This is an edited transcript of the keynote speech at the 2014 Global Corporate Venturing Symposium in London given by James Mawson, Global Corporate Venturing’s editor-in-chief.
What I was hoping to do today was to provide a perspective on the main theme for the conference – the idea of sustainability. This is our starting point. It is not the answer but what I hope to get over the next two days is some of the answers, and that we can then share those best practices with the rest of the industry, those who have not been fortunate enough to attend this, our fourth annual symposium.
When I was writing about venture capital for Dow Jones in the Wall Street Journal and Private Equity News a few years ago, I got a little bored with saying: “Why is it that venture capital (VC) is struggling, is shrinking as an industry and as an asset class compared with, say, the dot.com days?” One of the classic answers I constantly received was: “Well, fundamentally, it is pro-cyclical.” That means more funds are raised at the end of the economic cycle, more deals are done at the end of the economic cycle, and when the economy turns down into recession and prices are lower, VC firms are able to raise less money and they do fewer deals.
So I thought: “Well, is that the case for other people? Would you not expect them actually to do more deals at the lower part of that economic cycle?” It turned out to be probably no.
If you look back at the history of corporate venturing over the past 40 years, it has been as pro-cyclical, in fact more pro-cyclical than the VC industry as a whole, even though that is counterintuitive to good venture investing because the earlier in the cycle you do deals, the longer you have to hold them to the end of the cycle, and you are likely to get higher prices than you would have paid at the start of the economic cycle, therefore you are more likely to bear a better financial return and to show any strategic rationale on top of that.
And so what I was interested in back in 2009 and 2010 was whether for the first time we were seeing corporates understand both, first, the strategic need that they have to show how they could tap into innovation through a ventur- ing ecosystem and, second, deliver what the corporations needed by investing at that earlier point in the economic cycle so they had a longer time to show the evidence and proof of their success points.
And so this conference in effect is trying to take a half-way viewpoint. Back in 2010 I thought we were likely to see a changed paradigm so that more corporates would be starting to launch their venturing units at that point and then have a six, eight or 10-year track record before the global economy started to turn down again, and then be able to show that delivery and have that longevity.
The idea, the theme behind this year’s conference, organised by Toby Lewis as editor of Global Corporate Venturing, is pushing the frontiers of venture capital, creating a sustainable ecosystem from the “Golden Age”. This Golden Age was effectively the 2010-13 period during which we saw a number of groups launched, which then hopefully could do deals and show that track record, both financial and strategic, that will help when the economy turns down and the chief financial officer and the CEO are looking to cut costs. They can say: “Well actually, look at what we have delivered. We have delivered returns to you both financially and strategically. You would be crazy to cut us. In fact you should invest more now because we can show this performance.”
This year I am delighted to say we have venturing units from parent corporations with more than $4 trillion in aggregate revenues. In the room last year we had $3.68 trillion so we are on the right track. We are getting more corporates with more revenues understanding how important innovation and venture can be to their parent as well as to their own unit itself.
As many as 500 corporate venturing units were formed from 1999 to 2000. How many of them are still going or have a longer than 10-year track record? About 181 units have been around for more than 10 years, according to Global Corporate Venturing. That is quite a lot. If you look back in the US – the world’s biggest venture market – financial services provider Silicon Valley Bank reckons there may be 200 to 300 really active venturing units doing about two to four deals a year.
So 181 corporate venturing units with more than a 10-year track record is actually pretty good, but then if you look back at 2004, how many corporate venturing units were launched? Many of those initial 500 were cut during that 2001, 2002 and 2003 downturn. The technology, media and telecoms bubble burst, most economies went into a slight downturn and recession and a lot of corporate venturing units were cut.
But in 2004, 2005, 2006 and 2007, others were starting to be launched. From 2007 to 2008, just before the downturn, there were even more, but what I found really interesting when I ran some of the analysis was more were launched at the height of that credit crunch, from 2008 to 2009, than there had been before.
I wondered: “Maybe we are seeing that corporations understand the strategic need for venture capital, why they are working with the venture ecosystem.”
Why do I call it the corporate venturing Golden Age? From 2010 to last year, you see this massive explosion. It will be interesting to see now, concerning this issue of sustainability, how many will be closed.
You, in this audience, are the experts, you have the $4 trillion in revenues. What do you need to be doing to create that sustainability? What do you need to be doing to respond to your chief finance officer when he says: “Can we get you to be on an evergreen model? How do we get you to provide returns to the company?” It might not be big figures, but if you show that you are a profit centre rather than a cost centre, as much research and develop-ment (R&D) is, that is a powerful argument when the music stops and the party starts to break up.
What I find quite interesting if I talk to some of the really established groups, whether it is GlaxoSmithKline or Intel Capital, they tend to be a little bit more on a pendulum. Some years, some decades are a bit more strategic. Some years a little bit more finance-orientated.
But the idea of corporate venturing just being a sort of clone of venture capital no longer washes. Corporates do some things worse than VCs, they can do some things better than VCs but they are slightly different from VCs and how you understand and tailor that message to the VCs, to the entrepreneurs and back to your corporate parent, and get the connections with the business units that are increasingly important.
We talk to more than 1,000 corporate venturing units each year and the general trend we are seeing is that corporates are understanding how to get strategic impact. I am interested in learning from you, from the other keynote speakers and the other panellists what it is we will need to be doing as an industry to create that sustainability. A downturn will come, so how do you retain the talent, retain the people who will help you through that process?
There is no question that corporate venturing is much more important to that global entrepreneurial ecosystem.
Our analysis tracks maybe 50% or 60% of the deals out there. Not all corporates want to publicise their deals but we hope to improve our performance through you. Even if we do not publicise a particular corporate venturing deal, it is still useful to know how many deals you have done in a year, what stages they are and how much you have broadly invested.
Corporations are important, both at the very early stage through their incubators and accelerators as well as activity from the A round through to B and C, where they can start to see a product from the portfolio company and maybe apply metrics so that it can be partnered into the ecosystem, through to the pre-initial public offering (pre-IPO) stage, or even some of the later-stage companies, where there could be more strategic rationale.
We understand corporate venturing has a role to play in the entire ecosystem. If you just look at the VC part of it, it becomes much more focused on specific sectors, specific cycles, specific stages, and what we find is that corporates have a much greater role to play in that ecosystem as a holistic provider, not just of capital but of broader support to entrepreneurs.
We have just taken a round ourselves, and one of the questions we had for our investors was: “How can you help us? Capital is great, we need it obviously and that is an important part for our growth, but how can you help beyond that?”’
We have been very fortunate with Simon Leefe, our board representation from 24 Haymarket, an investment group of private equity professionals, and other shareholders, and our chairman, Dominic Riley, that they actually deliver on those things. And any entrepreneur will say the same thing to their potential investors. “Great that you are interested and you have this corporate parent. How can we tap into that?”
The impact of corporate venturing activity is global, both in sources of capital and where deals are done. When we track deals, it is obvious the US is the world’s biggest eco-system. Most of the international corporate venturing units outside the US go to the US as a point of call when they are internationalised to understand what the US, as the world’s biggest, most dynamic economy, is doing so well and how they can bring that back to their parent companies and back to their home countries.
Boston Consulting Group’s analysis of out data shows the different sectors and where companies are investing in their sectors. In a specific vertical such as healthcare, 95% of healthcare corporate deals are within the sector. They are not going into the IT sector and they are not going into biotech and clean-tech to understand some of the trends they can bring back to their own sector. They are focusing on finding the next Alzheimer’s drug, for example.
But look at some of the other sectors, whether media or energy, and hese corporates also look outside their sectors, asking: “What are the trends? What are the issues happening outside that might disrupt us?’
Quentin Carruthers, editor of Global Government Venturing, has just published a piece of research in his inaugural issue to help people understand not just how many start-ups are being formed but how many are most influential.
These are the so-called unicorns, those that get to $1bn in valuation, those that are more likely to hire more people, creating a hub around which other start ups can then feed. They are such a dramatically important part of any economy.
I ran some analysis on how many large deals there are, and whether they are now more likely to become unicorns creating this $1bn valuation than in previous periods of large rounds sizes.
Analysis shows there is now a large deal of at least $100m every couple of days at the moment, and there has been this increase in these large deals. Pinterest has done three venture rounds in the past 12 months or so of at least $100m and its valuation is now $5bn.
But are these unicorns all US companies? Certainly much of the popular press will talk about unicorns and they will talk about it in a fundamentally US-centric way, but if you look at the first quarter of 2014, the US and China are the two main markets. The interesting question is: who are the investors? In China they are the big companies – Baidu, Alibaba, Tencent, Qihoo and Sina – and in the US corporates are particularly important for these large rounds.
Intel Capital led with Cloudera, but the other investors on that deal show how diverse the investing syndicates are becoming. On Cloudera were Google, T Rowe Price, which is more of a mutual fund investor, and MSD, Michael Dell’s family office.
This is going to be increasingly important to the sustain-ability of the corporate venturing community – not just running accelerators but providing the means and ability to back the larger rounds, a function few European corporate venturing units appear to be up to.
Sodhani pushes returns for corporate venturing
In his first trip to the UK in four years, Intel Capital president Arvind Sodhani told the audience at the Global Corporate Venturing Symposium that financial returns were as important as strategic success when running a corporate venturing unit.
Intel Capital, launched by Sodhani in the 1980s, came from the realisation that semiconductor maker Intel could not fund all the research and development it needed to grow the ecosystem.
Intel decided to pursue minority investments in smaller companies to solve that problem, and the operation has since grown to a global team of 200 people.
Sodhani said one of the biggest challenges faced in corporate venturing was scale, and, alongside a motivated team, the support of the CEO and the board was important.
Financial returns were as critical as strategic value, he said in a fireside chat with Global Corporate Venturing editor Toby Lewis. Sodhani said corporates will need to be patient as the losses will show up first, and strategic value can often be subjective. In the early 2000s, many corporate venturing efforts were shut down because the numbers were not attractive to the parent companies.
Although there is currently a boom in corporate venturing, Sodhani was quick to point out that “the losses will come before the gains will come” and added that, as corporate venturing efforts get going, most of these will have to figure out “how they will deal with those losses”.
Their success also depends on corporates figuring out what exactly they are looking for from their investments, as start-ups that become billion dollar companies are far and few between, though Intel Capital does chase those too. Intel Capital holds annual meetings with their portfolio companies to receive feedback and to set out goals.
Intel Capital’s team is constantly keeping track of new potential markets, and it recently set up an office in Nigeria. One of the challenges when setting up in a new market is the lack of a local start up ecosystem, which Intel Capital will then need to assist in creating. Sodhani pointed out that not all new offices are a success, and that luck also plays a role.
Concerning the future, Intel Capital’s core focus is the continuum spanning wearable devices through the internet of things to data analytics. While data analytics is still in its infancy, Intel Capital recently made a $740m strate-gic investment in data management technology company Cloudera, and Sodhani noted that the cloud is a potential one trillion dollar industry.
BP uses corporate venturing as a route to innovation
IBM explores elementary business model with Watson
Joanne Faulkner, reporter
Claudia Fan Munce, managing director at US-listed technology company IBM’s Venture Capital Group, discussed IBM’s pioneering Watson fund in her keynote speech at the Global Corporate Venturing Symposium, asking delegates: “How can corporate venturing capital be used to build a partner ecosystem for a new business unit?”
Fan Munce is one of the founding members of IBM Venture Capital. Watson Group is focused on investing outside IBM and developers at other companies create apps for Watson.
IBM Watson has so far allocated $100m to incubation, with IBM previously stating Watson Group would be used to invest $1bn in research and development companies.
About 87% of people check their smartphones when they wake up, which means mainframes are busier than ever.
Fan Munce said research showed the average person checked their phone around 150 times a day, and this was transforming the way consumers wanted to engage. That level of interaction led to what Fan Munce described as a new “engagement model” of enterprise, which was driving IBM’s investment.
“There needs to be a new enterprise model in order for companies to transform the businesses,” Fan Munce said. “How do you engage with your clients?”
The fund is part of IBM’s strategic unit, working to drive business partnerships with venture capital firms and their portfolio companies.
Dubbed “the Watson journey”, taking its name from the IBM Watson supercomputer, which beat human competitors on US game show Jeopardy, the fund is shaping the future of IBM’s investment.
Big data is continuing to transform the industry, and IBM is optimising its business potential on both big data and cognitive computing. Utilising business analytics is a central focus for IBM Watson.
Fan Munce said that as an enterprise-focused company, IBM saw this as an opportunity to enter new markets. More often than not, IBM looked to local companies offering solutions that could be integrated into its system.
Panels highlight critical issues for venturers
Thierry Heles, reporter
The second day of the symposium offered several interesting panels to attendees.
The first panel – Dealing with other stakeholders (trade body, university and government panel) – was moderated by Claire Lee from Silicon Valley Bank, and included panellists Paul Morris of UK Trade and Investment, Tony Stanco from National Council of Entrepreneurial Tech Transfer, Lord Wei of Shoreditch Ventures, and Ken Yasunaga from Innovation Network Corporation of Japan.
They noted how it was sometimes easier to be influential on a higher political level as an outsider than it might be as an internal adviser, and that this presented huge opportunities.
At the same time, there was great opportunity in university spin-outs, with $35bn currently invested in research universities, but a major funding gap between research funding and commercialisation funding.
Meanwhile, another panel – Impact investing, corporate venturing and corporate venture capital – noted that although there was an established ecosystem in California and London, other regions were still lacking.
The panel was moderated by Amanda Feldman, from consultancy Volans, and included Jorn Bang Andersen of Clareo, Maximilian Martin of Impact Economy, and Vinay Nair of Social Investment Business.
The consultants on the panel offered Africa as an example for growth opportunities, a theme that recurred through the afternoon.
Social investing, the audience remarked, should, however, not be an element that was just added on top of any organisation, but should instead become a core focus and part of company culture – a statement with which the panel agreed.
The panel also noted that social responsibility need not necessarily be financial, and cited an example of staff teaching children and creating a positive impact on communities.
Elsewhere, a panel moderated by Dermot Hill from executive recruitment firm Intramezzo – Building a sustainable business: compensation and talent – included Chris Coburn of non-profit hospital operator Partners Healthcare, Raja Doddala from 7-Ventures, the corporate venturing arm of retail chain 7-Eleven, and Jay Onda from Docomo Innovations, a Silicon Valley-based subsidiary of mobile operator NTT Docomo.
The panel heard that corporate venturing was always conducted to benefit the parent company. However, corporate venturing should include some form of compensation for all participants in a deal, and not merely reward the management. Docomo does this through a carry-on programme, but it could also be implemented through bonuses. In some cases, this is trickier, with Doddala noting he was the only full-time member of staff at 7-Ventures.
Finally, the deal making masterclass was moderated by Mark Radcliffe, from law firm DLA Piper, and included Frederic Rombaut, from networking company Cisco, Stefan Gabriel of from 3M New Ventures, the corporate venturing arm of conglomerate 3M, and Markus Thill, from Robert Bosch Venture Capital, the industrial manufacturer’s corporate venturing unit.
Thill said investment was not always possible even if both partners might want to strike a deal. There were times when another company was direct competition, but sometimes working out terms and details between business units was also too much of a nightmare.
While Greg Becker, president and CEO of Silicon Valley Bank, explained in his keynote earlier in the day that software costs had been dropping exponentially, this was not true for hardware, and the panel noted costs at Bosch had actually been increasing.
The panel also showed frustration with the lack of advancement in data analytics, stating that milestones could not be treated as a holy grail – they could work, but sometimes did not.
Equally, acquisitions were not always the end goal, or even a good idea, if the two companies drifted too far apart and could function only as partners working on collaborative projects.
At noon the main room was transformed into a place of varied discussions through a series of unpanels that enabled delegates to split into interest groups to cover each stage of corporate venturing.
The unpanels were divided into two major topics, CV101 to CV301, and sustainability. The discussions were over seen by Andrew Gaule from consultancy Corven Networks, and included tables moderated by Neil Foster of law firm Baker Botts, Andrew Kelly from venture investment fund BioPacific Ventures, and Mike O’Brien of financial services firm UBS.
Bitcoin could change future of fin-tech
The panel, made up of Alex Mason, who leads Baker Botts’ technology practice, Bradley Rotter from Rivitz, and Allegis Capital managing director Bob Ackerman, had several interesting observations about the cryptocurrency’s weaknesses and what it could become if it managed to overcome them.
The panel said Bitcoin could be as close to a perfect currency as the world had yet seen, but was still far from optimal. Transactions were not insured, and the technology also needed to be easier to use, more transparent and trustworthy to the average consumer.
Bitcoin’s greatest technological marvel was the blockchain, the calculations that took place in the background and provided a permanent and immutable record of all transactions.
The blockchain had enormous potential for decentralised information, and could become the internet protocol for all kinds of transactions.
Thierry Heles, reporter
Capon pointed out that the impact of mobile was still largely underestimated and, worse, misunderstood. The entire TV ecosystem TV was undergoing a radical change, with some major new players, such as Netflix, Google and Amazon, positioning themselves in the market.
Long content was also increasingly being consumed on mobile devices, especially tablets. The common component in all these new offerings was connectivity and increased choice, leaving customers to decide what, when, where and how to consume.
As an added incentive for consumers, initial and running costs could be massively reduced, as Netflix and others had cheap flat rates, and devices such as Chromecast allowed people to connect many TVs to the internet at low prices. As rights move into the cloud, it would also become easier to watch content across devices once it had been purchased.
Moore noted that content would become more personalised and measurable. With the advent of 4G, and UK infrastructure gradually improving after being behind the US market for a long period, ubiquitous video consumption was becoming increasingly viable.
Finally, the consensus among seminar attendees appeared to be that the idea of a primary and a secondary screen was a concept which would not last, and that in order to survive, providers would also have to re-educate consumers that a growing catalogue without price rises was unsustainable.
Banks were currently being threatened by the disintermediation of outside companies pushing into the space between consumers and banks, with companies such as Square or Stripe taking over tasks traditionally controlled by banks.
An important aspect of banking was lending and that was also being disrupted by start ups focusing on peer-to-peer (P2P) lending, or lending to small and medium-sized enterprises (SMEs). While P2P disruptive technology had not yet been adopted by banks, SME lending had, but banks were not good at fringe lending, and more often than not SMEs’ applications were denied.
The panel also pointed out that if a technology was disruptive, it was always better to sit at the table rather than fight the innovation. To sell this to management, it paid to spin it not as a disruption but as an opportunity.
Thierry Heles, reporter Julian Ranger, founder and chairman of data protection start up SocialSafe, outlined his views on the future of data privacy in a seminar covering the future of personal data.
Ranger noted that information needed to be reorganised so value could be gained from it, as we had reached a plateau of innovation with what can currently be done with user data. As more apps would require access to highly sensitive and personally-identifiable information, users would need to be put back in control of this data.
New EU regulations on data protection and the “right to forget” were huge leaps forward in this regard, and Ranger also pointed out that all data rights would have to be explicit and opt-in, while keeping the actual data portable between services.
One problem the lack of portability had created was data loss. Whenever a person moved to a new service or changed utility companies, all their records were lost to them. Data access in its current form was unreliable as it was controlled by the companies and not by the users themselves. Although companies such as Facebook allowed third parties to look at data, it would not allow them to keep that data.
In future, the app would allow users to give selected content to companies, while respecting the right to forget, without SocialSafe keeping any of its users’ data.
Ranger concluded by saying that in his view, such a library controlled by users themselves was inevitable, though he also admitted he feared he could be bringing the platform to market too early.