): My question is around partners. In terms of internationalising the operations of your CV units, what has your experience been in finding partners internationally, and how has it affected relationships with other VCs, given that they traditionally have not been highly internationalised?
Rachael Nutter (CT Investment Partners): There has been a lot of talk about internal R&D departments as well as external companies, so I am interested in the balance of time that people spend working with commercialising internal R&D and getting that out to market, versus working with external companies and making investments in those?
Question: I have a question about when targets are large and based in multiple countries. How do you deal with repayment back to the parent?
Andrew Gaule: When you make fantastic returns after an investment, is this a hypothetical question? Let us kick off with the first one dealing with a globally distributed team which is doing CV, how do you deal with the partners and managing those variations across different areas? Nagraj, I have you down for doing some of these things about dealing with businesses regionally and different variances.
Nagraj Kashyap: We started in the US in 2000 and then we expanded fairly rapidly, we went to China in 2003, we established operations in Europe in 2006, in India in 2008, in Israel and Korea around the same time in 2009 and we have recently opened CVC operations in Brazil. In most of these places, we were fairly early on which means that we looked at the venture ecosystem, and again everyone has different views. Our view is that we are very comfortable working in the early stages and, as a corporation, we do seed investments. When we looked at these regions, we wanted to be earlier than our business units with established operations.
After this conference, I am off to India and the India ecosystem was not developed when we went there, which is fine from us. From our perspective, we want to build up that technology leadership in the CVC context where VCs will then come to us and ask can Qualcomm do the technical perspective and we shall do all the other work, so we can do a deal together. That model has worked really well for us when we have been early. In fact, the model has not worked as well when we have not been that early.
For example, in Europe we were not that early, we came in late, but in all the other regions we have been fairly early when the ecosystem has not been developed and have had great success doing that. Therefore, that is one model but not the only model. Again, it is relevant for us who are okay with taking earlier stage risk, and it is okay with going in at an early stage from a CVC perspective. That has been our model of how we have expanded into the variety of regions where we are now.
Andrew Gaule: So you go in early stage and how do you find these partners when you turn up in a new country looking to internationalise your corporate venturing?
Nagraj Kashyap: For the last six months, we were investigating Brazil, which I would classify from a VC perspective is where India was in 2007. The country has a high GDP and is growing pretty fast but, from a VC ecosystem perspective, it is not as well developed. When we went in and saw similar characteristics to what we had seen in India, we found few partners who were already active in the market, so we courted them for three to six months. We found a person from the local ecosystem to hire, so we hired someone who already had experience outside in venture capital and in the region but no Qualcomm experience necessarily. Our team has been exclusively hired outside Qualcomm. There is one person here in the audience who was a Qualcomm person who moved into the venture group, and he is our co-lead for Europe but other than that, all the people we have recruited are from the outside. The philosophy has been that, if you want to get expertise from Qualcomm, you can always tap into it but what we are trying to bring is a fresh perspective from the outside.
Michael Boshammer: Our investment philosophy is that if we have a local office in a country such as in the US, where we have offices in San Francisco and in Seattle, we do direct investments as a lead or co-investor. If we are not local we prefer to do co-investments. In addition we have also done fund-in-fund investments to open up new technologies for the use in Deutsche Telekom in the sense of an innovation transfer – window on technology – and to thus guarantee the sustainable, value-oriented growth of the DT group.
Chris Haase: Shell’s perspective, working in such a global environment, is that the innovation channels vary in different parts of the world, so that what works in Western Europe, what works in China and what works in India is very different. As a result, we customise our approach very differently. Direct investments for our corporate development tend to be managed, as you would expect, out of The Netherlands and Houston. However, we hold multiple LP interests in several funds that work particularly in the emerging space and in future energies. There are funds in British Colombia and London and a manager of our first venture fund County Capital in both Houston and The Netherlands. Additionally, through our internal fund GameChanger, we take an interest in very far-reaching opportunities such as through sponsorship of the renowned X-Prize.
In April, we launched our Projects and Technologies office in Beijing that provides an effective outreach both with the Chinese Academy of Science and the University of Sichuan in China that tap into the natural innovation channels in China. Therefore, rather than taking a one-size-fits-all approach, our approach is that you need to cover a spectrum in order to tap in and be an effective corporate venturing player.
Andrew Gaule: James and I were in Shanghai just after Easter and I was running a corporate venture capital programme, and they are bringing Western corporates with people in China, Chinese corporates. There is a different market, different innovation and back to the point about how the VC market is and how the investment market is, it will drive very much the approach that has to be taken within those areas and how you are going to partner.
Mark Felix: Responding to Jamie’s question about the team, we are in strong contrast to where Qualcomm is because we are so strategically focused. A large part of what we think the corporate group brings to the businesses is to be able to understand what those businesses are trying to achieve strategically. Each of our investment managers has a business as well as a geographic responsibility. We spend time with the businesses to understand exactly what their strategic objectives are, where they are trying to go and then see how we can help and support them to fill those gaps and allocate buildings or technology to achieve their business goal.
Particularly in a company like Dow, which has 50,000 employees and $60 billion in revenue, the way an organisation like that works is that it is very strongly networked. Therefore, that experience, in-depth knowledge of the network and how the organisation works is key to being successful. It does not mean that we are averse to the idea of having external expertise, and we may well explore that but, until now, it has been an internal team that has been addressed that way.
To the question on the issue of partnering, our partners come from funds with whom we have relationships. We also find strong relationships with labs and research institutions particularly in North America … [inaudible] familiar with us …
Andrew Gaule: Building on that and this piece about cross-sectoral innovation from different areas, and Rachael’s question around internal R&D/external R&D, I am sure that within Dow you have fantastic experts, PhDs and so on. When you are the scouts out there, seeing new technologies, seeing new business models from these cross-sectoral areas, how do you get them to listen, how do you link that external and internal part, so that they don’t say, “we’ve seen all that, go away, Mark!” – how do you deal with that?
Mark Felix: Let me take a stab at that. It is partly to do with us … investment management of the businesses, so that it does not become something we are trying to force down the businesses’ throat, but rather understanding what they are trying to achieve and trying to find things that fit that. Sometimes there is a persuasive part to that where you have to help them to open their eyes to look at things a little more broadly. To some extent, I think we have overcome the ?non-inventor’s case syndrome within the businesses, and there are some businesses that are more comfortable with, and more receptive to, that model and these external concepts and opportunities than others; not everyone is the same. It depends on the state of maturity of the business.
As far as the cross-sectoral issue, along with my colleagues here Dow’s international company has operations, expertise and insight into things that are happening in other geographies in other parts of the world, which we believe is something we can bring to our investment companies, helping them to explore some of these areas as well.
Andrew Gaule: That is great. To bring you in next, Nagraj, you say you have all these newbie people coming along and then coming back. When we were preparing for this, you had a very good perspective about different business models, different applications that are working in different markets. How do you persuade somebody in the corporate head office that this is going on in India or China, or something has failed in the local company – how do you see this happening?
Nagraj Kashyap: If I were on the panel 10 years ago, I would have a different answer. The one thing that has really worked in our favour is the fact that we have been operating for so long. The last panel discussion was around strategic and financial which is a never-ending debate but, from our perspective, our executives sit on the tenth floor of the building we are in, the CEO sits in one corner and the CFO sits in another corner. The mental picture which I tell to my team is if you keep the CEO and CFO happy, then we are operating under fewer constraints and we can do many more things. The CEO users a strategic sensor in bringing new things to the company, and the CFO wants to make sure we are not losing money, and when we do both as we have done for the last 13 or 14 years, we have been able to establish a very good track record.
About four years ago we started reporting to the CTO, and one of things he said to me was, I have a huge budget, I am starting new projects all the time, people come to me with new ideas. You have to tell me if there are three or four start-ups doing this, so I shall not start. I want to know what is going on outside, what kind of innovation is happening and, if that specific innovation is happening, or if there are a mass of companies doing that, there is no reason why we should be doing that inside. Regardless of how nimble we are, we shall not be as nimble as a start-up. Therefore, the criteria we have established together are pretty interesting, although they do not work for everybody.
The projects that require a lot of scale and capital are the ones that the R&D team should take on. However, if they can be technically done by five people, those projects are better done outside of Qualcomm than inside. We have a pretty good relationship with the R&D teams because of the track record we have that can define good companies early on, so that we can come back and say, don’t do this either because they are doing this already, or this did not work when we tried to do it in China, or we tried this in India. We have many examples of that kind from our track record and we have almost no resistance nowadays.
Sometimes a start-up will come with an innovation and our R&D people will say that is not that good, I think we can do it ourselves. We just go ahead and do the investment anyway and we have the freedom to say, it is okay, even if you guys do not believe it is relevant today, we believe that it will be relevant in the next five years and then we shall see who is right. Therefore, we have a model where that kind of collaboration and competition is perfectly fine.
Andrew Gaule: Michael, you are in a reasonably related sector, how are you taking T-Venture into new sectors?
Michael Boshammer: It is interesting to hear all these C level talks. My experience is that it is very important to have access to the top management, but it just works if you also have access to the workforce. If we identify relevant deal flow for DT and the relevant business unit there, we try to convince the right people in the organisation to make sure that they are willing to be the business owner, to prepare a business case on it and really create added value for DT out of this cooperation. Later on, we also involve the top management who sit in our investment committees and make the decisions based on the fundamental work we have done before.
Coming back to R&D and innovation. Our T-Labs are the central research and development unit of Deutsche Telekom, based in Berlin. Their mandate is to work closely with operative units at Deutsche Telekom, offering new ideas and support in the development and implementation of innovative products, services and infrastructures for Telekom’s growth areas. We have successfully spun-off a number of venture capital-funded companies. In addition, we have expanded our focus and are not just doing minority investments in the start-up and expansion stage. We are also doing seed as well as later stage investments.
Chris Haase: In today’s world, the conventional partition of internal and external R&D is largely a red herring. Every single one of Shell’s 30-plus technology platforms has an external technology component – period. It does not mean that we do not do our proprietary technology development. In fact, we have quite a lot of proprietary technology as that is a differentiator in our business. However, I would say a sizeable percentage of Shell’s R&D is conducted with external parties. From a value generation standpoint, we care the most about deploying the technologies, replicating them and putting them to use in field as quickly as possible to drive down cost, improve productivity while, at the same time, contributing to sustainable development to some of the Nexus themes that were discussed earlier.
We maintain about 21,000 patents, we have 43,000 engineers globally who are very focused on implementing solutions in various value chains. The real value is captured through the integration of the internal and external R&D together and putting it to work in the business. As far as the “not invented here” syndrome, I am sure my colleague in the audience would agree that, generally, when we bring a technology in for validation, if it meets some modest technology resistance internally about challenging “we can do that just as well”, that is probably a good sign. It means that we are bringing something in which is putting up a competition for the best ideas to win inside the company, which is a very healthy thing.
The big challenge we face from a corporate venturing/corporate management perspective is that to extract the most value from the technology and to apply it and deploy it fastest in the field sometimes requires losing control, not taking a controlling position but taking a minority stake. However, that minority stake does a few things. It brings fresh DNA in, it brings in external validation of the technology from other corporate investors and it allows that technology to grow and replicate faster in the market, which ultimately drives down cost and improves the quality of those product offerings for the Shell shareholders.
Therefore, corporate venturing is sometimes a struggle for long-time seasoned technology managers to accept that, in order to get the most out of the technology, sometimes you have to lose some control.
Question: [name and affiliation unclear] I am a regular VC. One of the issues that we encounter when co-investing with corporates is that what is strategic tends to change over time, and that change happens every three to four years. Start-up typically takes five to seven years from the time you start investing to the time you exit if you are lucky. The question is how do you marry that alignment with what is strategic today and what may not be strategic for you three to four years later, even though you are investing into a company today?
Andrew Gaule: Thank you, we shall hold that question. Also you have to come back and answer about how you put your financial returns back from a previous geography. Let us take another question.
Girish Nadkami (ABB Technology Ventures): If you compare corporate R&D, it is like the Prussian army: fine uniforms, walk in lock-step, eight or nine gates etc. The R&D world is more like special forces who do not wear uniforms, grow beards and do crazy things. They do things like “make it, sell it, fix it”, or “fail fast, fail often, fail cheap”. That is not something that big companies can afford to do. The question for the panel is how do you make sure that you share the best of both, and how do you make sure that what the companies invest in leverages what they have without in any way compromising your quality standards?
Andrew Gaule: That is a great question and in Corven Networks we had a key speaker event on that last week at which we had Brigadier Richard Dennis from the Army talking about the parallels, and he was very much talking about the special forces and how they bring normal troops in, indoctrinate them and make sure that they run the business and the Army straightforwardly. Then how do special forces run differently? We shall give you some cartoons, James, that you can put into GCV that we cut from there. Chris, would you like to address that one first as you were laughing about the special forces.
Chris Haase: That is a nuanced approach to modern corporate R&D but, moving away from the military side, sometimes I wonder whether it is also about understanding the challenge that exists. Innovation is more than just about the creation of technology. From a management perspective, it is about identifying the blockers between an opportunity and putting that solution in the hands of the customer, letting that flow as easily as possible. Sometimes you have to march and sometimes you have to strike, using your military analogy, but it is also about understanding what the challenge is. It reminds me of the DARPA red balloon challenge where they put up 70 red balloons around the United States and put a challenge out to teams to find those balloons as quickly as possible. They were found in a matter of minutes by a team at MIT through a novel crowd-sourcing approach in a matter of hours.
When we look at some of the most challenging innovations that are facing the companies today, sometimes it is neither about marching or targeting. Sometimes it is about sourcing those opportunities, making sure that, from a management perspective, we remove as many blockers as possible that can potentially put those solutions in the hands of customers.
Michael Boshammer: The core of R&D done at T-Labs is project work. All projects support the objective of developing innovative products and services for Deutsche Telekom customers. The results of this research and development are primarily transferred to the Group’s strategic business units or are used to establish spin-off organizations. But on the other hand the flexibility and dynamic of innovative start-up companies is one of the key success factors for DT. T-Venture accompanies and supports such young fast-growing companies from the first growth phase until market success. Acting as a catalyst, T-Venture creates exceptional win-win situations between Deutsche Telekom and companies. Overall it is important to make use of internal as well as external innovation.
Nagraj Kashyap: On that issue, the way in which we look at corporate R&D is divided very distinctly into two parts. One part is what we call supporting the classic core business. There are improvements that product groups do not do but there are longer-term improvements that the R&D group does in supporting core products, which is more like the Army. We have a completely separate path which is doing things which are completely new to Qualcomm, which is more like the special forces in the sense that they get a lot more autonomy.
We have done very different things with that. For example, one of the areas that Qualcomm wanted to get into which we identified was computer vision, and we said we shall look far into the company but we do not have that much expertise. We found a small company in Vienna where many people came out of the University of Graz. They have developed a very strong competency in computer vision, and we went as an R&D unit to do a corporate development activity and bought the company. Then we let them operate fairly independently up to now, saying that they can do pretty much what they want as long as they are making progress.
The second example is that we also wanted to get into areas where we could understand how brain works and how to marry that with known communication technology. We partnered in that case with a local San Diego company called Brain Corporation. This was an example of R&D and venturing which is fairly unique but also a good case study. We invested in the company but also partnered on the R&D side, and this is a company that we are collocating within our R&D which is the first time we have ever done that. The company and all their employees have collocated with Qualcomm in one of our offices. The reason why we did that was because they were providing complementary skills to our own internal efforts, so we decided that the internal team has to sit together with this start-up entity. There are also many dynamics there around how you manage internal teams in Qualcomm with a start-up that has some different incentives. Those are two examples of where we have done this fairly successfully so far.
Mark Felix: I just want to respond to that. ?Yosker raised an excellent point on the strategic alignment issue. You are right that corporations can change their strategy but, equally, start-ups can also change their strategy and you end up with a mis-alignment. If you look back at all the corporate portfolios, we all have companies in which we invested for very good reasons which are now not as strongly supported.
I have seen a change in the last few years in how Dow has operated, in that we have tried to get some collaboration or business alignment between the investing business and the company. We hope that, if that alignment and collaboration can be maintained, it ensures that continued support.
Andrew Gaule: So perspectives on the strategic financial.
Nagraj Kashyap: One of the things we have done as a core operating principle for our platform is that we definitely do strategic investments but we also want to work with VCs on a long-term basis. One of the tenets which we go into very clearly is that, regardless of what happens to the strategic alignment, we are pro-rata-ing investors. If you get a series A, and one very good example, one of the companies in which we invested called A123, which is a battery manufacturer in the US, all the way back in 2001, the premise was that they would come up with a new chemistry to improve cell phone battery life. Guess what, three years down the road the chemistry did not work but it worked for power tools! Therefore, from our perspective there was almost zero strategic alignment at that point in time but, having said that, the company raised over $100 million and we have been pro rata from series A all the way to IPO.
Once we do that, the VCs become much more comfortable saying there may be a change in strategic alignment, but that does not mean that the CVC will abandon support for the company. The point is that the VCs need to be comfortable that the CVCs will be there when the next round comes up and they will be a good partner in the syndicate. Once you provide that kind of feedback and stability, I do not believe it matters at that point in time the strategic part-exchange. The fact is that, at least from a financial perspective, you are supporting the company and, if the strategic direction changes depending on how long the company changes, it will get re-engaged. At least from a VC perspective, pro rata participation helps a lot, and it is one of the things that has really worked for us.
Chris Haase: This is a classic struggle. It depends on the clock cycle of the corporation and the market as to how quickly those strategies need to evolve. Our perspective is a little different. The average time it takes for a technology, generally, in the oil and gas business, like other mission critical systems such as for aircraft and defence, is between 12-14 years for a technology from embryonic conception to full-scale sustainable commercial deployment. Of course, that is outside the normal venture capital partner cycle.
The kind of problems we have in our business vary. We are working to compress those cycles by bringing in extra management, looking at dual use extensions of the technology, other markets, other niche applications that can adopt that and bring it to market quickly. However, there are times when the investor’s desire to exit, monetise or whatever is than that of the corporate, sometimes as a corporate you need to take a leadership position and go for a longer term perspective.
Andrew Gaule: Building on a number of the questions now, you have done your investment in an interesting region, with a partner and you make your financial return, how do you deal with the repatriation this great investment that you have made? [fire alarm test]
Nagraj Kashyap: That is the one part of the job I do not have to deal with, which is great. We get the returns and somebody in the tax department figures out how to get the repatriation done, so I have no idea, it is a black box to me. All I tell the CFO is we have made this money, after that you get the money out of somewhere!
Mark Felix: I cannot really say how we repatriate. When we go into invest, we use different investment vehicles depending on the tax situation and the corporate geography where you are investing.
Chris Haase: I concur with that, different vehicles unique for the geography in which you are working.
Andrew Gaule: Perhaps that is an interesting contrast to the VC, who probably expects to have a wheelbarrow full of money being trundled away. Thank you for your input. This whole issue of how you get different organisations to look at it from different sections and do it globally is something that within Corven Networks has been a big challenge over the years.
One little plug for what we are doing, within our network members now over the next few months we are running programmes where our network members and other organisations can participate. These will include BP, Unilever, DSM and there will be some collaboration around common themes such as health, sustainability and around these emerging market models. We shall be doing that in Europe, in the US and in Asia, so if anyone is interested in that, come and have a chat.
The other thing which I am keen to do, plugging GCV and my piece on Question Time, if any of you would like to be interviewed – and you can see in this month’s edition there are two interviews from different parts of Unilever, open innovation and corporate venturing/Physic Ventures – please come and have a chat with me.
I would like to thank the panel very much for their input.
James Mawson: I would like to add my thanks to Andrew for moderating that tremendous session.