The Missing Link – Corporate Venture Capital: For Innovation & Company’s Growth

According to NVCA , in 2Q’11, VCs invested $7.5B in 966 companies, both up 19% vs. 1Q’11. The funding in the cleantech sector was down 23%, at $942MM, across 81 companies (up 11%). There’s a growing trend of VCs shifting their investment strategies from capital-intensive to capital-light and IT-based cleantech sub-sectors, a theme that’s proposed will gain prominence . However, the need for capital intensive innovative solutions – from energy generation to innovative material solutions, will still remain and need to be filled. Corporations, through their venture or similar groups, are expected to step up, both to fill the void and to develop their growth strategies.

The importance of VC-backed companies to the US economy is no surprise – this group contributes 11% and 21% to nation’s employment and GDP, respectively. In addition to shift away from capital intensive sectors, the R&D spend in energy and related industries is a fraction of other industries, e.g. pharmaceuticals. R&D spend as a fraction of Sales for energy sector was 0.3% (an amount less than the country spends on potato chips), material-focused companies appx. 0.5 – 6%; while pharmaceuticals was reported to be almost 19%. Venture type investments, probably with a different model, will be critical to drive the growth in energy, materials, or similar industries.

At the same time, large corporations have an increased mandate on growth in incumbent or new sectors, while facing ever increasing competition globally. It doesn’t help when large companies share of overall R&D spend decreased from 71% in 1980s to 38% in 2000s . The majority of the innovation is happening outside the confines of large companies. A large company, with a broad growth strategy, can potentially tap into this innovation, fill the funding gap, and position itself for growth. A Corporate Venture Capital (CVC) group is likely to a key element of this growth strategy and to lead to a win-win-win.

For large companies…

An appropriately set CVC group could provide parent company the pulse of the industry, at the minimum, to an option to leap-frog into a new industry, at best. This is highlighted with some of the industry examples, with Google’s quest to find the next Google and a dedicated CVC team at BASF. In numbers, according to data from Synchrony Venture Management , CVC groups invested almost $2B in 2010 across almost 500 companies, while contributing 27% of invested dollars in energy & industrial sectors (vs. VC’s ~15%). Majority of these groups reported investing at least $50 MM annually – an equivalent to ~$350 MM VC fund. To make the most of a CVC group, several things will need to be done right (potentially differently from the current norm), including, having a right risk appetite, dedicated team, and long-term commitment.

For entrepreneurs…

In addition to financing, a CVC group provide access to the parent company and the industry ecosystem to the start-up. These could include providing access to critical elements in the supply-chain, a better understanding of the market, or becoming a potential customer. It can also potentially provide an exit route to the start-up as highlighted by this week’s technology-focused acquisitions by GE and DuPont. An appropriately designed CVC group will likely make the experience of working with an entrepreneur – from speed to execution, seamless.

For the broader economy…

It’s not far-fetched that innovation is the driver of the nation’s economy. Increased participation of large companies in this agenda will enable further economic growth, employment, and reduced reliance on scarce resources (in the energy or materials sectors). Corporate Venture Capital can be an important lever that large companies can use towards these goals and complement existing players.

A Few Notes on Effective Sales & Growth Strategy

Growth is critical for the survival of businesses, whether a start-up or an established company, in any industry. Finding the right growth strategy is more critical now given with increased competition, globalization of value-chains, and easy access of information. Yet so many times we become obsessed with our technology or product, that we miss the big picture. For a business to grow, someone has to be willing to open his wallet and buy the product. Sale cycle can vary from industry to industry, but it’s critical to start with the correct first step – How to turn a prospective customer into an interested customer in the first meeting?

A common error is to focus on details of your product / offering, while missing why it’s important to the customer. The product can be the next best thing since the slice of bread, but it doesn’t mean much if the value to the customer is not clearly articulated. You have to be in your customer’s shoes, and translate the ‘features’ of your product to the ‘value’ to the customers. The value to the customer will likely fall into one of these three categories –

1.     How will it help the customer to produce more? In other words, how will your technology / product help your customer to increase his revenue. You might come up with a new chip that is 5x cheaper, a material that will reduce clogs in the extruder, or a new search engine. Your offering will not mean much until it’s clear how it will increase your customer’s top line. In this example it might mean penetration into market segment that’s cost conscious, increased run time & through-put from the extruder, or new customers from targeted ads.

2.     How will it help the customer to produce at a lower cost? These are the solutions that will help customer become more productive. With the advent of various enterprise and IT solutions, the resultant savings at the customer need to be understood your product to be a success. It’s one thing to develop an enterprise-wide solution to manage supply chain, but more important to understand customer’s savings due to better demand forecast, fewer missed deliveries, or better AR conversion rate.

3.     How will the new features of my product enable my customers to command higher price? This is where improved properties of your product translate into new properties in your customer’s product and someone is willing to pay a premium for that. It can be a new electrolyte that’s stable at higher voltage in a li-ion battery to a new film combination that can increase the brightness of a laptop by 2%, but the value of these differentiated features in the value-chain needs to be understood. In addition to leading to a successful sales process, this exercise will be useful to effectively price your product based on its value.

Not matter what stage your product is in – from idea to almost commercial, understanding and translating its value to the customer, will be a critical for the success of that product and growth of your business. 

Are you a hunter or a farmer?

I recently attended an ACG event discussing senior executives view on future growth in their businesses and where it will come from. One of the comments from a President of a small-sized specialized equipment manufacturer stuck with me. He commented that over past couple of years, he asked himself and his team, “Are you a hunter or a farmer?” He expects this to be one the pillars going forward as well. What does it mean?

When times are good and things are good across the broad, for companies it’s easy to be a farmer and grow. Current customers keep coming back and it’s relatively not that hard to acquire new ones. During these times, more often than not, some of the key metrics – e.g. what’s the profitability / customer?, how’s the market segmented?, or how should the resources be allocated for maximum returns?, are seldom discussed. Everyone is happy and riding the tide. It’s when things turn, that a deep introspection is done. For this particular company, that meant saying no to much larger OEMs, because of several reasons, including, profitability at those accounts, ease of doing business. Remember, this is a company with revenue in tens of millions of dollars, turning customers 100x its size away. The result – lower revenue, but expanded margins, higher employee morale, and efficient allocation of resources to hunt for future growth opportunities.

This company is not an exception, in fact, many companies are in the game of hunting to grow via different strategies. Some of them include –

·       Becoming aggressive along the value chain: Dow Chemicals is one of the examples in this case, wherein Dow is evolving from being a pure materials play to applications / end-products supplier. The company is vying to become a supplier of lithium-ion batteries with its Dow Kokam Venture . Also, it has a dedicated commitment to become a leading supplier of building integrated photovoltaic (BIPV). Just couple of examples, but you see the trend.

·       Reaching out to external partners: Case in point, GE, and its commitment to be a leader in smart-grid, solar, wind, and related clean-tech sectors. In addition to internal resource commitment, GE announced partnership with four leading VCs to establish a $200 MM fund to fund entrepreneurs / early stage companies in the area smart-gird first and now to improve efficiency in our homes .

·       Adopting an aggressive M&A strategy: A recent McKinsey report stated that M&A activity in 2010 reached $2.7T and 7,000+ deals globally, a level seen before the current economic crisis. More importantly, the value added in these deals is significantly higher than what was seen in the recent past, across all deal sizes. One of the examples is ABB , which has invested in early stage companies (via its recently created Ventures group) to acquiring companies for $4B+, and in between.

One can expect these to be in addition to current on-going efforts – e.g. R&D, business strategy, customer segmentation etc. Though these are three broad themes, similar ‘hunting’ dynamics is expected in other areas as well – from the evolving investing strategy at a VC fund to a technology start-up aspiring to grow.

An answer to whether you are a hunter or a farmer could help you focus and better position your company for growth in the future. 

Decision-making: How to be quick & efficient

I recently went to a Management Roundtable session taught by Jay Paap . During the session, I heard a sage advice that a father gave to his son who was rushing to get married -

“Marry someone who doesn’t make you most happy, but someone who makes you least unhappy”

I won’t dwell into personal side of it, but believe this has applicability to business world (after few words are replaced). Every day we are faced with decisions on topics ranging from which project to back to which investment to make. Many organizations have exhaustive processes (e.g. stage-gate) and multiple metrics (e.g. NPV, IRR) to help in the decision-making. The output is as good as the assumptions, and many a times assumptions rely heavily on the “what makes us most happy” and with limited / no outlook to “what makes us least unhappy”.

Which begs a question, can decision making in a business scenario be made more quick & efficient?

The answer is yes. One of the groups who have mastered this is VCs. VCs see hundreds to thousands of business plans in a given year, and go / no-go decisions are typically made in a matter of few minutes. The key is, in addition to positives, to focus on the things that don’t make the complete whole and answer can we bridge that gap / live with it.

Say a company has a cutting edge material technology to make anodes for li-ion battery, A+ team, but will likely require 5 years for commercialization & 2-3 additional funding round. Instead of focusing on technology & team, discussion around investing time-frame & future dilution can enable decision making. Or say a company is thinking of making an acquisition of a smaller player who will provide unique technology to acquirer’s portfolio and grow one of the businesses multi-fold, but the target has a relatively weak management team. The key to decision making is can the acquirer live with the target’s weak management team and if not, are resources available internally or otherwise to fill that gap.

Like everything else in life, the outcome is not perfect – some bad decisions will be made and some good opportunities missed. But on the positive side, the time and resources that are saved can be focused on making current portfolio / projects better / stronger.

Answering what makes you least unhappy and your ability to live with it might be one of the keys to efficient decision-making.

Agree / disagree? Pls leave a comment below.

My new best friend

They say that life’s biggest joys come in small bundles. Ours came on Oct 12, 2010 at 8:30pm, with the birth of our daughter, Aadya Vaish. Aadya, one of the names of Indian goddess Durga, also means the first in Hindi. She weighed 7 lbs 1.4 oz and 21'' long at birth and adjusting well to her new world!

Already two-weeks old, she’s keeping us engaged with her antics, charm, and playfulness. No matter how sleep deprived or tired, her engaging looks and sweet smiles makes everything else fade away. Life’s beautiful and Aadya’s arrival has made it even better – welcome our adorable princess!

In the future, you can expect occasional postings here devoted to Aadya and her activities.

Globalization, with a local flavor

The recent cover story of Chemical & Engineering News titled “Chemistry Energizes China” has a pretty good overview of how China is charging ahead in the renewable energy space and how material companies are adapting to it. One of the comments that stood out for me was from Edward Frindt, CEO of Novolyte Technologies with reference to energy materials – “We see the U.S. as an emerging market and China as the established market”

And not just in the renewable energy space, these trends are increasing being discussed in emerging industries from water to advance transportation. China, India, and other emerging countries have been growth drivers in for past few years, and are forecasted to grow at near double-digit growth rates in the near future. Among several enablers, a couple of the key ones are millions of citizens coming into the middle class and clear government policies. At the same time, there are unique challenges like the low buying power of the consumers and weaker IP rights. So how will companies, large and small, will adapt to this changing dynamics?

I looked at the revenues of some of the companies referenced in the C&EN article from 2007-09 and its proportional share from emerging markets or its proxy as available. Not surprisingly, the contribution from the emerging markets increased steadily 4-8 percentage point during this period. But what is interesting is in 2009, in the middle of economic crisis, when the top-line growth decreased by 10-20%, the emerging markets contribution to DuPont’s & DSM’s revenue increased by 3 & 5%, respectively, on an absolute basis. What resulted in this dichotomy of results? 

There are several factors at play here but I think the prominent ones are –

1.     Increased localization – Instead of transplanting products and technologies from developed countries to emerging markets, successful multinational companies have adopted local approach while leveraging their global capabilities. This has manifested itself not just having R&D and manufacturing capabilities on the ground, but increasing and more importantly, by also having product innovation and human talent developed for local markets. In the article, How GE is disrupting itself, authors provide great insights into how “glocalization” is driving GE’s growth and developing better products for both emerging and developed markets.

2.     Clear & stable policies – Establishing a manufacturing or R&D presence in a new market is a hundreds of million dollar investment for a chemical company. Even with the access to millions of new customers, new and emerging sectors will likely need clear and stable policies to both create demand and for companies to justify large capex. Some of the countries are leading the charge, e.g. China’s goal of 5% alternate energy vehicle sales by 2011, India’s National Solar Mission to have 20GW of installed solar generation capacity by 2020; making markets attractive and decision making that much more clearer.

3.     Improving intellectual property rights – The weak IP rights enforcement in some emerging markets has been a showstopper for moving product / technology innovation in those countries. Things are improving – a recent report in the Economist highlights the closing patent applications gap between US, Japan, and China. While the applications from the US or Japan have either remained constant or declined in past four years, China’s has surged and the it is poised to take #2 position from Japan.

Accessing new markets with clearer policy outlook and coupled with local solutions will likely be one of the new growth levers, especially in nascent industries. Successful multi-nationals have an opportunity to accelerate their top-line growth, entrepreneurs to leverage global pool of resources, and investors to invest in innovations globally. Consequently, one can expect the gap between developed and emerging markets will get even smaller. 

The cost side of the lithium ion batteries

The DOE recently published a report on batteries and electric vehicles (EVs), highlighting the related programs under the Recovery Act and also the li-ion battery goals for next 10-20 years. It is projected that the cost of a typical battery for EV will decline 90%, from the current $33,333 to $3,333 by 2030.

Source: DOE

Both Nissan and GM are expected to launch their xEV models – Leaf (full EV) and Volt (PHEV), respectively, later this year. Among several other things, high battery cost is often seen as a critical hurdle for mass adoption of these types of vehicles.

In the short-term several countries have incentives – subsidies, tax reductions etc, to increase consumer adoption, with up to $8,800 subsidy for EVs in China. Though the cost of the li-ion batteries is projected to drop, the key questions remain – how fast, to what level, and how long will the incentives last?

Let’s look at the cost components of large a format battery (Chevy Volt is reported to have 16 kwh battery) up closer. As discussed in several conferences, like Advance Automotive Battery Conference, it is reported that critical components (anode, cathode, electrolyte, separator, and foil) for these batteries make up ~1/3 of the battery cost currently. Recent BCG study highlighted cost components of a typical 15 kwh battery to the OEMs, with production volume independent costs largely comprising of the cell critical component costs. Since these are costs to the OEMs, end consumers could be expected to pay additional 10 – 20% on top of that.   

Source: BCG

Assuming total cost to the consumers at $1000 / kwh, a typical Volt-sized battery will cost $16,000 and battery for Leaf (24 kwh battery) to cost $24,000. Sticking with Leaf, to achieve that DOE’s objective of 90% cost deflation and BCG study estimates, at a battery pack level, this would mean –


                                                          2010                  2030                Cost delta

Battery cost                              $24,000             $2,400              $21,600

Cell – critical component costs     $5,520               $1,152              $4,368

Other volume dependent costs     $18,480             $1,248               $17,232

Yes, the cost needs to be cut across the board, but the challenge / opportunity in the mfg and other volume dependent (primarily at the pack level) is ~4x than that of the critical materials!

So what does this mean for the industry?

1. Focus beyond active materials – There’s lot of exciting work and funding going on to develop next gen chemistry for li-ion batteries and other energy storage solutions. For increased adoption of these technologies, it will be important to also look at the system-level cost (assuming other key CTQs - safety, reliability etc are met). It shouldn’t be a surprise to see an increased focus on “implementation $s” in addition to “R&D $s” for these solutions. Rob Day from Black Coral Capital wrote an excellent post on this topic as it relates to cleantech sector broadly. If you haven’t read it, it can be found here.

2. Movements across the value chain – As the battery becomes the new heart of the vehicles, it will be expected for OEMs to keep a tight control on this. This will potentially be good for consumers also as it drives the cost with higher volume and more integrated operations. Examples of this is also seen by bringing pack manufacturing in-house by GM or having a close partnership with pack manufactures as in the case of Toyota with Panasonic.

3. Increased consolidation – As is being witnessed for the solar industry, li-ion battery appears to be shaping up for over-capacity, up to 200% by 2015 by one estimate. The likely outcome of this will be increased consolidation within the value chain and potential bankruptcies of the weaker players. In the end, this also will likely drive down the cost as remaining players achieve higher scale.

All in all, these changes will be important for achieving cost targets, increasing consumer adoption of xEVs, and potentially translating these solutions to other applications like stationary. These will be exciting times for the energy storage technology innovation and the industry.