Executives in services transcend sector boundaries – their networks are leading them into fertile areas for corporate venturing.
Advisers and other service providers seek options for both clients and themselves to stay in touch with innovation, often using their multiple commercial connections. Our most influential ranking is here.
Law and accountancy firms – notable examples include Wilson Sonsini Goodrich & Rosati and DLA Piper – have long looked at the possibility of investing in clients. This has been followed by a significant upswing in all types of services firms trying to gain an edge, with particularly strong corporate venturing involvement in marketing, communications, information and software-as-a-service businesses.
The big stories
Last year, units in the sector sealed substantial exits, including UK-based media communications company WPP (see profile), US-based advertising company Interpublic, and education company Knowledge Universe, which was cofounded by chairman Michael Milken, best known as the junk bond king during his time running US-based investment bank Drexel Burnham Lambert.
WPP was a big beneficiary of the sale of US-based social enterprise software company Buddy Media. Interpublic came closer to a second-stage exit in the Facebook initial public offering, having sold half its stake for $133m in 2011, after a reported original investment of less than $5m, and Knowledge Universe-backed online program design and development company EmbanetCompass was sold to Pearson for $650m.
There were other eye-catching deals. WPP invested $70m in Argentina-based information technology services company Globant in one of a number of deals sealed last year. US-based cloud computing company Salesforce’s prolific portfolio of corporate venturing activities included cloud storage company Box raising $125m of series E funding led by General Atlantic.
We tracked six services sector corporate venturing units formed in 2012, with US-based media research company Nielsen, US-based online travel and expense management business Concur Technologies, and Japan-based professional services firm Sunbridge among those launching programmes.
Nielsen’s venturing unit, Pereg Ventures, which operates independently, expects a first close of $25m in March.
Pereg chairman Itzhak Fisher said the firm’s dealmaking is already off to a running start because of the services its parent provides. Fisher, who is also Nielsen’s head of global business development, said: “Three to four startups pitch to me in a week, because in consumer, media and analytics we are the largest research company in the world. They all want to work with us.”
In consultancy, one of the most active corporate venturing units was Monitor Ventures. The consultancy business of its parent, Monitor, is now being acquired by accountancy firm Deloitte. Neal Bhadamkar, general partner of Monitor Ventures, said: “Monitor Ventures is, and always has been, a free-standing entity that has had a strategic affiliation with the Monitor Group. We do not currently expect any impact on Monitor Ventures’ operations from Deloitte’s acquisition of Monitor’s consulting business. We can comment more fully after the transaction is finalised.”
The strategy
Ben duPont, of Yet2Ventures, the corporate venturing unit of technology marketplace Yet2.com, said: “Not everybody who hires Yet2 as an adviser get an investment, and not everybody who gets an investment is a client, yet there are great synergies. How many venture capital funds have officers in two continents talking every day as part of a machine designed to connect start-ups and Fortune 500 companies.” (See MoBeam deal profile)
Dave Knox, chief marketing officer at media companyRockfish Interactive, which runs corporate venturing unit Rockfish Brand Ventures, said: “We are
seeing a ton of benefit. We are not working with an official fund, so we are extremely selective. We have looked at 500 to 600 companies and only pulled the trigger on four. Yet with 30 to 40 companies we have come across, we have ended up doing a deal working with our clients for them. We see these things first as a seed-stage investor and give them input to shape their business model.”
He added: “While financial return is nice, our real financial return is being plugged into startups. We have not been able to directly measure it, yet looking at client surveys on how are we doing, they have recognised that us being a digital innovation partner is really important. Definitely with Brand Ventures we are talking the talk rather than just saying we are innovative.”
When consultancy firms are able to get such investing right, they can transform their business. UK-based consultancy Cambridge Consultants has made half its profits from venturing, a number in the tens of millions, according to Ray Edgson, head of ventures, with its biggest exit being the initial public offering of FTSE 250-listed silicon and software designer and developer CSR (Cambridge Silicon Radio).
Edgson said: “We spend 10% of our time investing in technology. We do so in one of three productive ways. We take the technologies to normal customers where it might make a great product for them, or we develop it as IP [intellectual property] then license it, or in an even smaller number of cases it ends up being a spin-off. Yet 50% of our profits have come from the spin-off activity, as when they float we often have a significant stake.”
Edgson added: “We have an extensive track record across15 spin-offs. Of those, five have reached the London Stock Exchange and 13 of the 15 are still going. This is quite extraordinary and has created a virtuous circle that attracts entrepreneurial technology people to us because they see our success.”
Ikuo Kiraishi, chief executive of Sunbridge Global Ventures, the corporate venturing unit of Sunbridge, a Japan-based professional services firm, said it was looking to raise ¥3bn ($30m). He said: “We just started to go for investors. Our investors can be divided into two sets. The first comprises entrepreneur friends, who established their own startups that went public with huge capital gain and are interested in involvement in new start-ups they don’t want to start from scratch, as they understand how tough it is, but also they know how exciting it is. Their primary motivation is not capital gain but being involved in interesting innovation.
“Second, we may not be going after institutional investors, but corporations looking for new business opportunities. They have recognised and understood the domestic market is going to be shrinking and are looking to find new spaces to expand their business. It is tough to find out by themselves. So corporations are our second target. They are not working for numbers only, but to find genuinely new innovation.”
Firms should look to find a model that suits them, according to Edgson. He said: “The most successful venturing model for us has been home-grown spin-offs. We have tried other ways of doing things. Occasionally companies come to us and say we have got this technology, let us make it into a spin-out. We have to be candid – we have not cracked those alternative routes.”
Some corporate venturing executives wear multiple hats, reflecting the general flexible nature of their advisory firms. Nielsen’s Fisher acts as a bridge between parent and venturing unit. He said: “I am head of global business development at Nielsen for 75% of my time and for 25% of my time I do the fund. This is the most efficient way. Nielsen is in the fund structure as a limited partner [investor], not the general partner [fund manager]. They are not on the investment committee and they don’t have right of first refusal.”
All services firms have to take care to avoid conflicts of interest – when businesses find themselves investing in current or future clients, they run significant risks. Fisher said: “We have a very strict policy on conflict of interest and we are solving all issues as they come out. Nielsen felt comfortable, and we think our structure gives us an edge.”
Some services companies have become so tied to venturing that it can become a core activity. Such is the case with digital rights management company Intertrust. Chief executiveTalal Shamoon said: “Our venture fund is a venture in itself. I am obsessive about organisations that run in a matrix. I read in Tipping Point [book written by Malcolm Gladwell] that the optimal organisation size for a group of people was below 100 and took that to heart. I did not want us to grow too big so I have created companies that orbit Intertrust.”
He added: “The investment thesis of our portfolio is that all of our ventures should or could interact with each other. The model is like a Japanese keiretsu [a set of companies with interlocking business relationships and shareholdings], kind of like what Mitsui or Mitsubishi have done – ventures all interact with each other and are all potentially doing deals with each other. “We are currently quite pregnant with two of our incubated start-ups – they are building products and we are in the process of working on spin-outs. Intertrust is around 84 people and growing, with about 50 working in incubators.”
Some firms are finding that providing a service for portfolio companies can work in place of equity. A recent trend has been for companies to offer advertising inventory to start-ups in exchange for advertising. Niko Waesche, managing partner of GMPVC, a Germany-based media-for-equity fund backed by German media companies Regiocast,N24 and Wall, said: “We think the media-for-equity fund approach is the first venture capital innovation out of Europe.
Everything in venture comes from the US, yet this is truly European.
“I think it has come out of Europe because there is a gap of venture financing in the medium stage of development. Many companies in Europe are successfully sold to Google or Ebay, and [whose sellers] have now become investing angels. For later-stage deals there is London [source of deep capital markets with the biggest collection of large banks, institutional investors, private equity and hedge funds in Europe], yet in the middle we have a problem.”
Waesche added: “Companies give us excess media inventory. Media companies have high fixed costs, and whether they sell 200 ads or 220 ads does not make a difference in terms of cost. They are like airline seats that go away [stay empty] if you don’t use them. Yet they can only sell in the market at a certain price to keep existing clients happy.”
Some companies combine a private equity-style approach and services activity for portfolio companies. Such is the case of FTSE 250-listed outsourcing company Mitie.
John Telling, Mitie’s corporate affairs director, said: “Typically, management hears about Mitie and sits down with us. Provided it is sensible and
we like the look of the team, we prepare a business plan and from that plan we decide how much we capitalise the business at. We then provide support from day one – IT, payroll property, equipment and a corporate buying operation, all as part of one of our existing divisions.”
Telling said Mitie generally takes majority stakes in businesses. It later looks to acquire the management’s share of the business at an price based on how profitable the company has become.
Funds
Big funds have been raised in the services sector in the last year. Nasdaq-listed travel company Concur, a travel and expense management solutions provider, launched a $150m fund called the Concur Perfect Trip Fund. France-based advertising group Publicis Groupe joined phone operator France Télécom-Orange firm to back Iris Capital Management, committing €150m ($200m) to three funds under the OP Ventures (OPV) brand. OPV Growth is investing €15m in established companies in France and the rest of Europe; OPV Global is investing in start-ups outside Europe, also with funds of up to €15m per project; and OPV Early Stage will provide seed-capital and early-stage investment of up to €3m to young companies in France and Europe.
People
Executives have also entered the corporate venturing industry. Tom Bedecarré, founder of digital ideas and innovation company Akqa, joined UK-based communications group WPP’s Digital division, after Akqa was sold to WPP for $540m (see profile). Bedecarré joined WPP to run WPP Ventures. As president of WPP Ventures and chairman of Akqa, Bedecarré is based in Silicon Valley, California.
Box, an enterprise cloud company backed by strategic investors SAP Ventures, the corporate venturing unit of the Germany-based technology company, and Salesforce.com, the US-based software-as-a-service company, opened its international headquarters. The Box European headquarters is in central London. It plans to hire 100 people across Europe by the end of this year. Box’s Greg Strickland took on the role of international general manager and vice-president of global operations, heading the London office. Strickland was Box’s vice-president of business operations over the previous four years.
Japan-based advertising company Dentsu took a 7% stake in Digital Garage, a Japan-based internet company, for ¥2.6bn ($29.1m).
Digital Garage said: “Since the Digital Garage Group holds a significant amount of data through the management of internet media and provision of e-commerce settlement platforms, and Dentsu offers a huge variety of solutions in the digital domain, their strengths are complementary.
“The purpose of the alliance is to enhance the corporate value of both companies via expanded and innovative services in the areas of digital marketing and business intelligence.”