James Mawson It gives me great pleasure to introduce our academic key note. He gave a tour de force at our first symposium last year. It was an analysis of how corporate venturing is helping, what the returns, the metrics are. I am delighted that he was able to come back and spare time in his busy schedule to give some thoughts. Gary Dushnitsky from the London Business School, has been a thought leader in terms of corporate venturing and understanding its background. Gary, welcome to the stage.
Gary Dushnitsky (Associate Professor of Strategic and International Management and Entrepreneurship, London Business School – click here for his slides)
Thank you. It is a great pleasure to be here again and there is a wonderful community that has come together around the global corporate venturing; in general just a general growth in corporate venture capital.
A little bit about myself: I have been studying corporate venture capital for over a decade now. It is always a bit disturbing to say that. When I started off I spent the first five minutes just explaining what corporate venture capital is all about. In 2012, corporate venture capital is seen as one of the potential ways of getting ourselves out of the mess that we are in. It is a key driver of entrepreneurial activities, growth and so on and so forth. It gives me great pleasure to speak to such a wide audience. I have been studying the phenomena in the previous decade as a faculty member at the Wharton School. In this decade I am a faculty member at the London Business School and I just wanted to share with you a few insights based on some of my analysis over the years.
I suspect that to this audience I am not saying anything new in terms of representing some of the investment patterns over the last 15 years. A couple of the major takeaways are the high level of cyclicality in the venture capital market as a whole as well as the close parallel in terms of corporate and independent venture capital investments. Just to help you situate it, the column on the left represents in the figures, or the graph in blue, represents venture investment by independent VCs and the red bars, the axis on the right, represents investment by corporate venture capitalists.
When you look at the fraction of corporate venture capital as a function of normal venture capital markets, you see that corporate has been consistently an important part of the market for venture capital, from the ‘90s where we had a bit of a boom and bust, we see a relatively steady state of about 15 per cent of corporate investors within the market for venture capital. These days it is hardly the case that I run into an entrepreneur that does not tell me "I have either received or considered a corporate as my source of funding".
Perhaps more interestingly is that we see a sea of change in the way that the corporate venture capital units are within the organisations. Basically the exercise that you see in this figure looks at the longevity: how long did the average corporate venture capital fund live for in the 1990s and how long did it live for in the 2000s? What you see is that in the past, or during the 1990s, the vast majority of corporate venture capital programmes have been around for a year, perhaps two years. We know that the occurrence of CEO transition was an important point for the termination of many of these venture funds.
We see a fundamentally different role for corporate venture capital nowadays within the organisations. Over 50 per cent of them, or over 40 per cent of them have been continuously in play for four years or longer. Corporate venture capital is seen as an important part of firms’ open innovation strategy and many of you have probably experienced one CEO transition or more in the role that corporate venture capital plays within the organisation is becoming more and more important, if you wish.
Just a little bit in terms of geographical footprint: I have a little bit of a video clip here. It is supposed to keep you awake before lunch, but also to give you a little bit of a sense of the dynamic of corporate venture capital. What I am about to present to you is basically a hit map of the United States looking at where do corporates invest, or where did they invest across the US from the time period of 1987 to 2010? Let me just share this with you.
We are entering the second half of the 1990s. Then slowly receding. Still we see a healthy level of investment across the US. I know that California is always a place where many corporates either visit twice a week or twice a month, or have offices in, but we see that there is a fair distribution across the US. Perhaps more interestingly is if we start looking at a map of the world and we will start seeing some very interesting dynamics. Let me just emphasise what we are looking at it corporate venture capital investment that targets ventures based in different parts of the world.
Clearly North American play. What we are seeing here is that the global reach is becoming extremely important. One of the interesting points to think of is how corporates, with their global footprint, are equipped to manage the more geographically dispersed set of investment opportunities, vis-à-vis perhaps some of the other investment vehicles that exist out to there?
Let me just share with you a couple of analyses that I have done. I know that the key question that many of us ask ourselves is what are the performance implications of corporate venture capital? We talk about financials and we talk about strategic and so on and so forth. In a set of analysis I have looked at the impact of corporate venture capital, not from the fund perspective, but rather from the parent corporation. I have looked at a couple of parameters. To just situate the analysis, let me present a couple of data points for you.
What I am going to pull out over here is a couple of data points. The first one is looking at the market value to book value of publicly listed companies pegged at their value in 1987 and then looking at the volatility compared to that point in time. You see that we have basically gone up during the 1990s and we have had a bit of a volatile ride during the last decade and especially the last couple of years.
When you look at R&D expenditures, this is the budgets the companies invest towards driving innovation, again pegging it at its value in 1987 you see a stark increase. Companies spend more and more of their budgets, or of their revenues towards R&D. Unfortunately when we look at the outcome of these investments this is specifically the patenting output, we see that also there is an increase, but increase is not of the same magnitude of the expenditures. We see that companies are squeezed both ways, times are tough and the cost of innovating is ever increasing, but the benefits, or the ability to be efficient with these R&D budgets is becoming more and more difficult. This is where part of the logic of open innovation vehicles in corporate venture capital also fits in.
This is a figure delineating corporate venture capital investment over the same time period. What I want to emphasise to you is that the period of time where a lot of the analyses, especially in the academic domain, but also in the world of practice is focussed on was when all boats rowed together, the 1990s. We need to understand that over the last 10 years we are living in a fundamentally different world, so we need to analyse what is the impact of corporate venture capital? We cannot just rest on our laurels based on some of the calibration we have done in the 1990s.
I have basically attempted to do that using some robust and vigorous academic methodologies. In one set of analyses I have done the following exercise: I have looked at all of you and corporate venture capital investing firms, I have looked at your market to book value and then I compared that market to book value to industry peers, other companies within the same industry that do not engage in corporate venture capital. Of course you need to control for various activities, such as R&D expenditure, capex, financial leverage and so on and so forth, but what I find is that there is a positive and significant effect. Corporate venture capital investing firms seem to experience higher market to book value compared to their industry peers.
Now this is not a panacea and if you remember the figure I presented earlier, the decade leading up to the ‘90s and the decade following the ‘90s behaved very differently. What I have done in this exercise I have looked at who the winners are sector by sector and time period by time period. What you see is that certain sectors seem to be the constant winners in terms of benefitting from corporate venture capital, such as the medical devices industries. Others seemed to be experiencing a bit more volatile experience, such as the pharmaceutical industry, mostly because in the pharmaceutical industry it became a golden standard, or a must have to have a corporate venture capital investment. The comparison set is slightly different.
For the benefit of time I have replicated this analysis looking not only to the financial performance of the parent corporation, but also of the innovative outcome, specifically looking at their patenting output and whether or not these companies experience a benefit or bump in their innovative outcome. Again, if we look at this analysis, we see that there are certain sectors that have been consistent winners, benefitting from corporate venture capital, not only in terms of the financial market to book value of the parent company but also in terms of the overall patenting yield.
I want to touch on one last point and conclude with that. There was an observation that the panel concluded with which is nowadays if you are a venture you are likely to have more than just a VC as part of your investor portfolio. The question that interests me was as follows: we know that in these days many start-ups are vying for capital and they look for different sources, be that government, be that corporates and be that angels and so on and so forth, what is the long-term effect of receiving corporate venture capital? One industry that has experienced that in a long period of time has been the pharmaceutical industry. In the pharma industry we have many corporate investors operating for the last two decades, if you wish, some even more than that. What we have done, along with colleagues, is looked at the innovative profile of corporate backed start-ups compared to VC backed start-up. We wanted to see whether or not having a corporate backing as part of your investors does that affected the type of innovation that you engage in?
We focussed on two dimensions: one of them is engagement in basic research in the form of academic publication. The other one is engagement in applied research in the form of patenting in the pharmaceutical space. We divide these ventures based on whether or not they are above or below the median output of other ventures. We do this exercise looking at the profile of the start-ups. It is the day in which they receive the investment, which we call selection, as well as four years down the road, which is what we call nurturing. This is the effect of having an investor on board and how does that shape your outcome?
Let me briefly share the results with you. We find that having corporate investors is associated with a fundamentally different innovative trajectory for the backed start-ups and specifically it seems that those start-ups experience a higher level of innovative output, especially in terms of their basic research. Again these numbers are calibrated based on data for the pharmaceutical industry.
The point I want to leave you with is that corporate venture capital is an integral part of the parent firm open innovation strategy, but it also has important implications for our society in the type of innovation that we see those start-ups engage with. Thank you so much.
[Applause]