James Mawson: It gives me great pleasure to introduce our first panel for today. Stephen Ziff from Coller Capital will moderate the panel. I shall ask him to introduce his panellists but please come to the stage, Stephen. Coller Capital probably needs very little mention to you but they really are a powerhouse firm, perhaps one of the world’s largest venture investors themselves, they go in via secondaries. I shall leave Stephen to talk about his panel which will be looking at why firms are raising so many funds and so many are outside the US.
Stephen Ziff (Partner, Coller Capital, pictured right): Thanks, Jim, and welcome everyone. Before we start, I want to give big kudos to James, Tim and the rest of the team. In many respects, he has done what we look for as an investor. As an entrepreneur, he has seen an opportunity, he has chosen his time and I am sure he will see much continued success.
I am delighted to welcome my four panellists today, and I shall move round the table and ask them to introduce themselves. Fabienne, why don’t we start with you?
Fabienne Herlaut (Head of Ecomobilité Ventures, pictured second right): I am the founder and managing partner of a new type of fund called Ecomobilité Ventures, which is a multi-corporate venture fund, which regroups SNCF, the public railway company, Total, Orange and Peugeot Citroën , who were all dedicated to invest in smart mobility projects.
Martin Grieve (Unilever Ventures, pictured middle): I am Managing Director of Unilever Corporate Ventures. We have been doing corporate venturing for about 10 years as an organisation, and we have a portfolio of direct and indirect investments. We are one of the corporates that sponsor Physic Ventures that Justin mentioned in his keynote. I have been in the job for about three years, and I previously held a number of different finance and strategy roles within Unilever, and I think it is a fantastic job. I am really privileged to be able to do this job, which is incredibly diverse, every day is different, and I am privileged to be here.
Shellie Davis (Coca-Cola, pictured second left): I am Director of Mergers and Acquisitions at the Coca-Cola company. Corporate venturing is new to the Coca-Cola company in a defined way as we are discussing today, but the company has been doing venturing for a long time as part of its M&A programme, and I can talk more about that later.
Dominique Megret (Head of Swisscom Ventures, pictured left): I head the Corporate Venturing unit of Swisscom, which is a mid-sized telecom group based in Switzerland. We have invested around 100 million in the last six years in 20 companies and three venture capital funds. We invest in Switzerland, Europe and a third in America as well with a strategic intent.
Stephen Ziff: The topic is: "Why firms are raising so many funds, and so many are outside of the US?".
Before we start, can I have a quick show of hands: how many people in the room were corporate venture investors back in 2000/01? I make that probably 10, so a very small percentage. How many of you were at the same firm then as you are now, even if you are in a slightly different role? Around a similar number. For those of you who were not around in this business in 2001, let me just give you the backdrop to the climate then.
There were approximately 500-520 corporate venture investors, and in 2000 approximately $22 billion was invested in corporate venture capital. Where are we in 2011? Last year, there were close to 600 deals that were funded and over 650 firms that were doing corporate venture investing. The figure that was invested in corporate venture capital, ironically, is pretty similar, so around $22 billion. You are now looking at an area where more than half of all Fortune 1000 size companies have a corporate venturing activity, and it is a truly global business.
The traditional areas of corporate venture capital: the East Coast, the West Coast and perhaps parts of Israel are now giving way to new regions such as Qatar, Beijing and South Korea. My question, starting with Shellie, is this resurgence – why now and what is driving it?
Shellie Davis: I work in mergers and acquisitions and I have a functional role, supporting the functions of all the global marketing across the globe, and all of our technical organisation which includes R&D. As you might imagine, I see many familiar faces from a lot of conferences I have attended. Much of what is stimulating our corporate venturing is our need to innovate. It is interesting that our earlier speaker, Justin, talked about fuel, food and I cannot remember the other piece. In the Coca-Cola company, we care as much about growing mangoes in Kenya as we do about someone interacting with our newest fountain machine called Freestyle. Our supply chain is one of the broadest, longest and deepest supply chains you can imagine. I care about sustainable fuel. I care about renewables. We are one of the largest users of PET in the globe, and I am trying to find a way to make it all renewable, so I want those renewable energy companies to be successful and I am interested in investing in them.
One of the most mundane reasons for one of the resurgences in our company, which, while a lame answer is nonetheless true, is we have a lot of issues with funding all this research through our income statement. Therefore, we are very interested in trying to take a balance sheet approach, getting that as a capital investment versus a research investment. I have many discussions with our accounting and research department trying to figure out ways to make that happen. It is a very boring discussion but it is important for Coca-Cola Company and the way we are trying to think about innovation.
A third piece of our resurgence, which is something that again dates back to the beginnings of Coke, is we have a really strong partnering DNA and corporate venturing is giving us a reason, a model and a framework, making it more modern. Recently, our Marketing organisation announced a partnership with a company called Spotify, which is an online music streaming company. As the Coca-Cola Company, one of your big brands is around beverages, so it is interesting to look to partner with a very now, very modern music company, but it is helping us to get a closer connection to our final consumers, it is helping us to grow our brand and to grow our business. Therefore, corporate venturing in a broader way is helping us to move our partnering forward, making people more aware of our willingness to partner and bringing more people to us, because they see us now as a more valuable partner. I think that is about it for now.
Stephen Ziff: Dominique, do you see the same rationale for pursuing venturing along the same lines?
Dominique Megret: We have to focus on what we do best and not try to do what VCs do best, for example. It is all about finding your own niche in this ecosystem. As far as we are concerned, we believe what we can do best is about business development inside the organisation and bridging between the corporate venture companies and inside the organisation, which is tricky thing to do in a telecom environment, on the one hand. On the other hand, it is about bridging with the other telecom companies worldwide and the innovation ecosystem internationally. You want to have that under control and this is where we can add most value, compared to normal VCs. Therefore, we work hand in hand with classical VCs who focus more on the later stage part of it such as growing the company and finding the right exit, we do more the early stage part of the job, and in the first three years that is when you can get the most value. Ideally, that is where we should focus our activities, particularly when we are the first customer for the companies, and we have a say in the decision. We can have a point of view because we have inside information from the labs or from the customers, which is very valuable at the beginning when you are looking for your business model.
My point is that there is a good synergistic model to work between the VC community and the corporate VC as long as everybody focuses on their own strengths. Ideally, we could push the model to the point of doing only this part of the equation and all the rest can be outsourced.
Stephen Ziff: We shall come back to the corporate versus VC model, because, picking up a theme touched on by Justin, it is clearly a model where the two work in partnership. If you were to take the classic corporate and perhaps look at the strength of its balance sheet and see it is awash with cash, you would come to the view that it is investing in corporate venture capital because it is the buzz thing, it is the thing to do, it is not just something that is being done in the US and Europe; they are looking at it as a way to go into different markets. Martin, what is your experience of moving outside the US and Europe into new territories?
Martin Grieve: Unilever started in Europe and in North America in 2001 with our venturing programme. Many of the big corporates are not that dissimilar from that. The obvious areas where people are looking to expand are China and India, but probably the next area that will take off from that is the rest of Southeast Asia. We are certainly taking a watching brief on what is happening in Southeast Asia.
Then if you look at why are corporates setting up funds in these different parts, you have to come back to the strategic reasons for why corporates set up corporate venturing in the first place. There are probably a couple of reasons for me. From a Unilever perspective, we have 56% of our turnover in emerging markets, so when I talk to the Unilever senior personnel about our portfolio, and we are in Western Europe and North America, they think I am missing the plot a little, because the majority of Unilever’s turnover is in emerging markets. Not surprisingly, those markets are the ones that are growing much faster than in the developed world. Therefore, realigning our portfolio and setting up in Asia, which is what we did last year, is critical to the strategic relevance of corporate venturing units.
We are also seeing the need to be on the ground in those markets, because there are trends happening and different business models developing across Asia which are not being invented, potentially, in the West. Equally, there are copycat companies that are copying the latest companies that have been set up in the US.
The second reason is that, broadly, if you look at some of the big funds that have been set up, they are being set up by the Asian companies. The big Asian corporates like Tencent in China or Tata Capital in India are now setting up first time funds, and you are starting to see this whole change in the balance. One of the things that is helping western companies to set up in Asia is the derisking. If you looked at setting up 10 years ago in China or India, the risks that were there were just to great for many corporates to go. However, with the establishment of the venture capital industry, that is being derisked all the time to the corporate. I go back to some of the things that Shellie was talking about in that these are the strategic reasons why, and then you look at the geographic split.
Stephen Ziff: When you look at a new market, do you go alone, do you go in partnership and, as these are markets that are not close to your core business, how do you expand that? What is the best way or is it really tailored to each market?
Martin Grieve: That is a good question. From a Unilever perspective, we looked at various different options. We started working, first, in India because, as a corporation, we have a very strong business in India. However, entering into corporate venturing, I employed a consultant who could be on the ground, because I do not have the resources to be on the ground up front in India or in China. Therefore, I employed people to work for us on a temporary basis to get us established and to be able to understand the differences in those markets versus the West.
Stephen Ziff: Shellie?
Shellie Davis: One of the interesting things about working for the Coca-Cola company, rather like Unilever, is that we work in 206 countries around the world every day. As I said, we are a corporately-based function – M&A – it has been the design for a long time, and I am not sure if and when that will ever change; I guess it will not be soon. However, we have some growing venturing groups, there is one in North America that is really focused on incubating small brands. There is one that is growing now here out of the UK and across Europe, and we are hearing more and more about other smaller groups around the world that are doing it on a brand focus and into some technology.
We have also done some work through Israel. We use a lot of water, which is not a big surprise, and one of our sustainability goals is to become water-neutral, which, if you think about it, is a very lofty goal. We want to return to the world as much water as we use in our finished product, either through rain harvesting, through work we do with waste water – there is a tone of initiatives. Israel is one of the most forward-thinking and innovative countries when it comes to the use of water and water replenishment.
Therefore, we look at specific zones where they are further advanced in their work that matches some of our innovation goals or some of our business goals. I am trying to think of another example outside the US or the UK where we have partnered. There is work going on in India on the same thing, in agriculture looking at ways to use drip irrigation as I was talking about with our orange and fruit growing. Our Minute Maid company is the largest juice company in the world as well – we are just the largest of lots of companies, which sounds so arrogant up here! I mean it in a good way and not in a bad way.
As you were saying, it is a very interesting group for me to be a part of and to support, and to look across the world at different technologies that are emerging, and at how we can support the technologies to grow and to be successful, as well as at how that technology can support the Coca-Cola Company to be successful.
Stephen Ziff: I shall bring Fabienne in at this point. Your model is slightly different to that of everyone else, so do you want to tell us a little about the background to Ecomobilité and where it sits in the ecosystem?
Fabienne Herlaut: Probably, because I thought it was not easy enough, or difficult enough to run the corporate venture fund of SNCF, so to have only one corporate and to identify different projects, it came to my mind that perhaps I could create a club including three or four different corporates. The Ecomobilité venture started in November 2011, and the idea came about 18 months ago as a natural follow-up to the observation I was making as a Managing Partner of SNCF corporate fund.
Looking at the transport market, you do not say transport any more, it is old-fashioned. You talk about mobility – smart mobility, e-mobility, sustainable mobility. Everything that has mobility in it is fashionable. When you look at the mobility market, from a demand point of view you identify a strong need for changes for the end user. You look at the players in the market, and then you start to realise that the traditional players – the public transportation companies like SNCF, or the car manufacturers like PSA – were not the single player in the mobility market. You have new players coming in, information technology companies, building companies, who all want to take a piece of this huge and fast-evolving market. Of course, when a market is shaking up, you have a huge influx of start-up companies coming with innovative business models, trying to impose the business models on the market.
With that in mind, I started a roadshow talking to large French corporations and I finally managed to convince three green elephants – Total, PSA and Orange – to ally forces to create Ecomobilité Ventures with a shared vision to reinvent mobility by combining the expertise and the competence of the four major corporations, with the innovative skills of the start-up companies. This is how in a club spirit, in a partnership spirit, these four companies sat around the table and negotiated for six months or a year, I don’t know exactly how long, l have lost track. At some point in the discussion, I even let them discuss by themselves, because it was beginning to become too complicated.
We finally managed to create this new investment company – they do not like to be called a fund, because they see them more as investors in new projects – with a functioning mechanism which is relatively close to a corporate fund. Then the question you have is how does it work, how can you align the decision-making process of these four entities with this different core business, different centres of interest and so on?
Very early on, we identified the investment policy by identifying six market segments in which we would invest, including services, technology and products, all related to mobility; share usage of vehicles, green electric vehicles, smart infrastructure and so on. Geography, size – this is for the investment duration, investment policy. Governance: how will our decision-making process be made? It is very simple – unanimity – we all have to agree to make a decision.
Finally, they asked me to leave SNCF and to create my own management company to manage this investment company, to make sure that there was some kind of independence between the four investors and the management team.
How does it work? We have received about 250 projects so far. There is great enthusiasm from all the partners, who are themselves contributing to the deal flow. They are very eager to see what is coming from the deal flow, and we hope that in the next three months we shall be able to close two to four deals – let us say two deals. I should add that I now have a PhD in diplomacy!
Stephen Ziff: In French diplomacy!
Fabienne Herlaut: It makes it even more difficult!
Stephen Ziff: I am glad you said that and not me.
Dominique Megret: May you allow me not to be diplomatic here and to bring a bit of controversy to the discussion. I do not believe that corporate venturing is about creating financial value from the perspective of top management. In fact, the better the financial returns, the more people reaffirm the fact that it is irrelevant, which is always nice to hear. I do not believe it is a matter of getting access to information about new products and technologies, because the R&D departments have an overflow of information about new technologies, and the specialists know better than we do what is going on in a particular market.
I believe where we have the highest possible leverage point and sustainability issues to sustain the organisation is around process efficiency and the ability to become a centre of competence for early stage management. Let me explain this with regard to Swisscom. We have a hundred times more people and resources doing innovation inside the headquarters than us – 500 people who have much more ability to do anything we are talking about here than we do. If we improve by 5% the way they take decisions, the way they manage projects and source external resources as opposed to doing things internally, the way they manage to acquire companies, we shall do much more internal value creation than anything else.
For me, the key is also to have a special relationship with the CEO who is always changing. I cannot link it too much to a personal relationship because it becomes unsustainable. However, if we are recognised as being the centre of competence, to be able to have the leanest governance to take a decision within a couple of weeks, to be able to use fewer resources, to be more capital efficient and to link it with other telcos and other investors worldwide in a lean manner without having to have consultants, big strategy teams and big M&A processes, and if we are able to do that with a small team, I believe that this adds much more value to my parent company. They almost let us do a few investments to keep us in the organisation and to give us a certainly legitimacy. However, I do not believe that the portfolio itself will change the history of the company but the way of managing innovation might.
Stephen Ziff: If I hear you correctly, for Swisscom it is more about strategic than financial primary objectives?
Dominique Megret: The financial is a hygiene factor, because we are an evergreen fund, so we fund ourselves from exits. However, I can tell you that the way my CEO looks at us is not because of what kind of IR we bring in. It is more about how much intimacy he feels we have in internal decision-making, and how much we can help to improve the innovation ecosystem at large. That is an issue 100 times bigger than optimising our own investment budget.
Stephen Ziff: Is that the same theme at your respective firms, strategic versus financial? We could do a whole separate topic on this but strategic the aim and financial is a hygiene factor? Shellie.
Shellie Davis: At our company, it is all about strategic, it has to have a strategic reason for us even to consider it; if there is a financial reward it is gravy, which I believe is what Dominique was also saying. I could not agree with you more about how you get into these things because you want access to new ideas. Our R&D department is one of the smallest that may exist within this room, and every time someone approaches me about something new and interesting, I go to the person because I know them better and better now, and say look at this new ingredient, look at this new package – yes, we have already looked at that and it does not work for X, Y or Z reason. Therefore, it is not about a lack of ideas. It is really about venturing so that we can help those good ideas that can make it to get commercialised so that they become a success for us in our business, I don’t know whether you would agree with that, Dominique? And, as you said, fast!
Dominique Megret: At Swisscom last year, we did three product launches which is a bigger amount than the main line organisation. We did that because we had the freedom to choose an external company, to bring in the line, to shortcut a few decision processes and to make it happen. That is a really visible achievement in an organisation which has difficulties in bringing new products to market. Therefore, we should think about this as a value-add to the organisation.
Fabienne Herlaut: You cannot totally separate the strategic approach from the financial approach. In the discussion we had with the four corporations to set up this Ecomobilité fund, at some point in time you talk to the business people who have a strategic approach. Ultimately, you have to go to the CFO and ask for the money, and the first question he will ask you is how much is the cost and how much is the return. If you say, don’t worry, it is just strategic, you give me five million and don’t worry, we shall give it back to you, you know how it works in large corporations. Therefore, we need to have both objectives in mind.
My own vision is that, if it is well taken from the strategic point of view, the money will come, the return will come naturally. Therefore, I agree with you, let us not focus too much on the financials as they will move naturally. We have the power as a large corporation, if we invest in a start-up, to make it a success if we are really committed to grow and develop it.
Martin Grieve: As far as the financial/strategic point, some of that comes back probably to where the corporate venturing unit sits within the organisation. From my perspective, these are not one or the other. We have to deliver both and they ought to go together. If you are investing in something that is highly strategic, you ought to be able to get a good financial return out of it, but I know it does not always work like that which is where the portfolio comes in. However, we have to deliver, and we are being asked to deliver, higher levels of financial return and strategic benefit but, if we are not delivering the strategic benefit, that is why we are set up in the first place so we have to deliver that.
Dominique Megret: As far as this discussion about strategic benefits, I always try internally to say it is all about money: it is about cost reduction, it is about capital efficiency, for one million investment how many products can you launch and it is all about new growth revenues. It is not about soft points. The strategy value, ultimately, is just about money, which is why there is no fundamental difference. It just depends on where you leverage, so either you leverage the portfolio which is the so called financial returns, or you leverage the resources of your own organisation. That is what we call strategy but I would prefer to call it a financial return based on internal assets, as opposed to external portfolio companies.
Fabienne Herlaut: What makes my experience pretty unique compared to yours is the fact that I have to have the strategic satisfaction or vision for four corporations. It is interesting because you do not know in advance why they are interested in looking at such and such market or project. When I use my gut feeling and say this project will be of interest to PSA or Orange because of blah, blah, blah, then I get their return and I am totally off because they have something different in mind. Therefore, this strategic approach is very challenging as far as this new type of fund is concerned.
Stephen Ziff: Managing it for one investor, one task-master is hard enough but for four it is certainly an enviable role. I shall throw it open to questions, if there are any. If you can say who you are and where you are from please.
Girish Nadkarni: I head the corporate venture group for ABB, and thank you for the stimulating conversation. I have a question for the young ladies on the panel. For Shellie, I have always thought of M&A and venture capital as being quite distinct from each other, and I have striven all my life to keep the M&A people away from venture capital! The M&A people use battleaxes, we use scalpels. M&A negotiates a divorce settlement, we negotiate prenuptial agreements, because we have to live with the people in whom we invest going forward. Therefore, I am curious as to how you put both functions in the same – as you may know, you cannot really switch from tennis to squash because for one game you use your arm, and for the other you use your wrist. Enough analogies.
For Fabienne, you have partners who are corporates. Part of my function is not just to bring new technologies, but to convince my businesses that this makes sense for them. Sometimes I have to drag them kicking and screaming into areas. In some ways, I have to help them work on their own short-sightedness. With you not being part of their day-to-day interaction, how do you achieve that function?
Shellie Davis: What do you call people who are all-round sports people, a player on the team who can play every position? [All-rounders] Perhaps the M&A group is sort of that. At the Coca-Cola Company, as fantastic as we are at marketing, never mind the fact that we make great-tasting products, the company has a long history of having a very strong financial group but through finance. I could bore you for hours about how it is that we have placed our concentrate facilities around the world and what that has done for our tax and treasury. Within finance, they have always had a pretty strong hold on what happens around the world, and the M&A group grew out of the finance organisation. Then when it came to corporate venturing, I believe it was that feeling that there are processes already in place through M&A, to Dominique’s point. If we are going to move into corporate venturing, I do not want it to be the Wild West, I want it to have a framework, a structure and I want to feel comfortable with those people making decisions.
In our M&A group, as my boss likes to say, if you hang around long enough you will have made the acquisition and then divested the acquisition, and it has happened a couple of times in recent days. We took the largest North American bottler, took it public back in 1988 and last year we bought it back into the Coca-Cola Company. Therefore, we can do the prenup, we can do the divorce settlement, and I hope we can do corporate venturing as well.
Fabienne Herlaut: We have set up a governance with representatives, we have two investment committees with a board of directors with people from four companies with different seniority. I rely on them to convince the whole organisation about the adequacy of the project to their internal needs. This is the kind of transfer of expertise that is given and, for the time being, it works. I agree with you that it is not as fluid as it was when I used to be at SNCF but it works.
Stephen Ziff: I shall take one question that has come through. Dealing with early stage companies is one of the keys to success and the question asks: where do corporate venture units get that expertise from? Do they have it in-house given that it is a key to success, where does it come from?
Fabienne Herlaut: [off microphone] Not in-house, I have a specific one.
Stephen Ziff: It is specific to the portfolio manager or the GP. Martin, is it in-house or is it a skill that you bring in – can you nurture it in-house?
Martin Grieve: That is a good question. You can nurture it from in-house but our philosophy has been to put together a team which is a combination of external and internal people, because we are developing a team that is expert in managing small companies. You need to have those relationships back with the corporate and we have a balance of the two, which has worked well for us.
Dominique Megret: It is a combination with a common link entrepreneurship plus telecom expertise.
Shellie Davis: In North America, and there is one growing in Europe, we have a group that looks at incubating small brands, small start-ups, and we watch and assist until they hit a certain volume, a certain revenue. We try very hard to stay away as it is one of our not-strengths that we can kill things as much as we can nurture them, so we are learning to let the start-ups be start-ups as long as possible.
Stephen Ziff: We are just about coming to the end of the panel. I have one question at the back.
Farid Haque: I work with the StartUp Leadership Programme which is a boot-camp for very early stage companies, and I am an ambassador for StartUp Malaysia. I used to be the campaign director for StartUp Britain. The question that I have for the corporate venturing panel is mostly around how many of the traditional VC firms are now starting to offer additional services to early stage companies, which include the likes of PR and helping them to promote through very strong marketing efforts. Can CVCs add value in that space, or what other value-added services do you think you can offer very early stage companies when it comes to helping them get off the ground?
Shellie Davis: We know a little bit about marketing! We have talked about this internally but let me preface this by saying that there is not a decision at this point. Again, I do not want to sound arrogant but, like the other large corporates here, we have already gone into over 200 countries, we understand how difficult it is to start a new business in a new country, we understand the issues of IP, keeping hold of your brand and your IP. We understand the issues of PR, we understand labour laws and all sorts of other things. It is one of the concepts that we are trying to figure out around how valuable that might be to a start-up with which we are working, do they want to work with some of our people internally to start to grow expertise within their company.
Dominique Megret: The most valuable asset is opening the labs for a pilot in a small country and then helping afterwards to roll it out internationally.
Martin Grieve: In our experience, small companies find it really difficult to work with big corporates, and sometimes we can open up that door.
Fabienne Herlaut: As you say, we can open doors, we can identify the right person to talk to in order for the start-up to sell its service, to start marketing its service or product. However, once we sign the shareholder agreement, on the left hand we do not have the shareholder agreement, and on the right hand the commercial contract – this is not something we do. The commercial relationship has to be managed at arm’s length, so it is a relationship between the start-up and the corporation. My role is to facilitate the contract.
Stephen Ziff: I shall bring it to a close there. It just remains for me to thank the panellists. We have taken a lot from this morning as far as geographic focus, an increasing move to emerging regions such as China and India, or the emerged regions; developing and identifying businesses and business opportunities that are integral to the core business. Perhaps more importantly, when you are dealing not with one but with four taskmasters, you need diplomacy and, ideally, of the French variety! Thank you very much.