Taking all the benefits of a corporate venture fund and adding the bonuses of an independent VC. The prospect is an attractive one and b-business partners has set out to harness the best of both worlds. According to this new investor the joining together of some of Europe’s leading multinationals has created a new model for venture capital. Hans-Dieter Koch, CEO of b-business partners, is confident: “our story is difficult to beat.”
The fund is backed to the tune of EURO1 billion by an illustrious group of corporates including Investor AB, ABB and SEB and will target early stage business-to-business technologies across Europe for investment. The names of the investors give the investment vehicle both financial and industrial credibility but can b-business partners convince the market that its independence is genuine?
Recently corporate venturing has been actively pursued in the US and Europe, mainly in the format of IT orientated companies making investments in early stage high tech businesses. This type of set up has its advantages and the ones b-business partners hopes to utilise are strategic domain and market knowledge, contacts for reference and sales and a homegrown deal flow. Corporate venture teams operate with a different agenda from independent VCs – one that may be driven by strategic gain and is not necessarily dominated by financial returns. However, financial return is one of the primary motivations behind b-business partners. The strategic involvement of the investor group is driven by enlightened self-interest. By helping the start-ups in b-business partners’ portfolio they add value to their investment and open the way for strategic gains. Significantly, multinationals and their shareholders like to be seen to be involved with cutting edge of technology.
The company hopes to avoid the pitfalls of a corporate fund by incorporating elements of a stand-alone venture capital firm. These will include the committed capital, financial expertise and independence, which as far as Koch is concerned, is the key.
He hopes b-business partners will be “as independent as 3i”. The challenge facing the investor is to prove and maintain this.
Although b-business partners is incorporated in the Netherlands the idea for a vehicle focused on business-to-business investments came from Sweden’s largest holding company, Investor AB. Investor has other VC activities to consider but Koch is certain there is no competition with these as the model of operation and investment focus are different.
To demonstrate its commitment to the concept Investor pledged EURO300 million, a figure matched by ABB, the Swiss-based industrial, energy and automation company. The third major contributor to b-business partners’ capital pool is the Nordic bank, SEB, which committed EURO50 million. In March 2000 the investment group announced its intention to build closer links between the “new economy” and traditional industry. By April 2001 a further nine investors had chipped in to give b-business partners a total of EURO1 billion to invest along those lines. The additional investors are AstraZeneca, Atlas Copco, Electrolux, Hewlett-Packard, Saab, Sandvik, SKF, Stora Enso and WM-data.
While some of b-business partners’ money comes from IT companies other investors are drawn from sectors such as heavy industrial manufacturing and pharmaceuticals, which are more remote from the type of technology companies being targeted for investment. The diverse backgrounds the capital has come from is one of the reasons Koch is confident of b-business partners’ success. He also believes the company’s formula will prove impossible to duplicate as the egos of major multinationals generally prevent them from working together. “There is no other force that could convince investors to work below another it won’t happen.” When considering the b-business partners collaboration it’s worth taking into account the fact that Investor is a shareholder in AstraZeneca and ABB.
The chronology of b-business partners is unusual in that the management team was formed after the majority of the capital had been secured and the investment philosophy loosely defined. Although b-business partners has offices in Amsterdam, London, Munich and Stockholm and a staff of 25, the team is not yet complete. With around 15 people still to recruit the most recent addition is London-based managing director, John Collis, who joined from Internet Capital Group. While the management has a wealth of international knowledge and both financial and operational experience Koch is the only one with experience of growing a business. From 1991 to 1997 he served as CFO of CompuNet Computer as the German company grew from employing 200 people to 4,000. He stayed on for three years after GE bought the company until joining b-business partners in November 2000.
Although the financial backers decided the investment strategy for b-business partners, Koch says it needed further definition:
“b2b is everything and nothing.” The management team decided on four areas to actively build knowledge and investment skills in, but not to the exclusion of other areas where the investor will follow opportunistically. The technology Koch is most excited about is business process integration, software which enables the various software packages a business needs (procurement, logistics, sales and finance for example) to work together.
There are currently two business integration process companies in the investor’s portfolio; sync, a Swedish company targeting manufacturing companies in Scandinavia and the most recent investment, Healy Hudson. B-business partners led a EURO12 million round for this German company in June this year. Healy Hudson provides supplier relationship management software to companies including Dresdner Bank, DaimlerChrysler, Mannesmann-Vodafone, Siemens SPLS and Texas Instruments. Koch says of Healy Hudson: “If it works it’ll be a homerun, it’s either make or break, there’s little space for an outcome in between.” Other areas b-business partners has selected for investment are wireless solutions and bluetooth, high bandwidth, and wireless security. “I’m not worried that one of these sectors won’t take off, my fear is that there is another category and I just can’t see it. Sometimes by the time you see it, it’s already too late,” says Koch. Over the next three to four years he hopes b-business partners will become a market leader in its chosen investment sectors.
The investment vehicle has made ten investments so far including two ASPs (frontville and ECInet), two exchanges (surplex and iBX), a mobile content management solutions provider (iOra), software supplier of mobile applications (EHAND) and an intermediary for SME financing (Finexia). One of b-business partners’ earlier commitments was a strategic investment in antfactory, the incubator re-styled as a global investment firm. The idea was that this would increase the company’s investment opportunities within the UK and across Europe. Unusually for b-business partners (and fortunately, if recent press reports of pressure to liquidate the company are correct) it holds only 0.9 per cent of antfactory.
Generally b-business partners hopes to hold a stake of at least 20 per cent in its portfolio companies but would not be afraid to take 50 per cent or above. Despite targeting early and growth stage businesses Koch is reluctant to invest at seed level citing the time consuming nature of this type of investment and the large size of the fund as the main reasons. Typically investments will be between EURO5 million and EURO50 million. Koch lists the UK, Germany and the Nordic region as likely investment hotspots. So far half of the investments have been in Sweden, reflecting the deal flow provided by the company’s investors.
b-business partners prefers to lead investments and the names of its co-investors give it credibility. 3i, Atlas Ventures, Apax, Carlyle, Cazenove and Viventures have all invested in b-business partners’ deals. The company’s backers also have the opportunity to co-invest, SEB has participated in the funding of iBX and frontville, now on its second round. There has also been a collaboration with Ericsson to establish a Nordic commerce exchange, a testament to the network of the investor group as Marcus Wallenberg, a member of the board is president and CEO of Investor as well as vice-chairman of Ericsson.
Koch maintains a pragmatic approach to the investment focus of b-business partners. “We mustn’t stop discussing and questioning our investment strategy,” he says He believes three years is the maximum period an investment strategy can run without major adaptation. b-business partners already appears to be evolving. Companies with e-commerce labels, initially touted as a favoured sector, no longer seem as popular.
According to Koch one of the benefits of the company’s structure is that the lack of time scale pressures sometimes experienced by traditional VC funds allows b-business partners to be more value driven. He says an investor may have to exit an investment to provide returns to limited partners when it makes better sense to stay in the company. For example, if a portfolio company is showing an annual value increase of 20 per cent to 30 per cent it may be more profitable to hold on to the stake in that company than to sell it. However if the company’s plans are to come to fruition it needs to have proved itself, and the value of its portfolio, within three years.
From the outset the intention was to float b-business partners within three years. It is hoped this will provide the company’s financial backers with a healthy return on their investment. Obviously this, and the timing of an IPO, will depend on the market. Although an IPO is not on the immediate horizon the speedy recovery of the market is important to b-business partners in terms of exit opportunities. Koch says: “b-business partners can only do an IPO if it has a track record and to have a track record you need to have made investments and exited from them.” Three years is also the time frame within which Koch envisages asking b-business partners’ investor group for fresh cash. Again this will be dependent on the vehicle’s investment record and also the proximity of an IPO.
Returning to advantages of the b-business partners model Koch emphasises the role of the investors (who are generally referred to by the company as the partners) and in particular the partner council. Koch says of the investors: “Their job is to help us build companies and make sure they get the maximum value out of their investment.” Investors do this through involvement at three stages; screening potential investees, creating value and building portfolio companies and then growing them and helping accelerate them in the market. This process is well illustrated by the involvement of AstraZeneca with iOra, ABB with Healy Hudson and Atlas Copco with sync.
Strategic support is generally orchestrated through the partner council: “In terms of strategy the network of investors is key, in terms of implementation it’s the partner council which is key.”
Each investor has one seat on the council, regardless of its initial outlay; this is taken by someone two or three levels below the board of that company. For example, AstraZeneca is represented by its CIO and ABB by its head of VC. According to Koch this ensures b-business partners is taken seriously by the senior staff of its investors and makes sure all the necessary forces are put into motion to assist portfolio companies. The partner council is where expertise and contacts are shared, it relies on the enthusiasm of its individual members to work well. b-business partners promises its portfolio companies active coaching and that it will seek to foster partnerships between them and its corporate backers. However, approaches to the partners about a beneficial product or idea are only made after it has been mutually agreed with the investee company. The set up sounds egalitarian but above all it’s about the money. Koch remains realistic: “At the end of the day it’s a model designed to achieve superior financial returns, not to change the world.”
Investor, ABB and SEB hold larger stakes in b-business partners and they also dominate the board, which ultimately wields the power over investments. Could they turn this to their advantage? If an investor approached b-business partners to buy one of its portfolio companies, a likely situation given their in-depth knowledge of the company and one Koch does not rule out, he insists they would not pay a reduced price. “They all know that if they get preferential treatment it would be to the detriment of all the other investors”.
The profit of the group would be eroded and obviously no one is going to be happy with that. The key to b-business partners’ independence may well lie in the fact that it has so many corporate backers with very varied backgrounds, and therefore different vested interests, which play off each other and achieve a kind of balance.