Anglo-Dutch-listed Unilever, a company that sells 160 million consumer products every day, is preparing the biggest change to its corporate venturing unit since it was set up a decade earlier by expanding into emerging markets.
Unilever Corporate Ventures already runs one of the most sophisticated venturing models by funding groups that invest in areas of strategic importance from the venture to leveraged buyout stages.
Now board approval has been given for the establishment of a corporate venturing unit in India, and then China, developing into an evergreen model in which the returns from portfolio companies are reinvested in new deals.
Martin Grieve, managing director of Unilever Corporate Ventures, said: "We have been given unanimous support from the top of Unilever to expand into emerging markets. We have numerous options but it will be India and China first this year. Strategically, emerging markets are a high priority for Unilever, and this is the right time in the development of Unilever Corporate Ventures to leverage our model."
Grieve said the attraction of emerging markets was the expansion in the number of people earning more than the basic. He said: "We are seeing exciting investment opportunities as rising income levels and the trend towards urbanisation create demand for consumer goods and potential for new product categories.
"For Unilever, India and other emerging markets represent the expansion of a successful strategy that in September 2002 saw the company commit €100m ($140m) to create Langholm Capital Partners Fund, buying mid-market European consumer-facing businesses as an independent firm,and €70m over three years in Unilever Ventures and Unilever Technology Ventures, which invest in early-stage business in western Europe and North America respectively as subsidiaries of Unilever."
Langholm was set up in partnership with Netherlands-based bank Rabobank. After the initial fund of €250m was deployed, Unilever agreed to commit a further €350m in 2006 to the groups, as well third-party funds, including Catterton Partners and Swander Pace Capital, which invest in consumer-focused businesses in North America.
Richard Lagnado, venture director at Unilever based full time at Langholm, said Unilever’s decision to assemble a team from scratch to form Langholm was "a very bold move", but had succeeded, as the chemistry among the partners had worked.
He said the financial returns from Langholm’s first fund had been good, with a 2.1-times return so far and two remaining portfolio companies also performing well. He said a second fund was being raised.
Part of the reason behind Unilever backing later-stage private equity managers is to source acquisitions for the company at an earlier stage. This part of the strategy has yet to deliver, although Langholm has identified1,000 companies in Unilever’s space, Lagnado said.
Unilever Technology Ventures took its commitment of up to €125m from Unilever as the cornerstone backing for an independent fund that could take in other investors. The fund Physic Ventures is named from the Latin for the science of healing and is an independent general partnership formed by bringing together the teams previously involved in Unilever Technology Ventures and Brand New Brands, a functional food incubator supported by Unilever.
Phil Giesler, venture director at Unilever based in San Francisco as a full-time member of the Physic operating team, said: "Helping to establish Physic back in 2007 and then working closely with them via our strategic relationship offers us [Unilever] the best of both worlds.
"Physic has built a sound reputation in the US as a leading fund in the consumer health and sustainable living space. This has helped [Unilever] not only to see businesses early but actually to play a major part in shaping that space.
"At the same time [Physic’s] relationship with [Unilever] gives both parties access to great insights and to leading-edge expertise in key fields… and of course enables us to build strong relationships between Physic portfolio companies, helping all parties achieve their aims."
Unilever Ventures in the UK is the other significant investment, with a first fund of $66m and a second fund of €90m. At a fund level, all the investment comes from Unilever, but the fund is governed as if it had external investors, with independent decision-making by the management team and similar incentive structures to those in Langholm and Physic.
The unit secures co-investors at the portfolio company level to provide external validation and strengthen the network available to management. The portfolio has a mix of external investments and spin-outs in areas either of strategic interest to Unilever or where Unilever can bring strong assets or capabilities to accelerate the business.
It works closely with the core Unilever business to identify opportunities for new businesses or assets that can be developed through a venture.
Unilever Ventures is a hands-on investor taking control or significant minority stakes in its portfolio companies. As with all the Unilever Corporate Ventures portfolio, a focus is find in experienced management for the portfolio companies and providing the right equity incentives.
Grieve said: "The past decade of deals through Physic, Langholm and Unilever Ventures should lead to exits this year, such as HaloSource [which floated last year four years after Unilever Technology Ventures’ first investment] and [biofuels developer] Solazyme." (see box below)
Grieve added: "Brainjuicer is a great example of our model, where we invested in a business with €100,000 turnover, introduced market research expertise and Unilever as a lead customer, successfully listed the business in 2006 and grew revenues to in excess of €16m today."
Unilever has €600m of assets under management across nine funds, including Langholm Capital Partners, Physic Ventures and Unilever Ventures. Under its new evergreen model, as money is returned it will be reinvested across North America, western Europe and emerging markets. Grieve said: "For investments, they will be split between emerging markets, Western Europe and North America to give us a similar level of capability in the different regions."
The success of its venturing model over the past decade has come after struggling with internal venturing, or incubating business ideas. During the 1990s, Unilever had started 50 to 100 other businesses, including new channel ideas and taking existing brands into new areas, but internally 99% were regarded as failures because the company lacked the competencies or capital to make them successful, according to Lagnado.
Now, if a business unit has an idea they have professional fund man-agement resources to decide whether the ideas will succeed or are too risky. One example of the sort of strategically relevant business that the venture groups have developed is Spa and Salon International. This business, managed by Unilever Ventures, has grown from nothing to 50 sites, operated as Dove Spa or Ponds Institute Beauty Centres in the UK, Spain and Canada.
The business also has a professional product range under these brands. Another example is the start-up of Own Products by Physic Ventures last year, led by the entrepreneur who founded the Method brand in the US.
Grieve added: "The capabilities established over nearly 10 years allow us an alternative route for incubating internal projects, whereby we can attract entrepreneurial talent, creativity and the start up mentalities and risk environment to create successful businesses."
Through corporate venturing, therefore, Unilever is able to develop future growth options or acquire businesses that may give Unilever competitive advantage.
Planned or actual exits from Unilever’s venturing portfolios
Just Retirement, listed 2006 (Langholm)
Brainjuicer floated on Londons Alternative Investment Market (AIM) December 2006 (Unilever Ventures)
Vitamin Brands sold to PepsiCo in April 2008 (Unilever Ventures)
Textronics sold to Adidas in 2008 (Unilever Technology Ventures)
PharmaKodex sold to Orexo in February 2009 (Unilever Ventures)
HaloSource floated onAIM in October 2010 (Unilever Technology Ventures)
Dorset Cereals sold to Wellness Foods in 2008 (Langholm)
Farmos sold to KiiltoClean in 2010 (Langholm)
Fact box
Founded: 2001
Assets under management: €600m
Unilever Ventures – 11 portfolio companies
Key people:Martin Grieve, managing director
John Coombs, managing director
Mark Muth, Andrew Lane, directors
Jan Harley, Anna Ohlsson, Lisa Smith, investment directors
Physic Ventures – 15 portfolio companies
Phil Giesler, pictured, venture director at Unilever Corporate Ventures
Dion Madsen, William Rosenzweig, co-founders and managing directors
Andy Donner, Andrew Williamson, Stacy Feld, directors
Langholm Capital – six portfolio companies
Bert Wiegman, Christian Lorenzen, Oliver Wyncoll, Paul Richings, partners
Richard Lagnado, Investment director, and venture director at Unilever