For those who have had their fingers burnt in recent years, corporate venturing must seem like the kind of mistake that one makes whilst under the influence of something rather potent – in this case the spellbinding promise of returns on investments that would come thick and fast. But despite the finger-burning that has taken place as a result of the implosion of the technology markets, there remains – in certain quarters at least – a good deal of positive sentiment about the important role that corporate venturing can, and some would say should, play as part of a co-ordinated business strategy.
Corporations did not rush into venturing overnight. Firms like GE Equity and Intel Capital, pioneers of modern venturing, have been involved since the 1980s. However, venturing really started to make the headlines in the mid to late 1990s, when firms sought to get their share of the technology spoils. Will Schmidt, managing director at Advent International, which established its first corporate venturing fund in 1985 and currently manages funds for around 20 corporates, describes the impact of the tech boom: ?All of a sudden there was an overriding belief that you couldn't lose any money, ?we're gonna go e-business, we have to be involved in this.? It was a strange situation. You would have steel companies setting up internet funds even though such ventures didn't work for the VC guys, let alone the corporate guys. The only people who made the money were those who got in early. Very few corporate programmes managed this.?
Ebb and flow
The technology boom saw large numbers of corporate programmes set up across Europe and the US during the late 1990s. These funds invested large sums of money across a broad range of start-up firms operating principally in the TMT sectors. The inflated amounts of capital invested, coupled with the subsequent downturn in technology, made many of these investments untenable. ?A very large number of these programmes were unsuccessful and when this happens within a corporation the result is simple. The programme gets shut down,? says Schmidt. The downturn impacted significantly on a wide range of corporates including Compaq, which disbanded its venture group last year, shifting its focus to its proprietary business units. Other notables included AT&T, News Corp, Primedia and RSA Securities, who have all pared back their venture capital interests as a result of heavy losses.
Figures from Venture Economics highlight the massive influx, and subsequent retreat, of the corporates during the boom. Around one-third of companies actively investing corporate funds in start-ups in September 2000 had stopped making such investments a year later. During the same period, the amount of corporate money invested in start-ups fell by 80 per cent. Global corporate venture capital investments in start-ups rose from $468m in the fourth quarter of 1998 to $6.2bn at the beginning of 2000 and then tumbled to $848m in the third quarter of 2001.
According to Jason Purcell, CEO at UK early stage investment advisor First Stage Capital, the pattern for corporate venturing in recent years has been fairly uniform. ?The trend has been for corporates to be pulled in to venturing at the top of the market and to exit at the bottom.? Thus it is clear that venturing needs to be more than just a gain-driven sortie into early stage investing. Success requires a coherent strategy. ?For the right business it definitely makes a lot of sense, although you've got to be clear about what you're hoping to achieve,? explains Purcell. ?You also need to have a venture capital timeframe because it's a long term business. It's no good coming into it and exiting again after a couple of years because you won't have had time to see if it's successful.?
The trend has been for corporates to be pulled into venturing at the top of the market and to exit at the bottom.?
So what are the criteria for a successful strategy? As Henry Chesbrough, assistant professor at the Harvard Business School and a leading academic in corporate venturing points out in the overleaf interview, there are few, if any, examples of corporates achieving superior returns to their VC counterparts. The major benefits for corporates come when the investment is evaluated from a strategic perspective, he says.
According to Andy Katz, consultant at UK corporate venturing advisers Corven, this perspective should cover a broad range of guiding factors. ?On one hand you have the financial drivers, increasing revenue, market cap, share price and so on. But it's equally important to know about business and market developments that might be a threat or an opportunity, for example shifting customer needs, new technologies, new market entrants and business models.?
Advent's Schmidt endorses this point from the reverse perspective. ?If the only thing that corporate venturing teaches a firm is that a sector is too tough to get into, then that's a success. It's a low cost way of going through a learning curve with a lower level of exposure.?
Intel, cited by many in the industry as the paragon of venturing, has a clearly defined approach to its investing. The US chipmaker invests in early stage companies for business development purposes, centred predominantly around the firm's own technology. ?If we want to improve our sales, we can't exactly go out and sell chips on the streets. So we'll look to invest in complementers – firms who are looking at different types of chips that complement or complete our technologies,? says Tim Keating, managing director of Intel Capital's European operations. ?We will invest in these firms to create an ecosystem of interlinked products. If we're successful, the market will grow faster, we will sell more of our chips, the other guys sell more of their equipment and everybody is happy.?
One of Intel's key strategies is to develop the market around one of its products that requires a catalyst. It invested around $20m in the technology around Infiniband (an Intel architecture for mainframe machines) in order to develop the technology. Intel Capital then put a further $50m into smaller companies who were using that technology with other software. Venture capitalists, becoming aware of the growth potential of the sector, invested another $300-400m in other related companies. According to Keating, ?by doing some work on the technology and the ecosystem around it we attracted a lot of other investment that built a whole industry around Infiniband. That's a nice way to grow a business up.?
Despite Intel's ongoing commitment to venturing, Keating admits that it has been difficult to get partners on board for further investments. ?Our plan for 2001 was to do as many deals as we had done in 2000 (350). We did half that figure.?
The unpredictable ebb and flow of venturing amongst corporates presents opportunities for private equity investors willing to take the reins of opportunity from corporates who have rushed into the market and now want out. Participants in the secondary market are seeing an increasing number of opportunities coming their way. Even firms that have managed successful venturing portfolios have provided such secondary players with appetising opportunities. Late last year, Lucent Technologies, a successful venturer which hit upon leaner times in its core operations, raised $100m by selling an 80 per cent stake in one of its venture units to British secondaries specialist Coller Capital. As part of the Lucent portfolio Coller acquired a significant stake in Celiant, a wireless engineering company that was subsequently sold to US firm Andrew Corp. for $470m.
The current environment is riddled with stories of corporations cutting back their involvement in venturing. However there are companies that are bucking the trend. German telecoms firm Siemens is one such entity. Late last year it launched a €20m wireless startups venture fund, Siemens Mobile Acceleration (SMAC), which is looking to make investments of around €1m in companies that are at the very earliest stages of development. Dietrich Ulmer, CEO of SMAC, explains the thinking behind starting a fund in the present environment. ?We figured that wireless was a growth area, especially in the US where it is making considerable progress. We want to make the most of first-mover advantage, particularly in the UK and Scandinavia where there are a large number of underfunded opportunities.?
?If the only thing that corporate venturing teaches a firm is that a sector is too tough to get into, then that's a success.?
SMAC CEO Ulrich believes that the firm's wireless fund will serve two purposes. ?The fund is a concerted effort to stimulate the mobile market which will benefit Siemens. Of course the other objective is to make money. My job is to make a profit and in that respect I'm in the same boat as the start-up people.?
Ulmer's comments are in line with the idea that whilst strategic investing is an integral aspect of venturing, the potential for new revenue streams should not be overlooked. Says Katz at Corven: ?Firms hoping to achieve organic growth of 5-6 per cent are unlikely to achieve this from within the core part of their operations. Venturing allows corporates to identify new opportunities to supplement their core activities. It can even allow the firm to reposition itself if the traditional business model isn't going to generate sufficient growth. Venturing allows you to put your toe in the water, to do something without damaging the value that you already have.?
Corporates can also take encouragement from the correction that has taken place in terms of valuations. Katz again: ?You can now get a lot more for your money than was the case during the boom. So with a fund of $50-100m, which in the context of a multi-billion dollar business is not particularly large, you can get a useful window on early stage opportunities.? Ulmer, who has considered over 800 investment proposals in the ten months since SMAC's inception, agrees. ?There are a lot of opportunities available at present and the valuations are much lower than a few years ago. Given that there aren't many corporates getting involved at the moment this is a great opportunity to get first-mover advantage at fair prices.?
So is now the right time to be involved in venturing? Jason Purcell certainly thinks so. ?For the right business, now definitely makes a lot of sense.? Will Schmidt affirms this sentiment. ?I'm a real evangelist, I would always recommend staying involved in corporate venturing and encourage newcomers to participate.? However, the fact that corporate venturing activity is still on the slide, and with Purcell estimating that it could be 3-4 years before corporates shake off the fear of failure that stifled a number of previous forays, it may be that those awaiting the return of the corporates should be advised against holding their breath in anticipation.