Corporate venturing on the test bench - Analysis by Boris Battistini and Martin Haemmig - SECA
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Global Corporate Venturing
Corporate venturing
on the test bench
Analysis by
Boris Battistini and
Martin Haemmig
All articles first published in Global Corporate Venturing
www.globalcorporateventuring.com
Analysis
CORPO
This is the first in a series of articles by Haemmig and RA
Battistini to keep readers abreast of the latest trends VENTU TE
RING
Great leap forward ON THE
TEST BE
NCH
Over the past few years, analysts and
commentators have described the Boris Battistini, research
new wave of corporate venturing (CV)
activities sweeping across industrial associate, ETH Zurich, and
sectors. Despite adverse macroeco- Martin Haemmig, adjunct
nomic conditions and highly volatile
capital markets, the total number of
professor CeTIM at
CV programmes has grown dramati- UniBW Munich and
cally from 694 in January 2010 to 865 Leiden University
in December last year.
Perhaps most importantly, today’s
corporate venturing landscape is the CV new entrants by parent’s country of origin the resources and assets
35
first truly global one. It is a landscape accessed through interna-
30
characterised by the acceleration of 27
26 tionalisation. Unlike their
the geographic shift of venture invest- 25 23 western counterparts, such
ment patterns and the emergence of 20 16
19
companies are not prima-
new global innovation hotbeds. But 15 13 13 13 rily market and resource-
10
what is the distinguishing feature of 10 seeking investors. They are
increasingly globalised corporate ven- 5 3 3 3 innovation-driven investors
1
turing activities? 0
0 0
in search of highly disrup-
An analysis of the data on new CV 2010
North America Western Europe
2011
Eastern Europe Asia
2012
Middle East
tive technologies and busi-
programme entrants reveals a new ness models, and therefore
generation of corporate ventures – Source: Global Corporate Venturing interested in strategic assets
innovative and fast-growing Asian Asian CV new entrants 2010-12 by sector (n=41) and investments in know-
corporations. In fact, Asian-headquar- how in global entrepreneurial
tered corporations launched 19 CV 2% hotspots.
2% 5% 2% 5%
programmes out of a total of 52 new 5% The most recent exam-
Clean-tech/energy
entrants last year, in so doing sur- 5% 10%
Consumer ple is the announcement of
passing – for the first time – the US Financial services Samsung’s “global platform
and the EU, each of which had fewer Industrial for disruptive innovation” last
IT
new entrants (see figures, right). month. The platform strategy
24% Media
It is worth noting that Asia-based Portfolio is designed to gain access to
39%
corporate investors constitute an Services outside innovations in coun-
increasingly important fraction of Transport tries, such as the US, Israel,
Utilities
overall venturing activities with a total China and India, with exter-
of 189 programs (22%), debunking Source: Global Corporate Venturing nal venturing and partnering
the myth that corporate venturing is a initiatives – for example, a
US phenomenon. $100m catalyst fund with a focus on early stage, and the
The rise of Asian corporate venturers urges us to reflect global $1bn Samsung Venture Investment Corporation –
on the key drivers of this shift as such factors are likely fun- that complement the 24 corporate research and develop-
damentally to redefine the future marketplace for technol- ment centres with a budget of $10.8bn last year.
ogy and innovation. Here are three important – and related Interestingly, Samsung Electronics is the only South
– developments that should not be underestimated. Korean company whose president and chief strategy officer
1 A number of Asian corporations – for example ZTE, LG, is strategically based in America’s Silicon Valley. This is to
Huawei, Samsung and Panasonic – have established ensure Samsung will invest $20bn up to 2020 in novel mar-
themselves as serious international players and innova- kets to identify and capture tomorrow’s business opportuni-
tion leaders, adopting a different strategic approach to ties – wherever they can be found around the globe.
Global Corporate Venturing March 2013 27
Analysis
2 In China, India and other vibrant Asian high-growth mar-
kets – think Taiwan, Indonesia and Singapore – technol-
ogy clusters and entrepreneurial talents are arising, putting
become strategic investors in local incubators and acceler-
ators. High-profile examples include Kyron, a $50m accel-
erator for Indian start-ups based in Bangalore, or Innova-
innovative Asian start-ups on the global technology map. tion Works based in Beijing and Shanghai, which over the
As the copy-cat and production-driven era fades away, last three years has incubated and invested in more than
a number of Asian IT, media and consumer-focused start- 50 local start-ups and recently closed its second fund at
ups have begun to break through with market-leading $275m.
products, often combining frugal, agile and highly scalable
solutions with innovative business models. As examples,
consider the mobile internet gaming sector, where Asian
3 As more western technology ventures consider Asian
markets as an essential part of their expansion and
commercialisation strategy, increasing numbers of Asian,
start-ups have fiercely challenged western market leader- especially Chinese and Indian, investors are financing US
ship, or observe how Twitter has recently started to copy and EU-based start-ups and providing the much-needed
various features from Weibo, a Chinese microblogging support to break into the region. For example, research
website. shows that nearly twice as many Chinese venture capital
Moreover, it is worth observing that recent research firms (VCs) backed US-based start-ups in 2011 compared
suggested that of all US publicly-traded internet compa- with two years earlier. More importantly, the trend is set to
nies only six achieved over-30% top-line growth in 2011 continue well into the next few years, as a number of Chi-
and 2012, and 2012 ebitda (earnings before interest, tax, nese VCs are expected to raise more cross-border funds
depreciation and amortisation) margins of at least 30%. to invest in global transactions.
That means only 5% of the current crop of public internet Beyond exporting Asian venture capital, a number of
companies are in the top echelon in terms of profitability innovative start-up acceleration initiatives, such as Inno-
and growth. Spring, Silicon Valley’s first US-China technology incuba-
Most interesting, all six companies in the top tier are not tor, are emerging and are helping to redefine the role of
western based but from Bric nations (Brazil, Russia, India Asian venture investors in the entrepreneurial ecosystem.
and China), such as China-based Tencent, Baidu and In an increasingly global venture capital landscape, cor-
Qihoo 360. porate venturing has a unique part to play in turning the
As corporates have realised the innovative potential of great potential offered by these transformations into value
Asian markets, they have begun to forge alliances and for their corporate parents. n
Benchmarking investments in global innovation hotbeds
Global VC investment by selected innovation hotbeds
2012 by dollars invested and number of investment rounds
Ranking by amount raised (US$bn) Ranking by number of rounds Of the global total VC amounts invested, the US
(Global total: $42.3bn) (Global total: 5,090) still dominates with $27.9bn (70%) of all
global VC investment (US, Canada, Europe,
Israel, China, India), and of the global 5090 number
of rounds, has 3,363 rounds (66%).
As a VC innovation hotbed, the Silicon Valley
dominates with $11.2bn (26% of global) and 1,128
deals (22% of global) with a huge margin the rest of
the world.
Global corporate participation in financing rounds
2006-12 percentage of CVC to total VC-backed deals
US, Europe, Israel, China, India, Canada
With the financial crisis the proportion of corporates
participating gradually increases. With the recent new
CV funds raised particularly in Asia, the ramp-up of
corporate participation is expected to increase in the
coming years.
Global corporate/CVC participation by geography
2006-12 as percentage of total VC-backed deals (not to scale)
Global Corporate Venturing March
US
2013
Europe Israel
Corporate participation in innovative companies is
continue to grow in the mature markets, while China and
28
India is expected to see an increase CV investments,
both from foreign corporates and the rise of the local
corporates in these two countries, since the 2012 launch
CV funds raised particularly in Asia, the ramp-up of
corporate participation is expected to increase in the
coming years.
Analysis
Global corporate/CVC participation by geography
2006-12 as percentage of total VC-backed deals (not to scale)
US Europe Israel
Corporate participation in innovative companies is
continue to grow in the mature markets, while China and
India is expected to see an increase CV investments,
both from foreign corporates and the rise of the local
corporates in these two countries, since the 2012 launch
of new CV programmes in Asia surpassed those of the US
China Canada India and also of Europe. As a result, Asian corporates
will invest both in their region and also in the mature
markets to seek leading technology and market access.
Global cross-border deals will fuel CV deals.
CVC investments by stage of development
2006-12/Q3 by number of deals (not to scale)
Europe US China India
Start-up Product development
The global sweet spot in number of deals is focused on
revenue generating (preprofit) companies, followed by
product development (prerevenue). This is where the
corporates can add the most value to innovative
companies.
It is obvious that China and India are still small in scale
Revenue (pre-profit) Profitable on corporate deals and focus mainly on revenue
generating and profitable companies.
CVC investments by stage of development
2006-12/Q3 by percentage of US$
Europe US China India
Start-up Product development The global sweet spot of CV capital investments is in
revenue generating (pre-profit) companies, with over
60% of the entire amounts.
In the US and Europe, 20%-40% goes into
companies in product development (pre-revenue)
companies and the large bulk in to revenue pre-profit.
Revenue (preprofit) Profitable
India has recently seen almost all CV money funneled
into revenue pre-profitable deals, while China is the
outlier with a significant portion into profitable companies
(although decreasing now).
CVC: foreign vs domestic corporate co-investors
2006-12 percentage of VC deals with at least one foreign corporate co-investor
The low ratio in the US of foreign corporate
US Europe
investors has to do with the very strong presence of local
CV players, with a blend of European and Asian
corporates sharing the deals.
In contrast, the bulk of foreign corporate investments in
Europe stem mostly from mature US MNCs.
Foreign HQ corporate investor
China Domestic corporate India The number of deals with corporate investors in China
and India is still marginal, and a few additional deals on
either side will rapidly move the needle in either direction.
Although local CVs are on the rise, it is difficult to
predict if the foreign MNCs will outgrow them as
they are desperate to access the growth markets.
n
Source: Dr Martin Haemmig (CeTIM) and Ernst & Young (VC Insights Team); data: DowJones/VentureSource
Any reproduction or reuse of the graphs is permitted only with the agreement of Martin Haemmig
Global Corporate Venturing March 2013 29
Comment
Top-level focus on
technological discontinuity
Corporate venturing (CV) funds are
often established to generate strate- In our series of articles
gic value for the corporate parent. The
success of CV activities is therefore Corporate Venturing on
not only measured in terms of growth, the Test Bench,
but also how well CV can complement
internal research and development
Boris Battistini and
efforts or gain early access to poten- Martin Haemmig
tially disruptive technologies and busi- review and analyse
ness models. For this reason, CV
investments are often seen as a win- the latest trends
dow on emerging technologies and
business models – a sophisticated radar set up to identify rations in four information and communication technology
potential technological discontinuities. industry sectors, Maula and colleagues found that corpo-
Technological discontinuities are fundamental changes rations can direct top management’s attention to techno-
from a dominant technology to another that result in quickly logical discontinuities, by establishing appropriate inter-
rendering products and services obsolete, and transform- organisational relationships such as strategic alliances or
ing industry dynamics in ways that are difficult to antici- venture capital networks.
pate, especially among incumbents. More interestingly, the results suggest that among the
Such discontinuities are what former Intel chief execu- various forms of the interorganisational relationships in
tive Andrew Grove termed “strategic inflection points”. In which incumbents engage, only CV investments appear
his book Only the Paranoid Survive, he suggests that what to play a crucial role in guiding top management’s atten-
such a discontinuity does to a business is profound, and tion to technological discontinuities. In particular, their
how executives manages this transition determines its analysis shows that “ties with high-status partners through
future. coinvestments with high-status VCs [venture capital firms]
Discontinuous technological change therefore requires positively affect top managers’ timely attention, whereas
effective managerial responses. In fact, according to a homophilous interorganisational relationships (ie industry
recent article in Organization Science by M Maula and alliances) do not have a significant impact”.
T Keil of Aalto University, Finland, and S Zahra of the Uni- Why are CV investments so important for the recogni-
versity of Minnesota, US, effective and timely responses tion of technological discontinuities? The authors argue
are made particularly difficult as such transformations often an “incumbent may be able to gain access to more
occur at the fringes of an industry and are usually driven diverse information and diverging viewpoints that can
by highly innovation and venture capital-backed start-ups. help to reshape attention patterns within the incumbent.
Based on a longitudinal study of the largest US corpo- … In addition to the diversity of the information sources,
the status of an information source plays an
important role because knowledge and infor-
CV investments are often seen as a window on mation from these sources carry different
weights with corporate decision-makers. The
emerging technologies and business models – a high status of partners, such as syndication
with high-status VCs, may increase the cred-
sophisticated radar set up to identify potential ibility that top managers attach to information
from these ties”.
technological discontinuities In short, this research suggests that CV
activities can play a critical role in influenc-
Global Corporate Venturing April 2013 32
Comment
ing senior management’s cognition, facilitating the iden- become important for the incumbent.” n
tification of emerging business opportunities and related
business models. Importantly, as Maula and colleagues Boris Battistini is a research associate at ETH Zurich and a
observe: “Even when an incumbent does not transfer a project leader of the Corporate Venturing Research Initia-
specific technology that a start-up can commercialise, CV tive with Bain & Co (e-mail: bbattistini@ethz.ch)
investments may provide important insights into the evo-
lution of a technological field. Information received from Martin Haemmig is an adjunct professor at CeTIM at
CV investments may also influence how senior executives UniBW Munich and Leiden University (email: martinhaem-
think about the likelihood that a technological area will mig@cetim.org)
The rate of technology
adoption and diffusion
The rate of technology adoption has
radically increased in recent years
Source: Ernst & Young and
University of California Berkeley
The adoption of social technologies
has occurred at unprecedented pace,
with important implications for product
market strategies and the obsolescence
of products. Also, the product lifecycle
in high technology sectors, notably,
the mobile industry, has significantly
shortened
Source: McKinsey Global Institute
China tops the list of the world’s
leading patent offices with 526,412
applications, compared with 503,582 in
the US, strengthening its position as an
emerging innovation leader
Source: World Intellectual
Property Organization
Global Corporate Venturing April 2013 33
Analysis
Corporate investors add
value to their companies
To what extent can corporate inves-
tors add value to portfolio companies? In our series of articles
This question is particularly important
for a variety of reasons. First, prom- Corporate Venturing on
ising new ventures exert consider- the Test Bench,
able choice regarding their funding
sources and, especially so, in the
Boris Battistini and
case of assessing the pros and cons Martin Haemmig
of corporate backing. Second, promi- review and analyse
nent traditional venture capital funds
(VC) prefer to syndicate with investors the latest trends
that can significantly contribute to the
success of the new ventures, enhancing the likelihood of The results show that CV-backed companies are more
a profitable exit. likely to secure a successful exit and, perhaps more sur-
Yet there are pros and cons when corporate investors prisingly, to receive higher valuations and acquisition pre-
engage with innovative and dynamic growth companies miums. However, this is the case only when portfolio com-
and it is therefore important to understand how and under panies have a strategic fit – a strategic alliance or close
which conditions corporate investors actually add value to business relationship – with the parent corporations of
portfolio companies. the corporate venturers. The strategic fit allows portfolio
Recent empirical work, published in Financial Manage- companies to benefit from the assets and operation com-
ment by Vladimir Ivanov of US regulator the Securities and plementarities of corporations – for example, market and
Exchange Commission, and Fei Xie of George Mason Uni- technical knowledge, infrastructure for product develop-
versity, presents evidence suggesting that corporate inves- ment, and access to intra-firm information networks and
tors – compared with traditional VCs – add substantial market channels.
value to the portfolio companies. In particular, they analyse While such results provide a compelling case for the
a sample of VC-backed initial public offerings (IPOs) and potential benefits of partnering strategic corporate inves-
a sample of acquisitions of venture-backed companies to tors, it remains unclear under which particular conditions
see whether corporate venturing (CV) backing affects the corporate backing is beneficial.
valuations at the IPO or the takeover premiums in case of Analysis presented by Haemin Park and Kevin Steensma
acquisitions. in Strategic Management Journal provides some insights
on this, as they specifically exam-
ine the trade-off faced by start-ups
“Corporate investors can provide complementary assets when considering CV funding.
“Corporate investors can pro-
that enhance the commercialisation of new venture vide complementary assets that
enhance the commercialisation of
technologies. However, tight links with a particular new venture technologies. How-
ever, tight links with a particular
corporate investor has drawbacks and may constrain new corporate investor has drawbacks
and may constrain new ventures
ventures from accessing complementary assets from from accessing complementary
assets from diverse sources in an
diverse sources in an open market.” open market.”
Their analysis of 508 venture-
Global Corporate Venturing May 2013 18
Analysis
Median pre-valuation at IPO of VC/CV-backed companies backed start-ups in the computer,
wireless and semiconductor sectors
Global valuations: CV-backed companies show higher valuations
found that CV-backed new ventures
400 were less likely to fail – bankruptcy,
Median pre-money valuation prior to IPO ($m)
Non-corporate participation for example – and significantly more
350
Corporate participation likely to go public under specific condi-
300 Overall (combined) tions, when they required “specialised
complementary assets” and operated
250
in a relative more uncertain environ-
200 ment, where start-ups cannot easily
assess their future resource needs.
150
If corporates do not add significant
100 value to their investee companies,
50
where there is a clear strategic fit with
the parent company, entrepreneurs
0 may opt more frequently for tradi-
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 tional VCs, since they have generally
fewer strings attached and the path
Time to IPO from 1st institutional VC/CV financing to exit – IPO, merger or acquisition
– is significantly shorter than with the
Corporate participation with strategic intent leads to longer holding time
engagement of a corporate investor.
14 As a result, corporates need to com-
pensate for some of their drawbacks
12 Non-corporate participation when being involved with innovative
Corporate participation growth companies and the best way
10 Overall (combined) to overcome this hurdle is to provide
unique and superior value that tradi-
8
Years
tional VCs may not easily match. n
6
4
Sources
2
Ivanov, VI and Xie, F (2010) Do
0 corporate venture capitalists add
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 value to start-up firms? Evidence
from IPOs and acquisitions of
Percentage of failed companies without CV financing VC-backed companies. Finan-
cial Management 39: 129–52. doi:
Majority of company failures (bankruptcy) lack corporate backing
10.1111/j.1755-053X.2009.01068.x
100
Park, HD and Steensma, HK (2012)
90
When does corporate venture capital
80 add value for new ventures? Strategic
70 Management Journal 33: 1–22. doi:
10.1002/smj.937
Percentage
60
50 Boris Battistini is a research asso-
40 ciate at ETH Zurich and a project
30 leader of the Corporate Venturing
Research Initiative with Bain & Co
20
(e-mail: bbattistini@ethz.ch)
10
0 Martin Haemmig is an adjunct
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 professor at CeTIM at UniBW
Munich and Leiden University
Source for all graphs: DowJones VentureSource (email: martinhaemmig@cetim.org)
Global Corporate Venturing May 2013 19
Analysis
What we can learn from
ventures into biotech
The pharmaceutical industry is under-
going considerable changes in face In our series of articles
of R&D diminished productivity, the
patent cliff and increased competi- Corporate Venturing on
tiveness leading to pricing pressure. the Test Bench,
The traditional linear approach to cor-
porate innovation appears unable to
Boris Battistini and
increase pipeline value and corporate Martin Haemmig
revenue. In fact, recent mergers and review and analyse
acquisitions, geographic expansion
and diversification into consumer and the latest trends
animal healthcare have neither com-
pensated for the slowdown in innovation, nor decreased Recent corporate venture capital activities, as docu-
the unsustainable cost of bringing new drugs to the market. mented by Global Corporate Venturing data, show that
Big pharma, as a result, is moving beyond internal dis- corporations have realised the nature of the opportunity,
covery and drug development programmes. In recent becoming a prominent source of capital and resources for
years, industry analysts have documented the increasing the development of early-stage innovation in biotechnology.
number of open innovation initiatives such as academic Interestingly, the current wave of corporate venturing
partnerships, open source platforms, crowdsourcing and exhibits a set of novel characteristics. A recent study pub-
external venture capital units. lished in Nature Biotechnology, conducted by the Swiss
For example, InnoCentive’s pioneering open innova- Federal Institute of Technology (ETH Zurich) and Bain &
tion model was followed by several prominent initiatives Co, reveals the majority of the established corporate ven-
of industry peers, including the public-private partnership ture units reported substantial changes of the corporate
founded by Structural Genomics Consortium and Glaxo- venturing activities of leading pharmaceutical companies,
SmithKline, Lilly’s Phenotypic Drug Discovery initiative primarily with respect to the structure, strategic scope and
and Merck’s Oncology Network for collaborative clinical human capital.
trials. Perhaps more importantly, as observed by Henry “Corporations have developed large and more sophisti-
Chesbrough who coined the term “open innovation” in cated venture units, which take a more active role in syndi-
2003, in the recent years “companies that have used open cates and deliver greater value to co-investors and entre-
innovation not just with technology but also with business preneurs. More importantly, corporations are increasingly
models, there has been a rethinking”. adopting new models, practices and fund structures.”
The shift toward external innovation sourcing is consist- The results of the study revealed a number of ventur-
ent with the increased importance of venture and growth ing practices that distinguish successful venturing activi-
equity capital investments for new biotechnology start-ups. ties and that offer a benchmark against which to compare
As biotech ventures are increasingly regarded as one of current and future corporate venturing practices in other
the most valuable sources for industrial sectors.
future revenue opportunities, So, what are the practices
corporate venturing is grow- that define successful CVC
ing in strategic importance – The current wave of corporate units? First, they develop a
especially at a time when the strong mandate and estab-
market for traditional venture venturing exhibits a set of novel lish direct reporting line. Most
financing is dwindling, affect-
ing the ability to raise new characteristics pharmaceutical firms take
a longer-term view of equity
private VC funds. investments by providing
Global Corporate Venturing June 2013 30
Analysis
a strong mandate to corporate venture units from the Focus venturing and secure strategic alignment:
executive team and board of directors. Percentage of importance and frequency (mean score;
Second, they ensure decision-making autonomy. min=1, max=3.0) of strategic objectives
Successful corporate venturing in the study relied on 70% 3.00
2.90
autonomous governance structures. Three-quarters 60%
2.80 2.80 Highly important (3.0)
2.70
of the corporate venture units enjoyed financial auton- Important (2.0)
Percentage of respondents
Mean score 2.50
omy with either a separate budget – that is, not subject 50%
to internal review – or a closed-fund structure. Moreo- 40%
2.20
ver, the management of the venturing activities and 30%
2.00
1.90 1.90
2.00
1.90
strategic investments showed considerable decision- 1.80 1.80 1.80
1.60
making autonomy. 20%
1.50
Third, they secure external legitimacy and active 10%
involvement. In particular, they build and sustain rela- % 1.00
tionships with traditional VCs, which enables corpo-
n
th
ts
e
gy
re
n
ets
s
s
s
s
t
n
hip
gie
es
itie
tur
nc
tio
rke
row
me
ltu
olo
ss
sin
e
rac
rate units to access high-quality dealflow and identify
l re
bil
ns
olo
cu
ma
llig
lop
ea
hn
eg
pa
bu
tio
att
cia
hn
al
e
tec
ve
rat
-lin
ing
ca
int
ela
uri
re
tec
an
nd
opportunities. Also, the study showed that corporate
de
rpo
gh
co
top
erg
ne
w
et
r
Fin
na
ct/
ic
ne
ce
ark
rou
pre
co
xt
em
teg
du
to
tio
rvi
ne
to
venture units have been moving away from a passive
s/m
kth
ing
tre
pro
on
em
tra
se
to
ss
or
En
ea
rag
uti
gie
ps
ct/
ret
ss
ce
for
hf
trib
Br
investor role with limited involvement to become a
du
ce
olo
ve
elo
Ac
arc
nt
nd
pro
Ac
n
Le
le
hn
v
Se
Co
ma
De
Ta
tec
w
sophisticated investment partner capable of participat-
de
Ne
on
se
ow
rea
ing in larger and more prominent syndication. Often, nd
Corporate venturing unit’s objectives
Inc
Wi
units even lead or co-lead financing rounds and are
involved in the development of their portfolio start- Secure external legitimacy and active involvement.
ups, frequently taking board seats and actively lever- (a) Importance of the relationship with different parties for
aging their corporate resources. the corporate venture unit.
Fourth, they create value-based incentives. It 80% 3.0
emerged from the study that successful coporate ven-
70%
turing units tend to provide greater incentives to the
managers of the fund. As a result, the research docu-
Percentage of respondent
60% 2.5 2.5
mented the increased used of performance-related 50%
incentives as a central component of the overall com-
pensation package. 40% 2.0
Fifth, the study uncovered a systematic use of mul- 30%
1.8
tiple performance metrics. Most firms not only have 1.6 1.6
20% 1.5
a broad range of key performance indicators, includ-
ing metrics for financial and strategic returns, but also 10%
define performance and management-related target 0% 1.0
values. Business idea coming Business idea coming Business idea coming Business idea coming
from VC firms from employees in the from directly from from conferences or
In sum, the study reveals that the corporate ventur- corporation outside external forums
ing practice of pharmaceutical firms has substantially Sources of business ideas
evolved during recent years and that successful CVC (b) Importance of sources for obtaining new business
units have consistently adopted a number of VC-like ideas/business proposals.
practices that allow them to become more profes- 80% 3.0
sional investors. Less important (1.0)
Less important (1.0) Important (2.0) Highly mportant (3.0) Mean score
Important (2.0)
Today’s corporate venturing in biotechnology has a 70%
Highly important (3.0)
new face – and it is more attractive for biotech start- Mean score
2.6
60% 2.5
ups and the VC community. n
Percentage of respondents
2.3
50%
Sources 40%
2.1
2.0 2.0
The changing face of corporate venturing in bio- 30%
technology, Nature Biotechnology 30(10): 911–15,
doi:10.1038/nbt.2383 by Georg von Krogh, Boris Bat- 20% 1.5
tistini, Fotini Pachidou, Pius Baschera (2012)
10%
An audience with Henry Chesbrough, Nature Reviews
Drug Discovery 12(5): 338–9, doi:10.1038/nrd4008 by 0% 1.0
Henry Chesbrough and Asher Mullard (2013) Head Office Corporate business units Venture capital community
Parties of corporate venturing unit
Start-up community
Global Corporate Venturing June 2013 31Analysis
How innovation spreads
from emerging markets
Jeff Immelt, chairman and chief exec-
utive of General Electric (GE), in 2009
prioritised very clearly: “Don’t even
In our series of articles
talk about your growth plans in the Corporate Venturing on
US. You have got to triple the size the Test Bench,
of your Indian business in the next
three years. You have got to put more Boris Battistini and
resources, more people, and more Martin Haemmig
products in there, so you are deep
in that market and not just skimming
review and analyse
the very top. Let’s figure out how to the latest trends
do it … On the one hand, our target
is to win local market shares with
local products which fit to the local needs best; on the bally, thus building up vast economies of scale in manu-
other hand, emerging markets offer effective conditions to facturing and extensive distribution and logistic channels.
develop really new solutions – often solutions that are by During this phase products were created and researched
far simpler and cheaper.” at home and distributed wherever the demand occurred.
For GE, “reverse innovation isn’t optional, it’s oxygen”. In the second stage, MNCs shifted R&D to the local mar-
But what exactly is reverse innovation? Does it matter to kets, in order to become more competitive, tap into local
your innovation strategy? knowledge and decrease the distance to the end customer.
While strategic perception of emerging markets has In so doing, they started winning market shares by adjust-
developed over the past few years and taken an unprec- ing the global offering to the local requirements, a process
edented shape, reverse innovation represents one of the also known as glocalisation.
most unreported – yet potentially impactful – phenomena. Finally the third phase involved refocusing local R&D
Reverse innovation – a concept originally coined by Vijay efforts on developing the products “in country, for coun-
Govindarajan of Tuck School of Business – refers to a case try”, including emerging countries. Hence no longer was
in which an innovation is adopted first in an emerging mar- the global offering simply depleted of its functionality, but,
ket before being successfully adopted in developed markets on the contrary, the local R&D centres performed their own
and added to the global offering. It describes how corpora- assessment of the customer requirements and developed
tions develop innovative products in countries such as China products satisfying such requirements.
and India and then distribute them globally. The number of In today’s marketplace, the biggest competitors for
examples of reverse innovation are becoming increasingly MNCs are larger local companies from emerging markets
frequent, unveiling the extent to which emerging countries that target global markets – for example, Tata, Mahindra,
will become the research and development (R&D) hubs Godrej, Suzlon, and Financial Technologies from India;
and technology accelerators for breakthrough innovations Haier, Lenovo, and Goldwind from China; Cemex from
in a variety of industrial sectors ranging from healthcare to Mexico and Embraer from Brazil.
energy, housing, transportation, financial services and so on. The table below shows a selection of examples of recent
However, to appreciate the current shift in the global disruptive innovations from India by large local players,
innovation strategy and the underlying implications of with some already reaching global markets:
reverse innovation, it should be noted that reverse inno-
vation has been preceded by three stages – three global What does it mean to western corporates?
innovation approaches.
In the first stage – internationalisation – multinational It is often being said that innovation is the mother of com-
corporations (MNCs) began exporting their products glo- petitiveness. That is true, but only to a limited extent.
Global Corporate Venturing July 2013 36Analysis
The fact is that innovation Recent disruptive innovations from India
is only a means and not an
end. So what is the end? Product Firm (year of market Market Entry level price of
Adaptation! Only those introduction) introduction existing, competing
companies, that adapt to a price ($) products ($)
changing environment will Tata Nano (car) Tata Motors (2009) 2,600 6,500
withstand the test of time.
Mac 400 (ECG machine) General Electric (2009) 1,000 10,000
From a western perspec-
tive, the notion of innovation ChotuKool (fridge) Godrej & Boyce (2009) 70 180
as the key source of com- Pureit (water purifier) Hindustan Unilever (2005) 43 150
petitive advantage held true Swach (water purifier) Tata Chemicals (2009) 21 150
for most of the 20th century
as companies in the devel- Sakshat (tablet PC) Indian govt and public institution 35 500
oped markets could rely on www.global-innovation.net/publications/PDF/Working_Paper_61.pdf
global business models and
reap benefits from cost dif-
ferentials and arbitrage opportunities across geographic ducing in large volumes and keeping overhead costs low
regions. However, as globalisation keeps its momentum, enough to survive on razor-thin margins. Once competi-
the traditional paradigm of inventing in the developed mar- tors get access to crucial technology, they penetrate pre-
kets and producing in developing markets is becoming mium markets with lower prices to turn them into volume
increasingly obsolete. markets.
More importantly, there is a different notion of inven- Over the years, multinationals have prospered by turn-
tiveness and innovativeness between mature and ing out premium-priced products for the world’s affluent.
emerging markets. This is a dangerous fallacy, as it pre- Rather than also designing products for poorer people
vents western companies from thinking about innova- elsewhere, many businesses found they could simply
tion in the new and necessary ways that are required to pass yesteryear’s models down, as if they were unload-
succeed in novel markets. Whereas people in the west ing fleets of used cars. Lately, big companies such as
tend to think about innovation as a clearly linear, struc- Microsoft, Nokia and Procter & Gamble are discovering
tured, long-term process with the aim of creating radical they can profit by targeting the world’s masses first. And
or disruptive innovations, innovation in emerging mar- they can score again by selling these low-priced products
kets is often the opposite – unstructured, chaotic and elsewhere.
opportunistic.
This is first driven by a fast-growing economy and a ris- Conclusion
ing middle-class consumer base, which have not yet devel-
oped the level of brand loyalty seen in mature markets. MNCs from mature markets have deep global capabilities
Therefore, agility is essential in order to exploit opportuni- and a solid technological foundation, while local corpo-
ties, which could be perceived as short-term behaviour by rates in the emerging markets have a deep understanding
those from the western world. of local customer problems. Both have different strengths
Second, purchasing power is often orders of magnitude to excel at reverse innovation. Combining these assets
lower in emerging markets whereas the savings rate is through strategic alliances among these key players may
higher. This limits the ability of local consumers to absorb be the answer to success, particularly if they can also
the cost of breakthrough R&D. combine a frugal technical solution with a smart business
Third and finally, consumers in emerging markets often model, which can create a strong sustainable competitive
have special needs and, hence, any product or service advantage.
features that are added are usually idiosyncratic, often As Vijai Govindarajan commented: “If multinationals
low-cost and almost always highly impactful. ignore reverse Innovation, they are likely to get disrupted.
As a result, the western approach to innovation has We have seen this happen in the 1970s and 1980s when
worked well in the business-to-business arena, where the Japanese companies disrupted Detroit [the US auto-
quality and performance requirements are high, and rea- motive industry].”
sonably well with luxury consumer goods and certain prox- The same was true for the Swiss watch industry, which
imity-dependent services. reinvented innovation to gain its leadership in the 21st cen-
For most other industries and direct consumer-facing tury after being almost dismantled by the Japanese elec-
businesses, premium prices are harder to command and tronic watch revolution in the 1970s.
maintain, hence making them vulnerable to emerging Going forward, the statement of GE’s Jeff Immelt, “reverse
market competitors. The reason for this is that emerging innovation isn’t optional, it’s oxygen”, should therefore be
market layers are often adept at reducing complexity, pro- seriously considered by most multinationals that want to
Global Corporate Venturing July 2013 37Analysis
stay ahead of the curve not only in emerging markets but tive with Bain & Co (e-mail: bbattistini@ethz.ch)
also in mature markets. n
Martin Haemmig is an adjunct professor at CeTIM at
Boris Battistini is a research associate at ETH Zurich and a UniBW Munich and Leiden University (email: martinhaem-
project leader of the Corporate Venturing Research Initia- mig@cetim.org)
2000 years of economic history of the major powers
Drivers, evidence and cases for GDP pendulum swings back in favour of emerging markets
emerging market innovation for Share of
world GDP
the rest of the world 100%
Non-Asian ancient civilisations (Greece, Egypt, Turkey, Iran)
China
90%
India
80% Japan
In year 1, India and China were home to one- 70%
Russia
third and one-quarter of the world’s population 60%
Germany
respectively and thus also commanded two- 50% Italy
thirds of the world’s economy. The industrial Spain
40% UK
revolution(s) changed all that. Today, the US France
30%
accounts for 5% of the world population and
20% US
21% of its GDP. Asia ex Japan accounts for
10%
60% of the world’s population and 30% of its
GDP. Asia’s growth will now be driven by its 0%
1 1000 1500 1600 1700 1820 1850 1870 1900 1913 1940 1950 1960 1970 1980 1990 2000 2008
huge population and its increasing wealth. www.MartinHaemmig.com / 2013 © Source: Statistics on World Population, (01-2008); Angus Maddison, Univ of Groningen
Global R&D flows between advanced and developing nations
Number of new R&D centres to/from advanced (A) and developing (D) nations
Data available for 2,080 R&D units (by 2010) 180
By 1970 there were 243 established R&D units 243 units established before 1970
160
by MNCs, rising to 2,080 units by 2010, with the
Two-thirds of all units are international, one-third are domestic
number of new R&D centres peaking in 2005 Expand from 31 countries into 78 countries (1970-2010)
140
Number of new R&D centres
at about 160, before the financial crisis brought D D 120
Peak in 2005
it down to 90. Over the past 40 years, about Height of economic boom (#160 new centers)
D A 100
two-thirds of MNC R&D centres are outside A D
Data sources A A 80
their HQ nation, while one-third is domestically 450 of 1000 largest R&D companies (Fortune 1000)
based. In future, developing nations will take a 60
Data sources
bigger share in global R&D, both as hosts and Data sources: UNCTAD and OECD
40
as sources for R&D centres worldwide. 20
0
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
www.MartinHaemmig.com / 2013 © Source: GLORAD-Database www.glorad.org / Max von Zedtwitz
The days where advanced market players Needs in emerging markets require new solutions
leveraged the emerging markets as product Emerging market innovation to both other emerging markets and mature markets
lifecycle extensions with ageing technologies GE-India: Mac 400 ECG machine: for rural India
Designed in India for India’s rural
Tata Motors-India: Nano Nano: emerging market city car
Made and sold in India, the Nano is
and solutions are over. The next phase with market and launched in 2007 for US.
$1,000, this portable cardiac testing
the cheapest car in the world today.
Before it went on sale, a price of
device was developed in only 22 $2,000 was widely touted. Since its
stripped down lower-cost versions – still used months for $500,000 with off-the-
shelf components. Each test cost
2009 debut, the price is now $2,600.
Nevertheless, the Nano remains the
by many international players – is underAnalysis
Are partners worth more
than the sum of their firms?
Most venture capital (VC) firms will
define one of the core competences
as the ability to identify and develop
In our series of articles
high-potential start-ups, so as to cap- Corporate Venturing on
ture value from an exit. However, the Test Bench,
there is a significant difference in fund
performance between the top quartile Boris Battistini and
and other VC funds. Such differences Martin Haemmig
are even more interesting when con-
sidering that about 85% of financial
review and analyse
returns are the result of only 10% of the latest trends
investments.
What determines the ability of VC
firms to generate value from venture investing consist- on delivering below par.
ently? Empirical research in finance and entrepreneurship Several studies on venture capitalists highlight the
seems to point to superior dealflow, industry knowledge or importance of personal traits, often referred to as skillset
networks of high-performing VC firms. or intangible quality. This study confirms that it is not nec-
However, a recent research study published by Carn- essarily the brand name of the VC firm that attracts better
egie Mellon and Harvard academics examines the extent business plans – although this may be the case – but a
to which the variation in performance depends on a VC strong sense and intuition on the part of the individual VC
firm’s organisational capital or the skills of investment pro- who smells the deal, which encompasses market opportu-
fessionals that work for the firm. nity, technology or solution, and the right team to execute
To this end, Michael Ewens and Matthew Rhodes-Kropf it during the early days of the start-up.
examined consistency at the individual partner investment
level using a “unique dataset that tracks the performance of The implications for corporate venturers
individual venture capitalists’ investments across time and
as they move between VC firms”. They covered venture
investments from 1987 to 2012 – 27,079 financing rounds
in 16,897 start-ups financed by 3,777 investing firms.
1 Staffing and processes: Corporate venturers (CVs)
tend to assemble their teams with internal people.
Hence there is a high likelihood that a number of the
The study found evidence of individual VCs have repeat- required skills are missing when dealing with start-ups.
able investment skill, even after controlling for observable This is particularly critical for corporations that set up a CV
characteristics such as time, industry, dollars invested, team with no experienced VC or CV member.
VC experience, investment round number, firm founding
date and other factors. In particular, the study found “evi-
dence of skill and exit style differences even among ven-
2 VCs converting to CV: With a currently shrinking VC
industry in mature markets, some successful VCs are
hired to CV teams. Historically, many CVs have become
ture partners investing at the same VC firm at the same VCs, creating a brain drain, but this is now reversing, lead-
time”. Furthermore, their estimates suggest the partner’s ing to brain circulation. This is particularly true in emerg-
human capital is two to five times more important than the ing markets, where there is a need to assemble new CV
VC firm’s organisational capital in explaining performance. teams and processes from scratch. The following global
The authors also noticed a persistent pattern related sample includes:
to the performance of individual VCs, irrespective of the l US: George Hoyem moved from Blueprint Ventures to
firm in which they were involved. Top performers with sig- In-Q-Tel, Central Intelligence Agency-backed venture firm.
nificant initial public offerings (IPOs) continued to deliver l US: Sue Siegel moved from MDV to GE Ventures
again and again, while their underperforming peers kept (Healthymagination).
Global Corporate Venturing August 2013 17Analysis
l Europe: Jonathan Tudor moved from CodyGate to BP Companies receiving added value from VCs
Ventures.
l India: Akhil Awasthi moved from Baring Private Equity
India to Tata Capital’s growth fund.
l China: Shaohui Chen, moved from WI Harper in Beijing
to Tencent in Shenzhen.
l Korea: Young Sohn, moved from Silver Lake to Sam-
sung Electronics in California’s Silicon Valley.
3 Long-term venturing: Building a personal network
takes a VC two to three years, not only to source deals
but to establish a solid deal generation pipeline combined
with a co-investment network and an exit platform. Several
Asian CVs tend to rotate people globally every three to
four years. Hence it is difficult for them to have significant Source: PwC – Paths to Value (on 350 early-stage companies) 2002
impact and results. Since a lot of deals are financed from
Consultant PricewaterhouseCoopers surveyed senior managers at 350 VC-backed
the corporate parent’s balance sheet, there are no hurdles companies in the US, Europe and Israel from 1999 to 2001. Of more than 10 vari-
to a CV investment professional changing positions or firm ables, the top five require lots of experience and a vast network, often beyond the
reach of an early-stage start-up. This is the value VCs and CVs can provide.
at any time. In contrast, typical VC fund structures include
such hurdles – key-man clauses, for instance – which
makes it difficult to leave the VC firm. Most important human capital for a VC profile
4 Compensation for CVs: This has been a long-term
issue, so many CV funds are restructuring to enable
third-party investors to contribute the majority of the fund
volume while the corporate parent remains a minority
anchor investor. This forces these funds to deliver solid
returns and VC-like compensation. Some global examples
include:
l US: Microsoft Ventures
l Spain: Amérigo (Telefónica)
l Switzerland: Zuehlke Ventures
l UK: Inventages (Nestlé, Switzerland) % %
l Japan: Itochu Ventures Source: Dr Martin Haemmig (compiled) / Data: Journal of Private Equity – Fall 2000 (pp7-29)
l China: Hony Capital (Legend Holdings/Lenovo)
l India: Tata Capital There are 17 important skills required by VC investment professionals. Of the top
10, eight are soft skills. Hence it is all about people and people skills. Finance and
As highlighted by the Ewens/Rhodes-Kropf study, the accounting knowledge are necessities but are least critical.
factors driving superior deal performance are primarily the
result of the personal skills, capabilities and strong sense Typical profile of successful US venture capitalists
for the right deals by individual VC partners, and less (145 VCs in 98 VC firms, 42% West, 38% East, 20% others)
with the brand name of the VC firm. To be in a position to
Education / schools
attract and maintain such exceptional talents, corporates 83% BA/BS, 17% MA/MS, 67% MBA, 14% PhD/MD (84% => 1 technical degree)
with CVC programs/teams are well advised to consider the 36% Harvard, 20% Stanford, 7% Wharton, 4% Chicago & Columbia, 29% others
above mentioned structures and compensation, in order to Career background (not mutually exclusive)
34% corporate manager, 32% banking/finance, 30% entrepreneurs, 24% consulting,
create stellar teams for the long-term. n 18% marketing, 16% technologists, 10% sales, 6% manufacturing
Business experience
Reference: Ewens, M and Rhodes-Kropf, M (2013) ‘Is a 26% > 15yrs, 16% 11-15yrs, 36% 4-10yrs, 15% 1-3yrs, 4%Analysis
On the role and value
of business models
The role of business models has
recently received considerable atten-
tion both in practice and academia. In
In our series of articles
this article we briefly review the cur- Corporate Venturing on
rent debate and highlight a number the Test Bench,
of interesting insights regarding the
value of business models and the pur- Boris Battistini and
pose they serve. Martin Haemmig
What is a business model? While
there is, surprisingly, no consensus
review and analyse
on how to define a business model, the latest trends
most studies appear to agree that it is
the construct that conceptualises how
firms generate, deliver and capture value – the model that In today’s world, where product lifecycles may often
explains how financial value can be extracted from a tech- have only a few months of shelf-space – particularly in the
nology, product or service. consumer, mobile and internet products, service and solu-
In particular, the business model depicts how a firm tions sector – business models are often at the core of it.
makes money by specifying where it is positioned in the Large corporations and corporate venturers are well
value chain and determines the design of the content, advised to learn from young start-ups, since they often
structure and governance of economic transactions so tend to follow and understand the needs of their friends
as to generate value through the exploitation of business in the same age bracket. This is particularly true in the
opportunities. In so doing, it specifies the value proposi- emerging markets, where western internet companies
tion, the partners and channels through which value is have often failed, particularly in China.
generated and delivered, and the revenue model. Chinese companies typically look at some existing tech-
An interesting set of research studies by Doganova of nologies, re-engineer it and add local features and include
Mines ParisTech and colleagues suggest that the design local services, and add a completely new business model
of models is particularly important for the development on top, which has little to do with western revenue models.
of entrepreneurial ventures. In fact, “the business model This is particularly true in the area of e-commerce – Ali-
works as both a calculative and a narrative device. It baba vs eBay – and in mobile gaming – Tencent, Shanda
allows entrepreneurs to explore a market and to bring their and others. By investing as a corporate venturer in innova-
innovation – a new product, a new venture and the net- tive local start-ups, large foreign and local corporates can
work that supports it – into existence”. It is suggested that prevent very, very costly mistakes, while such investments
business models can be therefore be fruitfully analysed as may lead even to potential acquisitions or a new distribu-
“market devices” that play an important role in the interac- tion channel, in order to get rapid access and traction in
tions with business partners and investors. the market.
Management scholars “found that the stock market con- When considering an investment in a young and inno-
sistently values certain types of business models more vative company, financial backers, mentors and coaches
highly than others. Specifically, [the study] found that in should assist the entrepreneurs in the following three
recent years, investors have favoured business models questions – why, when and how?
focusing on licensing intellectual property – such as Goog- Why an analysis of the business model? On the one
le’s business model – and a certain kind of highly innova- hand it provides a guide for the entrepreneurs in the defi-
tive manufacturing – such as Arduino’s rapid prototyping or nition of all the parameters related to the future business
the largest 3D-pinting companies: 3D Systems, Stratasys and its activities right from the beginning of the business
and Exone”. creation project. On the other hand it provides a useful
Global Corporate Venturing September 2013 21Analysis
tool for investors to help entrepreneurs prepare the crea- model must evolve constantly over the various stages of
tion of their businesses, notably in the communication with the company’s development, and structure relations with
the project’s stakeholders. business stakeholders and decision-makers.
When should the business model analysis start? As How can entrepreneurs be helped in the development
soon as the business idea has been identified, entrepre- of their business models? Financial backers and men-
neurs should start building their business model. The tors and advisers should assist in building and testing the
results of the work on the business model will end up being business models. It is in their own interest to understand
formalised in the company business plan. The business the foundation of the company, which they are trying to
help and end up investing in. The
THE BUSINESS MODEL FRAMEWORK business model is becoming a cen-
Our business model framework defines the types of assets a company sells and the rights tral element in optimising the way
it grants customers to use those assets. We classified all the companies listed on US entrepreneurs and their projects
exchanges into the framework by identifying the percentage of their revenues generated progress in tight collaboration with
through one or more of the business models. their investors, in order to improve
Share of total the chances of business success.
Asset type revenue of
US-listed firms In today’s increasingly global,
Financial Physical Intangible Human complex and competitive world,
Manufacturer companies looking for profitable
Creator N/A* sustainable growth need constantly
0% 57% 0% 57%
to invent new competitive advan-
Financial Wholesale/ tages. Innovation brings differentia-
Distributor trader retail N/A*
AssetYou can also read
