Mawson: Why was Software AG interested in corporate venturing?
Hanika: We were interested if there was a way to leverage the core business. It comes down to the question: where do you want to source innovation from? Research suggests innovation is highest if you have limited resources, hence pouring dollars into research and development is the wrong way of scaling your business. The question was how to do this because as an organisation we were structured just to sell our core products. We were within days of setting up a corporate venturing unit when the opportunity arose to buy business process management software peer IDS Scheer, the German company with subsidiaries in about 60 countries, in July last year.
Mawson: So how did Software AG get the idea of venturing?
Hanika: About three or four years ago I started building a venture capital (VC) network in the Boston area as we were young guys in mergers and acquisitions with not too much technology experience and so going to the infrastructure and software portfolios of VCs was logical. I started reading about venture capital, which included a little about corporate venturing, and then thinking about innovation – questions such as "who is innovative?" and "how to grow faster?"
When I had joined Software AG there was only R&D, but we added M&A, such as our 2007 purchase of US-based webMethod for $546m. In software technology, however, M&A is often too late as competitors have already started building or buying. So you have to think about M&A early, but this comes from VC portfolios and you have to pay a lot in multiples to the target’s revenues or any earnings, which is difficult to explain to public shareholders. So the next step was to say "why not invest ourself as a VC?"
Also, when you invest less, you can place multiple bets and see which one pays out (so-called positive Black Swans). Doing the same with your own R&D is dramatically more expensive.
I came across a Harvard Business Review article saying corporations were more innovative with a corporate venturing division than with only R&D, and I heard a talk by Steve Wozniak, a co-founder of Apple computers, that R&D does not lead to invention. He said he invented only because he had no money. Just like a kid with no money has to invent or build his toys, so a start-up with no money learns to be innovative, quick and cheap.
Mawson: what about the business organisation and culture fit for corporate venturing?
Hanika: The important thing for us in venturing would be to find something to scale up. The key account managers at Software know what the customers are missing and so the next steps on their wishlist. The "not built here" syndrome is a problem at Software, just as in any other tech company.
That is why you have to deal with it and manage through incentivisation. The same holds true for many partnerships at conglomerates – if they are not managed, they do not generate revenues. At Software there are plenty of partnerships but they have to be tightly integrated in our process.
The investment decision would have to follow product management and market analysis. They would have to want to buy right away because it creates value, not just because the technology is cool.
Mawson: Is the idea on hold or dead?
Hanika: After such a transformational acquisition in IDS, organisations need two to three years until they have resources for new ventures, such as a corporate venturing arm, requiring some internal reorganisation. Now would be a good time to start a corporate venturing arm, but not for us, at least this year.