Corporate venturing: a new approach

Members of the council will initially include venture capital partners at Accel Partners, Darby Overseas Investments, Ltd, Draper, Fisher & Jurvetson, Hummer Winblad Venture Partners, 3i, U.S. Venture Partners and Walden International. The council will meet throughout the year to review opportunities for start-ups in IBM’s partner programmes. And new VCs will also be invited to join the council based on their expertise in technologies, key trends in emerging markets and the synergy of their strategic investments to IBM’s growth strategy. Council members will gain access to top executives, decision makers and experts from IBM’s hardware, software, services and research units.

Claudia Fan Munce, vice president and managing director of the IBM Venture Capital Group, a team of professionals developing relationships with the venture capital community, says: “What better way to source innovation in the start-up community than to partner with the venture capital community, which sees before anyone, those business plans and funding requests coming in from entrepreneurs, from where the likes of the next Google could arise.”

More recently, IBM has launched a licensing programme with the venture capital community to help start-up companies accelerate the development of innovative solutions in the marketplace. The new IBM Ventures in Collaboration Program will give venture capital firms in IBM’s partner network and their portfolio companies the opportunity to access the broadest range of intellectual property in the industry, more than 40,000 patents, to help ignite innovation. The programme also provides start-ups with the opportunity to partner with IBM’s inventor community to access the technology behind the patents, thereby stimulating new thinking around IBM’s existing intellectual property.

Fan Munce says: “IBM is making it easier for young companies to innovate. This programme provides VC-backed companies with an opportunity to access IBM’s patent vault to innovate faster and become more successful in the marketplace.”

Jo Taylor, head of venture capital at 3i, who sits on IBM’s venture capital advisory board, explains the benefits for 3i. “There are two main reasons the arrangement works for 3i. Firstly it enables the venture team to talk to the company on co-tenders with large companies and also seeing how to make the licence content or revenue come to life. They can also give us good ideas by looking at their own technology. It doesn’t necessarily mean that we’d use it, but may be able to suggest someone else who is interested.

But he adds: “The most valuable information we get is when they tell us when technology is not any good. They might not be that blunt but might point to specific concerns around the technology. It’s not really that we work with them to be a co-investor or to be an exit route for our portfolio companies. However, they can help us when we sell our companies by advising on our technology and can help to scale up a business.”

Syndications grow

Looking at the most recent figures for corporate venturing from the European Private Equity & Venture Capital Association (EVCA), activity in 2004 registered a decrease in investment amounts while divestments increased significantly compared to 2003. Mirele Ene, in charge of research at EVCA, says: “The reduction in the value of corporate venturing investments is not due to a decrease in activity volume, but a reduction in the average deal size.”

Corporate venturing investments in Europe decreased by 21% to €372m in 2004 from €470m in 2003. This was close to the amount recorded in 2002 of €337m. The total number of deals decreased only marginally (by 3%) to 307 in 2004 compared to 315 in 2003.

Ene adds: “More corporations are now using the strategies closer to those of the independent VC houses such as carry structures, or placing more importance on financial gains than strategic synergies (40% of the players in 2004.) What is interesting is for the first time ever carry structures are being implemented by corporate venturers structured as departments of the corporate sponsor. And more and more corporations are working with VCs in generating their deals.” This is reflected in the figures with more than 50% of deals in the corporate venturing space being syndicated, according to EVCA, suggesting growing relationships between corporations and traditional VCs. In 2004 63% of deals were syndicated, in 2003 55% in 2002 36% and in 2001 26%.

John Hummer of Hummer Winblad Venture Partners, who sits on IBM’s venture capital advisory council board, says of corporate venturing today: “It is a different era to the bubble where we saw corporates doing all sorts of corporate venturing, jumping on the venture bandwagon and losing their shirts. Now these corporates are reaching out to venture firms that understand the process.”

IBM’s venture capital efforts take a slightly different approach to what large corporates have done in the past. While traditional corporate venturing models that focus strictly on direct investments have been rapidly disappearing due to lack of strategic synergy with the parent corporation, IBM’s VC efforts are focused on building partnerships with existing VCs with strong track records.

Since its formation in early 2000, IBM partnerships with VC backed start-ups have jumped from 20 to more than 850 in the past 18 months. Today, IBM has successful informal relationships with over 100 of the world’s leading VC firms.

Hummer says of IBM’s decision to set up the council: “IBM is evangelizing a more open standard of corporate venturing. There has been for many years informal contact between corporates, corporate venturing and the VC community. Some of these relationships develop into a formal agreement and some remain informal. The corporates you see reaching out to the venture community are the corporates that have a desire to be a platform. The definition of a platform is that someone has to be standing on top of you; that is you want software developers to develop on your platform. These corporations want to make sure the venture firms know of their existence and the products they have on offer.”

Of course any sort of corporate venturing has to be a two-way street for it to work. Hummer says: “These large corporates can provide sales channels and direct support to the VCs. The word here is leverage. If start-ups can leverage the existing sales channels that the large corporates have established then you have the possibility of a win-win situation.”

He adds: “We like it when corporates come to our offices saying bring five of your companies to us so we can see how they might fit into our strategy. This is something we do regularly and is something we have done three or four times in the last six months.”

An interesting model and also unique in the corporate venturing space is New Venture Partners (NVP), which specializes in corporate spinouts. NVP manages around $300m of funds on behalf of Coller Capital and other limited partners and has recently announced its third corporate partnership with electronics group Royal Philips Electronics. Since March 1997, NVP has developed and invested in over 40 portfolio companies that resulted from the spinout of technologies from its corporate partners including Lucent/Bell Labs and British Telecommunications.

External venturing allows a huge corporate such as BT to exploit rapidly growing emerging technologies and services. Azure, spun out of BT by NVP in April 2003, is an example of a highly successful business and now a key BT partner for revenue assurance services. The business also secured backing from venture investors Doughty Hanson Technology Ventures and Intel Capital.

Traditionally, corporate laboratories collectively invest hundreds of billions of dollars on research yet many great innovations are never commercialized. BT’s partnership with NVP, which began in 2003 with the incorporation of large parts of BT’s BrightStar corporate incubator into NVP, gives BT the opportunity to use NVP’s skills, capital and resources to commercialise some of these innovations that might not otherwise have been developed.

Stephen Socolof, managing partner of NVP, says: “Over the past 12 months we have seen a dramatic increase in demand from large corporates around the world to work with us as the value of spinouts has become better understood. We have created a portfolio of over 40 successful companies, founded on innovative technology from leading global multinationals such as BT, Philips, Lucent and Boeing.” He adds: “Many VCs have tried to work with corporations like this. NVP is celebrating three years of working with such corporations. It has figured out a business model which works well and it’s wonderful to see the fruits of this relationship ripening so well.”

BT has ten more companies currently in its spinout pipeline. iO, jointly funded by BT and NVP, spun out last year. The company provides a complete integrated mobile digital content solution. Harry Berry, NVP partner, says finding such businesses takes time, but it is worth it in the end. He says: “To gauge the success of a corporate venturing business you have to ask yourself how many companies the division has successfully spunout.” John Hummer adds that, “the main issue is not whether there is a formal or informal corporate venturing scheme in place, it is how vibrant and fruitful the programme is.”