Corporate venturing at its most basic is about finding tools and ways to have an impact on the parent and third party customers, suppliers and other stakeholders so they want to do more with the business.
Too often, the shorthand way of looking at the sector is to focus on corporate venture capital (CVC), the minority stakes taken in smaller third-parties. However, a true view from the crow’s nest by the corporate venturing unit to the parent’s CEO looks beyond CVC to how the innovation toolkit can work best together.
Erik Vermeulen, head of governance at Philips Lighting and professor of business and financial law at Tilburg University, gave the keynote speech at the Global Corporate Venturing Symposium on the second day and took the opportunity to argue for a new approach to corporate venturing.
Vermeulen suggested corporate venturing should be used to remove the corporate aspects of the parent company in order to bring it into the 21st century. Vermeulen listed seven corporate venturing strategies to achieve the goal of making the parent company “uncorporate”.
Those strategies involve direct and indirect investments (traditional CVC); external incubators and accelerators; co-working spaces; retaining acquired founders and maintaining acquired startups’ identities; in-house incubators; and turning the corporate into an ecosystem with “fluid and vanishing boundaries” with the outside community.
Rather than having a hierarchy, therefore, the “uncorporate” has a flat hierarchy with visionary leadership, fluidity of roles and open communication leading to “meaningful, relevant experience for stakeholders”.
Vermeulen said he was collecting data on such corporate venturing efforts and promised to return to the symposium in 2017 to present his findings. However, early results from his preliminary research of the US market showed Alphabet, Salesforce, Amazon, Facebook, Under Armour, Netflix, Tesla Motors, Apple and GE among top performers. Many of these have relatively little direct CVC investments but instead focus on the ecosystem that supports their innovation initiatives.
Corporations are usually grappling with similar challenges of hyper-competitive markets, anti-corporate sentiment expressed through environmental sustainability concerns, business complexity and regulation, automation and disruptive technology. But the top performers had found a way to use the broader corporate venturing tools to increase the proportion of high performance employees in the business even as the company and business complexity increases and many are looking to combine CVC with environmental and/or social considerations (so-called impact investing).
But once you act as a corporate, Vermeulen said, you lose customers and cited the example of ride hailing app provider Uber’s failure to fight regulations in Austin, Texas, last month by acting like a corporate, which resulted in the company’s forced departure from the city.
In fact, Vermeulen argued, millennials will abandon a company if it shows any signs of acting like a big corporation and will not want to work for it, resulting in a lack of talent.
The broad differences between millennials – people under 35 – and older generations also sparked Bruce Dines, vice-president of media company Liberty Global’s corporate venturing arm, Liberty Global Ventures, to call for a rebranding of the industry.
In the GCV Symposium panel, Creating new value through corporate venturing in increasingly disruptive times, moderated by Mark Bidwell, alliance partner at Clareo, Dines said: “We are living in a time of such rapid transformation. It is always challenging for large corporations to keep up.”
Given millennial antipathy to corporations he said “corporate venturing” should be replaced with term “team innovation”.
On the same panel, Lana Glazman, vice-president of corporate marketing and corporate innovation for cosmetics producer Estée Laude, said that for millennials, “everything is blended and blurred: gender, ethnicity, even age”. Glazman added: “We are interested in millennials. They make up 45% of luxury shoppers, and they are a transformative force for us.”
Estée Lauder, therefore, has set up a millennial advisory board so executives can hear from “influential millennials and better respond to the needs of today’s generation of consumers,” she added.
But beyond innovative partnerships, accelerator programmes, and advisory boards, corporations’ strategic responses to disruptive challenges from startups often have as a cornerstone the CVC element.
Thomas Birr, senior vice-president of group strategy and innovation for energy utility RWE, said in the face of disruption from smart technologies, Germany-based RWE created a €130m ($145m) strategic venture capital fund to invest in innovation. RWE now has teams in place across tech hotspots in Silicon Valley and Israel to develop collaborative partnerships.
In February, RWE’s Innovation Division partnered California-headquartered home energy management startup Bidgely to bring energy-intelligent products developed in the US to its German consumers, enabling households to identify which appliances use the most power.
But the strategic threat is pressing in multiple sectors. The opening discussion, The future of communication, of the Symposium’s second day saw Nobuyuki Akimoto of NTT Docomo Ventures and Telstra Ventures’ Matthew Koertge explain their units’ differing approaches to CVC in the telecoms space.
However, a straw poll of Symposium delegates before they started their discussion found a majority of respondents thought the dominant telecom operators currently would be disrupted within the next 10 years as new entrants disrupt traditional revenue streams and competitors, such as Google Fiber, emerge from leftfield to challenge them. This threat necessitates independent thinking.
Akimoto, who has been at NTT for 30 years and is chief operating officer of its corporate venturing subsidiary, NTT Docomo Ventures, until the summer when he takes on a new role at the parent, said: “I believe the important thing is not to talk to the group companies or R&D because they do not like to be disruptive.
“NTT Docomo Venture Capital needs to do our own studies on the future and the market, for our own strategy.”
In contrast to NTT Docomo Ventures’ independent approach, Koertge, managing director of Telstra Ventures, stressed the importance of collaboration within the group, explaining how every investment it makes needs to be sponsored by a Telstra business unit. As a result, the deals often lead to direct collaborations.
Andrew Gaule, partner at GCV Academy and consultancy firm Aimava, moderated a panel, Corporate venturing 3.0, on the third stage of corporate venturing and the creation of new value chains.
Gaule defined corporate venturing 3.0 as the stage at which units realise that different startups and technologies need to be strung together to create new business models.
He was joined on stage by Sarah Fisher of pharmaceutical firm Johnson & Johnson, Phil Giesler of tobacco company BAT, Pauline Tay from Singapore’s National Research Foundation (NRF) and Jonathan Tudor of Castrol InnoVentures, the corporate venturing arm of industrial lubricants producer Castrol.
The panel discussed a range of topics based on questions from the audience, including the importance of storytelling to market a product or understand challenges surrounding a technology.
Ultimately, however, CVC itself comes down to dealflow: sourcing then closing the best entrepreneurs as in some new markets, power law returns means often only the top three (and often only the best) wins the majority of returns.
John Riggs, senior managing director for strategy, innovation and development at professional services firm PricewaterhouseCoopers, hosted a panel, Second-level investing, to explain how investors could apply “second-level thinking” – an approach to investing that uses traditional methods of valuation, but is strategic in that it takes into account how other investors view a prospective company.
Riggs said: “Second-level thinking is about looking for value others can’t see. It is about considering what you know that others do not…it goes where other investors are not going.”
Riggs moderated a panel featuring Joe Volpe from pharmaceutical company Merck MSD, Michael Chuisano from healthcare product group Johnson & Johnson, Bo Ilsoe from communications technology provider Nokia and Jacqueline Lesage Krause from Munich Re/HSB Ventures, a subsidiary of insurance firm Munich Re.
Volpe is managing director of pharmaceutical company Merck’s $500m Global Health Innovation Group and Global Health Innovation Fund. GHI has made a series of investments in medical devices and remote monitoring systems aimed at helping the 2.2 million patients in the US who suffer from Atrial Fibrillation (AFIB), a medical condition that results in an irregular heart rate.
“We took a strategic venture investment [in businesses to treat AFIB] and put some [private equity] dollars into it,” Volpe said. GHI’s strategic analysis of how a portfolio company can progress from a venture fund investment to a private equity fund investment is a clear example of second-level thinking, Riggs said.
Corporate development and venture expert Michael Chuisano said Johnson & Johnson’s corporate venturing fund, JJDC, which focuses on consumer and medtech, chose to invest in products that treat problems associated with heart failure since it is “a major unmet need” based on its market research.
For example, the unit’s Minneapolis-based portfolio company, CVRx, has created an implantable device for patients with high blood pressure. By “looking beyond the dataset” to spot such unmet needs, JJDC is applying second-level thinking to its investment approach, Riggs said.
Ilsoe, managing partner of Nokia’s corporate venturing vehicle, Nokia Growth Partners (NGP), explained what drew his unit, which has $1bn under management, to UCweb, a China-based mobile internet company from which it exited in 2014.
UCweb produces software that speeds up internet browsing on mobile devices, Ilsoe said, explaining that the software was in high demand because back in 2010, blue collar workers in China relied largely on browsers on their Nokia Series 40 phones to surf the web.
NGP invested about $125m in UCweb in 2010, but at the time there was “no exit market,” Ilsoe said. Then, in 2014, NGP sold its stake to e-commerce group Alibaba in what was “China’s largest internet merger deal at the time,” he added.
NGP employed second-level thinking to solve a key investor’s dilemma: how to exit a profitable company that lacks an obvious exit at the time of investment, Riggs said.
Munich Re/HSB Ventures managing director Lesage Krause said Munich Re’s corporate venturing activities began through its equipment breakdown insurance subsidiary, HSB. One of HSB Ventures’s main areas of investment is the internet of things (IoT), Krause said, citing the fund’s investment in San Francisco-based IoT company Helium.
HSB Ventures conducted two to three years of piloting to understand Helium’s core operations, Krause said, and it applied second-level thinking to identify synergies in the business.
One way to find potential investments is to attend pitches by entrepreneurs, including a host of UK-based stars presented by Scottish Enterprise and Silicon Valley Bank on the second day (SetSquared’s selection presented on the Tuesday) and a special sector discussion on advanced materials.
However, data analysis also helps. To this end, Stefan Gabriel, former head of advanced materials and manufactured product group 3M’s corporate venturing unit for six years, hosted a discussion on CVC data.
Gabriel’s panel, Contrarian Data Insights, looked for interesting data from Toby Lewis, chief analytics officer of GCV Analytics, and Douglas Trafelet, managing director of private equity and venture capital database PitchBook Data.
Lewis noted that the total number of active corporate VCs has been growing over the past five years. The amount of money committed to investments have increased in parallel, and more rapidly, than the number of CVC deals.
Almost half of Fortune 100 companies make venture capital investments, according to the data, and Lewis said that for the rest of companies on the Fortune 500 list, having a corporate venturing unit becomes a matter of discussion on resources.
Trafelet commented that deals in Europe have been growing in both size and number over the past 10 years and that later-stage funding rounds tend to drive larger amounts of capital.
According to PitchBook data, corporate VC investors have already secured a much larger place for themselves in the overall VC funding landscape, with almost half of all venture capital deals in 2015 including some corporate capital.
Data presented by Trafelet also suggests that having a corporate investor in a given deal tends to a difference. Not only are deals involving corporate investors consistently valued 30% higher than other deals, exits with corporate investor involvement are consistently larger. (see chart)
Martin Haemmig, adjunct professor at Cetim, then followed up with what he called a “Martin-style talk” (rather than a TED-style one) on the US versus Europe performance characteristics in both corporate and independent venture capital within the context of competitiveness of both companies and nations.
Using data from Pitchbook, Haemmig’s analysis showed US-based VC fund vintages between 1995 and 2009 outperformed European peers at the top level but with a far wider spread of returns between the best and worst.
However, when looking at the 2010 to 2013 fund vintages, albeit still relatively early in their lives, Haemmig noted a substantial change. He said whereas the top quartile of US-based VC funds had an internal rate of return (IRR, a form of annual performance,) of 37.2%, in Europe the top 25% had returned 57.9%. A similar near-20 percentage point outperformance was seen for the top half of funds in Europe against US peers, while even the bottom quartile had a positive return in Europe, at 7.7% IRR compared to zero for US peers.
Haemmig said the primary reason was because European VCs had been more efficient in round sizes and selling portfolio companies to trade buyers for a higher multiple of capital invested.
An alternative way to boost returns but still fund portfolio companies is judicious use of so-called venture debt, which leverages the equity although some warrants can be stapled to the debt and then converted into equity.
Ajay Hattangdi, CEO of India-based venture debt provider InnoVen Capital, in a keynote explained the benefits of venture debt for startups at series A to C stages.
Debt financing makes up about 2%-3% of the venture capital market in Asia, compared with between 10%-15% in the US, said Hattangdi.
The firm is the first venture debt platform in Asia, with investor commitments of $200m. Venture debt interest rates vary across the region, ranging from the mid-teens in India to the “late single digits” in Southeast Asia, said Hattangdi.
Set up in 2008, InnoVen Capital was bought out by Singaporean state-owned investment fund Temasek Holdings and financial services group UOB in 2015 from Silicon Valley Bank’s India operations, and now has additional offices in Singapore.
The firm has so far deployed $150m in loans and established relationships with 30-plus funds across venture and private equity including Microsoft Ventures and Sequoia Capital.