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.