Corporate adventures

The nature and reach of corporate venturing has changed dramatically over the last three years. But with corporate portfolios massively in the red, where does the model go from here?

Between 1996 and 2000, the amount of cash channelled through the corporate venturing arms of companies across the world ballooned from $773.3 million (€878.8m) to $18.9 billion (€21.5bn).

Corporations have, of course, been dabbling in corporate venturing for decades in the hope of developing new products for core businesses, entering new markets or discovering ‘breakthrough technologies’. But there were added incentives particular to the new economy bubble that fuelled this explosive growth.

The proliferation of start-ups, initially at least, captured ‘mind share’, and lured away valued employees, thus threatening more established vendors. The accelerated speed of innovation in technology, and the multiple directions it was taking, meant that keeping plugged into the marketplace hype was a must, says Jyrki Rosenberg of mobile communications giant Nokia: “Corporate venturing is a way for us to keep our eye on the market and emerging technologies. It gives us a window on the world outside of Nokia.”

Then there were the more tangible financial gains associated with technology investments. The bullish markets of the late 1990s seemed unstoppable and demand for technology initial public offerings was insatiable. If venture capital firms and start-ups incubators could make so much money – so the thinking went – then surely industry stalwarts, with all their cash, tech know-how and market knowledge, could do as well, if not better.

For a while, at least, that was the case. In 2000, the corporate venturing arm of semiconductor giant Intel, Intel Capital, brought in $3.7 billion (€4.2bn), more than a third of the company’s $10.5 billion (€11.9bn) in net profits. But plummeting valuations brought those kinds of return to an abrupt end.

The key to successful corporate venturing is a clear mandate and clear focus.
Lucy Marcus, Marcus Venture:

The sheer scale of many companies’ exposure to technology investments has been revealed in recent corporate accounts. Even the most tech- and marketing-savvy companies were forced to concede huge portfolio losses. Microsoft, the world’s largest software supplier, for example, wrote off $1.2 billion (€1.4bn) related to its stakes in cable and telecoms companies; Compaq, the world’s leading network equipment company, wrote off $514 million (€584.7m); and online retailer Amazon wrote off $71 million (€80.8m).

Some of the most calamitous investing was due to inexperience, says Lucy Marcus, chief executive of Marcus Venture Consulting, an advisory service to private equity investors. Investing in technology seemed such an easy sport that inexperienced graduates were often given a free rein: “In some of the largest corporate venturing efforts I’ve seen, you’d ask what qualifications the person in charge had and they’d say, ‘Oh, it’s ok, some of my friends are venture capitalists’.”

A new outlook

Today, many corporations are reassessing their approach to corporate venturing – some are rethinking their commitments altogether.

Hardware vendor Compaq disbanded its corporate development team over the summer; telecoms equipment maker Lucent was rumoured to be considering the sale of its private equity portfolio; and database giant Oracle pulled its plans to invest in European start-ups, having spent less than a third of the $500 million (€568.2m) earmarked for the project. Even GE Equity, part of US conglomerate General Electric and one of the largest corporate venture arms in the world, is scaling back its operations.

Yet at the same time, the financial and strategic imperative for corporate investing is perhaps stronger than ever – and it can carry less risk than the alternatives.

Overpriced acquisitions made at the height of the dot-com bubble have come to haunt technology companies and may convince them to heed the words of mergers and acquisitions expert Marco Fasoli of advisory boutique Broadview: “Half of all M&A deals are deemed to be failures.”

Cisco, one of the most aggressive corporate buyers of all time, is increasingly choosing to invest rather than acquire, or at least to invest first. The option to acquire can always be exercised later, say observers, when the business model and technology are proven. Cisco, for example, purchased investee and developer of virtual private network (VPN) technologies Allegro in July 2001.

For technology companies that reacted to adverse trading conditions by slimming down and focusing on their core business activities, investing in related business is a good way to maintain broader exposure to technological developments, and at a lower cost, says Marcus. And there are plenty of different levels of risk and commitment to choose from.

“[A corporation] doesn’t need to invest or formalise a fund to keep its finger on the pulse of innovation,” points out Pierre Ladeau, a partner at nCoTec, a European-focused technology venture capital firm. “There are other ways,” he says, pointing to the recent announcement by Japanese electronics giant, NEC, that it is to invest €8 million in nCoTec’s first fund. “It allows NEC to get access to innovation and local partners in Europe, through leveraging a small amount of money,” he says.

Corporates are realising that they often lack the skills or local contacts for making astute investments and are, therefore, increasingly opting to invest in venture capital funds or bring in outsiders to advise on the best strategy.

They’re only investors and, at the end of the day, it’s up to the company to perform.
Dr Wolfgang Krause, Telesoft:

That move is being welcomed by the venture capitalists. “If you invest today,” says Frank Boehnke, a partner at Munich-based technology VC Wellington Partners, “you want to know how [the investee] fits into the market. You can address these themes with the corporate. Discussing this gives you confidence that the company will have a space in the market.”

“We’re huge promoters of getting corporates involved,” concurs John Brochers, a partner in the London office of US Crescendo Ventures, who points to a study from the Harvard Business School that suggests there are quantifiable financial benefits to such a strategy.

Similar research from the London Business School also concludes that value creation tends to be higher when corporate investors are involved (see table). Start-ups with multiple corporate investors take an average of 3.5 years to float, compared to 4.5 years for purely venture capital-backed companies; and their market capitalisation upon flotation is higher – an average of $1.0 billion (€1.1bn), compared to $467.7 million (€531.5m) for non-corporate-backed companies.

What can be correlated from this? “Perhaps less than you think,” says Keating. A corporate investor certainly does not guarantee the success of a company. (In the US, Amazon.com invested in the now-defunct Pets.com and Webvan). “You mustn’t expect too much from corporate investors,” warns Wolfgang Krause, managing director of VC Telesoft Europe, “after all, they’re only investors and, at the end of the day, it’s up to the company to perform.”

But start-ups too are becoming increasingly keen on corporate money due to the benefits they can bring. Aside from cash, they can provide access to their network of global contacts and even to their sales and marketing channels. “The investee can gain a knowledgeable business partner, a sheltering port during stormy times, and a powerful advocate. It appears more reliable and credible to potential partners, and more threatening to existing competitors,” says Marcus.

Karlheinz Gulden, chief executive of Switzerland’s Avalon Photonics, a developer of optoelectronics components, says that the investment in his company by Intel Capital has certainly bought added business value. “[Our products] are semiconductors and we can profit from Intel’s know-how. We can understand how to manufacture cost-effectively and get input on market trends.”

Lasting legacy

The key to successful corporate venturing for all parties, says Marcus, is a clear mandate and clear focus. “Otherwise,” she says, “it can turn into a black hole, which can sour goodwill, cause discontent and become the object of industry cynicism.”

Some management consultants, including Bain & Co and PricewaterhouseCoopers, believe that such ‘focused’ corporate venturing is set to become one of the most enduring legacies of the dot-com era. Nokia’s Rosenberg agrees: “We think continuous innovation and venturing is crucial for any corporation. We’ve always done it and it is really important for ensuring our future. There’s no question that we won’t do it because of market circumstances.” As proof of this, Nokia says it is expanding its corporate venturing activities into the Asia Pacific region for the first time.

Most companies, however, are undeniably scaling back their venturing efforts, in line with their independent VC peers. Yet they remain aware that, however corporate venturing is defined, it remains a good method for identifying the threats and opportunities in the marketplace. That should ensure that corporate venturing continues to account for a sizeable chunk of risk capital.

Methods and models

Corporate venturing in its purest form involves a corporate taking an equity stake in a company. In practice, the term is applied to all sorts of partnerships and relationships, from mobile communication giant Nokia’s Innovent, which can help an entrepreneur clarify an idea and write a business plan, through to Microsoft’s commitment to invest $51 million (€58.0m) in peer-to-peer technology supplier Groove Networks and to help tune Groove’s software to run most efficiently on Windows XP.

There are two reasons for this diversity. First, corporations take the decision to invest time and money in a technology based on any mix of financial and strategic motives. Second, there is no single model that guarantees corporate venturing success, so corporations have tested many different approaches.

Nokia, in particular, seems to have hedged its bets. In 1998, the Finnish telecoms giant set up Nokia Venture Partners, a standalone investment fund focused primarily on return on investment (ROI) and modelled along flashy VC lines, complete with an office in Menlo Park, California. In addition, it boasts an internal venturing and incubation arm, Nokia Ventures Organisation, with 2000 employees. The primary aim of this group is to hit upon disruptive technologies, market trends and emerging business models. Each core business division also has its own business development unit with a mandate to invest in strategically important technologies.

Intel Capital is one of the largest and most sophisticated corporate venturing operations, with over 500 companies (100 in Europe) in a portfolio that, even at today’s prices, is worth $2.7 billion (€3.1bn). It has recently put a lot of thinking into its strategy: “We have a strong strategic mission to support Intel’s growth. But [the investee] has to be financially viable. That’s a winning sustainable model, for us at least,” says Tim Keating, director of Intel Capital for EMEA. And this means investing in potential customers to stimulate demand for its chips; testing new product areas, notably micro electro-mechanical systems (MEMS) and optical technologies in Europe; and generally promoting the use of the Internet.

British telecommunications giant BT has focused its efforts on its internal incubator, BrightStar, which aims to commercialise as many technologies and patents from BT’s R&D efforts as possible. BT even dared to hope that the financial gains from BrightStar spin-offs would fund its wider R&D effort. But, with only two spin-offs this year, it has yet to live up to these great expectations.

	Pure VC	Single CV	Multiple CV
The fastest growers
Years from the founding to IPO	4.5	4.2	3.5
Proceeds from IPO (€ millions)	68.3	68.3	93.9
Market capitalisation upon IPO (€ millions)	531.5	680.6	1196.9
Source LBS 2001