How are corporate venture capital funds deploying their in-house research, data analysis, and strategic know-how to spot undervalued investments ahead of the rest of the market? The question was put forth in a panel hosted by John Riggs, senior managing director for strategy, innovation and development at professional services firm PricewaterhouseCoopers.
The ability to unearth such deals reflects what US investor Howard Marks calls ‘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, said Riggs.
“Second-level thinking is about looking for value others can’t see,” Riggs said. “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.