Their discussion highlights the strengthening corporate emphasis on innovation and the growing importance of corporate venturing to both large corporations and start-up entrepreneurs and was part of Ernst & Young’s 2010 Venture Capital Trends and Insights report (click here for the PDF).
The discussants: Drew Clark, partner, IBM Venture Group; Wendy Lung, partner, IBM Venture Group; Dr Reinhard Ambros, executive director, Novartis Venture Funds; Dr Markus Thill, managing director, Robert Bosch Venture Capital; Dr Claus Schmidt, managing director, Robert Bosch Venture Capital; Stephen Lee, principal, Samsung America Ventures.
Asking the questions: Bryan Pearce, Americas venture capital advisory group leader, Ernst & Young; and Dr Martin Haemmig, senior adviser on venture capital to Stanford University.
Ernst & Young: What are the objectives of your venturing programme – strategic, financial or both?
Ambros: Our objectives are primarily financial. Our largest fund is a pure equity fund where financial return is the only measure. We also have the Novartis Option Fund, an early-stage biotech fund with a dual mission, financialas well as strategic. And we have a third fund, our Korea Fund, whose mission is to support development of the life sciences industry in Korea.
We invest in companies and technologies that have a strategic component for the healthcare industry broadly, not for Novartis specificall. From the start, we determined that doing investments with a purely Novartis focus could never be successful because the number of exits Novartis could provide would never be sufficient to drive financial return.
Thill: Our corporate venture group exists for strategic reasons. This means Bosch knows there are many intelligent people and emerging innovations outside the Bosch Group, and we want to know about these from the standpoint of potential opportunity and risk.
Experience shows you can only go so far if you are not really a player yourself. Hence, to survive in this mar-ketplace, we have to be among the top-performing VC funds, otherwise we shall never enter the virtuous cycle of VC investing.
Our existence would be at risk because we would no longer get any interesting deal-flow or we would just be a black hole for corporate money. So our objectives are both financialand strategic – one is not less important than the other.
Clark: We think our corporate venturing is unique in the US and probably worldwide in that we do not have a fund of our own: we do not invest capital up front into start-up companies. And we do not really think about involvement with start-ups as financial.
It is really about nurturing excellent partners which are going to be part of our ecosystem over time. So we look at it as an investment, but not a capital investment – more an investment of our resources and our time toward developing that ecosystem.
Our objectives extend beyond financialreturns to include driving insights into IBM strategy and developing ecosystems for IBM platforms and solution partnerships. They even include advising IBM’s clients on their innovation.
Lee: We have both strategic and financial objectives. However, I would say we place a stronger weight on the strategic portion. There is a minimal financial threshold we are expected to achieve on all of our investments.
We are actually a separate management company, with the different companies – such as Samsung Electronics and Samsung Fine Chemicals – within the Samsung Group as our limited partners. When we make our investments, we seek to gain strategic sponsorships from our limited partners, of which the largest is Samsung Electronics, but at the same time, because we are our own separate management company with our own investment funds, we definitely need to perform financially as well
E&Y: Measuring success is often problematic in corporate venturing. What is your approach?
Thill: This is a very challenging question for us since we were formed so recently. We are still wrestling with the exact formula for measuring financial performance – whether it includes a benchmark against the top venture capital (VC) funds, whether a corporate discount applies or whether performance relative to the public market should be factored in.
Still, we are part of the Bosch Group, which has broad strategic objectives. Strategic relevance can, however, not be measured directly. In the long term, you can point to new areas of business established through VC or collaborations with new companies, but it takes quite some time.
Lee: From a financial perspective, we have a hurdle rate we have to hit internally that we seek to outperform to deliver returns for limited partners. I would say that on the strategic side, it is really a qualitative success case.
We have been doing a lot of investments we term value-chain investments – companies Samsung can immediately partner or be a vendor or a buyer for. If we make an investment in a company and it ends up being a supplier for a finished Samsung product, we are able to create a success case story around the relationship.
Ambros: Our measures are only financial. Arriving at a meaningful strategic benchmark is very difficult. A corporate fund can only survive if it makes money because the average life of a corporate fund is two to three years. Once the parent company realises you can lose a lot of money with corporate venturing, it stops the programme.
Clark: At IBM, we are at the other end of the spectrum from Novartis – our measurement is purely strategic since we do not make investments. The leaders of our various business units across IBM provide annual feedback on how we helped to drive their business, whether they were able to move into a new market or improve their brand as a result of our partnering efforts. We have a subjective measure of how we impacted the business across 17 verti-cal industries and dozens of brands.
E&Y: How does your group support your company’s innovation strategy?
Clark: Basically, we are at the heart of IBM’s innovation strategy. Our research division is global, with programmes in places like China, India, Europe and the US. VC is a significant piece of many of these programmes.
We see innovation not as a binary choice, where we are either doing something internally or looking externally, but rather as a blending of external innovation into what we are already doing.
We often work with our VC partners to "operate the blender" to leverage our internal innovation processes and blend in just enough external innovation from their portfolio companies to achieve programme objectives. We call this approach "innovation sourcing".
We are not outsourcing our research and development or externalising product development. Instead we are looking for selected innovation to incorporate into solutions we are building and offering to clients.
Ambros: We invest with a focus on healthcare overall – whether it fits with Novartis’s innovation strategy will be determined later. If I invest into a biotech company today, it will take between five and eight years until the technology is mature enough for Novartis or another pharma company to want to acquire it.
Knowing now what large pharma will want in five or eight years is very, very difficult because it depends on their internal programmes, competitor programmes, the amount of cash available, many different things. In principle, we say that as long as it is strategic to the healthcare industry, it makes a difference for the patient and we like it, then it is good for us.
Lee: Our group supports Samsung’s corporate innovation strategy in two ways. When our former chairman, Lee [Kun-hee], returned to the company earlier this year, his message was that Samsung is going to enter a number of new businesses and markets five to 10 years from now.
Samsung really is leaning on Samsung Ventures to be the eyes and ears that help guide change at the company. Our US-based team works with a large number of counterparts in Seoul, who interface with our different limited partners within the Samsung Group.
We meet the business units regularly to understand each other’s needs and to discuss new technologies and innovations. We are constantly talking with people in the R&D group, trying to figure outwhat they are looking for, where the gaps are and what help and support are needed.
Schmidt: A number of people in our group have been with Bosch for many years and know every inch of the company. We maintain close connections with the various business units through their strategy and technology groups.
They give us a good understanding of their innovation strategies and objectives, and we are in close connection with the corporate strategy and technology organisations.
One way we provide support is by screening the start-up market to provide feedback on major trends. Another way we assist is in connecting the most interesting companies – whether or not we have invested in them – with our internal groups so they pursue areas of mutual interest.
Of course, if we have invested in the company, we are active in facilitating different levels of relationships for it among our business units.
E&Y: How has your corporate venturing strategy evolved over the past couple of years? Do you anticipate further changes?
Ambros: When I joined the Novartis Venture Fund in 2005, I took a totally different approach that asked: what is our mission and what do we want to achieve? The answer we arrived at – and that is written on the doors of our Boston offices- is innovation, patient benefit and superior returns.
If you really look at the venture landscape, both private and corporate, there has not been a new fund concept for about 30 years. So when I introduced our Option Fund, some people told me it would never work; others said this was an interesting experiment.
In the Option Fund, an initial equity investment is made along with an option (for a fee) to a specific therapeutic programme – which cannot be the lead, and there must be other programmes as well. The optioned programme or target is exclusive to us until the last opt-in point, which is either phase one clinical trials or five years, whichever is earlier.
We now have nine investments in the Option Fund and all the chief executives of those companies will tell you that they find the concept very attractive. They know our business leaders as well as we do by now, because they have had half a dozen years or more of interaction with them.
We are a global team, so even though we are physically located in Silicon Valley, our members are spread out worldwide across Asia and Europe, Israel and so on.
Our small team has a couple of objectives in maintaining these relationships. One is certainly strategic – to develop a better understanding of where the VCs are heading, their thoughts on trends and their investments. We get to know each other’s business. Through that strategic conversation, the VCs can also highlight their own portfolio companies that might be appropriate for IBM strategy.
E&Y: What is your view on where we are today in corporate venturing and the outlook for the next few years?
Lee: There is more excitement around corporate venturing today than there was in the past. We are all aware there is less limited partner money flowing, and so there is much more tension and competition among venture firms.
A lot of corporations understand extra innovation is a necessary growth engine for their own companies – that is relatively well established now. The struggle corporate venturing firms face comes down to balancing the strategic versus the financial, because if a corporate venturing division cannot maintain positive returns, the internal justificationfor keeping it on board becomes much more difficult.
We all need to keep our eyes on maintaining strong financial returns and really leveraging the strategic partnerships that we have available to help drive those returns. Overall, corporate venturing activity will continue to grow.
Thill: I agree there is more interest in the whole venture space on a corporate level. Where companies want to differentiate on innovation, they more often than not also think about a venture unit.
Whether they find the money and internal sponsorship is another matter. There will always be fluxin corporate venturing, both newcomers and those exiting the field,whether due to poor timing, change of corporate strategy or lack of financial returns.
Time shows, however, that venture groups are here to stay. The corporate venturing model has proven itself over the past 30 years. It is almost as old as the venture world as a whole.
Ambros: At the moment, corporate venturing is booming. It is very clear it is interesting because people in small and large pharma companies are worried about their pipeline, and they hope to substitute internal research failures with early entry into biotech companies.
Most of those approaches are likely to fail because they have a very strong strategic focus and probably cannot live long enough to be successful – they are too dependent on the parent. I have seen several new funds formed with too little capital to fund a viable portfolio. Longer term, you cannot necessarily count on them to be there at the series D round when you build a company.
At the same time, some of the established funds are in trouble, and it is useful to have new funds available, especially during the financial crisis – it is valuable to have the additional capital they bring as syndicate partners and as enablers of potential partnerships.
Clark: I will address the question from a different angle to observe that the current economic conditions and slowdown in VC investment provide an opportunity for corporate venturing.
The slower pace of investment allows us to spend more time with the fewer, higher-quality, companies that do get funded. And in today’s environment, the strategic benefits we can bring as a corporate venturing group become even more valuable to portfolio companies and their investors, whether it is technical assistance, enhanced visibility, global market access or IBM as a referenceable customer.
We will see corporate venturing continue to grow in importance as part of the venture ecosystem.