Corporate Venture Capital
Innovation Funding
Innovation Lab 2014
Innovation Lab: Corporate Venture Capital
PDFaid.com
Veronica Tottone Davide Cristiano
Vincenzo Terracciano
(Coordinator)
Intesa Sanpaolo
Letizia Gabbrielli
Selex ES
Lucia Marchisio
Telecom Italia
Professionals
Team
Gabriele Torti Marco Russo Veronica Tottone Davide CristianoAcademics
Dream Team
Michele Serri Piero Tonelli
Roberto Barontini
Scuola Superiore Sant’Anna
Andrea Piccaluga
Scuola Superiore Sant’Anna
Definition & Mission
Global Market Analysis
Seeding a future growth: Investment Goal
Table of contents
Structure & Governance
Portfolio Strategy: Investment Management
CVC Models in a Snapshot & Case Analysis
Italian Scenario
Our proposal: Vertical Corporate Venture Capital
Survey’s Process Results
Table of contents
Survey’s Process Results
“
CVC is defined as equity investments in small, young and privately held entrepreneurial companies by
established corporations, usually motivated not only by financial goals, but mainly by strategic interests”.
(our elaboration from Chesbrough and Tucci, 2002)
Corporate Venture Capital: Definition & Mission
Open Innovation is the use of purposive inflows
and outflows of knowledge to accelerate internal
innovation, and expand the markets for external
use of innovation.
(Chesbrough 2003)
Definition & Mission
Corporate Venture Capital is part of the wider Open
Innovation model, it speeds up corporate innovation
processes through external innovation keeping
control of its financial aspects.
CVC: Cross National Comparative Analysis
15% of CVC global number 15% of CVC
global number 4% of CVC global
number 4% of CVC global number
2571,8
504,3
50,4
344,6
CVC 2012 spending
(million USD) >65% of CVC global number 2,77% r&d/gdp Strong public support for start-ups>65% of CVC global number 2,77% r&d/gdp Strong public support for start-ups 1,94% r&d/gdp Attractive valuation (lower median multiples than US) Fragmented tax policy 1,94% r&d/gdp Attractive valuation (lower median multiples than US) Fragmented tax policy <2% of CVC global number 4,38% r&d/gdp Strong public support for high tech start-up and R&D
<2% of CVC global number 4,38% r&d/gdp Strong public support for high tech start-up and R&D number 1,97% r&d/gdp Developed market of later stage investments number 1,97% r&d/gdp Developed market of later stage investments
2571,8
50,4
Sources: Crounchbase data export, OECD iLibrary
PricewaterhouseCoopers (2014), 'National Venture Capital Association MoneyTree™ Report', Thomson Reuters Restart Italia, Ministero dello sviluppo economico, 2013
Studio Icom per fondazione Lilly, Presenza ed impatto economico delle “start up” innovative di successo: un confronto internazionale, 2013
Global Market Analysis
USA is the main corporate venture capital market.
Corporate Investment Goals: Strategic vs Financial
CVC preferred objective
O
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Focus on exit value of ventures strictlyrelated to Corporate core business
Focus on achieving impact strategy through integration of ventures with the
core business
EMERGENT
DRIVING
50%
CVC Investments strictly
depend on investor’s goal
The strategic focus is
Corporate Venture Capital, Seeking Innovation and Strategic Growth- NIST, 2008
O
p
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ti
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Long term goal, possibility to:
explore white-spaces leverage underutilized technology
experiment new capabilities develop back up technology
Exploitation innovation strategy,
unable to produce disruptive innovation
Common benefits:
promoting standard, improve market share and technology efficiency
Focus on exit value of ventures Pro-cyclic investments: “opportunistic”
to positive economic cycle (Bull market)
Focus on core business market
proximity Exploration-exploitation innovation strategy
PASSIVE
ENABLING
15% 15% 20%Strategic More Strategic than Financial
Financial More Financial than Strategic
The strategic focus is
predominant in CVC
investment.
CVC literature evidences
investments not only strictly
linked with core business
but also in cross sectors.
Seeding a future growth: investment goal
to positive economic cycle (Bull market) No immediately clear benefit for
corporate BU Stakeholders
strategy
Develop ecosystem network Stimulate corporate demand by offering
Corporate Venture Capital Models
Corporate/direct
investments
Objective : Strategic Level of Innovation: ExplotationRisk of investment: Low Risk
CVC Model
Key Dimensions
Structure
Observations
Maintains control of all investment decisions.
Receive all strategic returns.
Risk of inefficiency due to the absence of
External
Subsidiary Fund
External
Risk of investment: Low Risk to the absence of
professional VCs.
Greater opportunity for disruptive innovation. Greater opportunity to discover new emerging
businesses and technologies. Requires greater
resources and committment.
Objective : Primarily Strategic
Level of Innovation:
Explotation & Exploration
Risk of investment: High Risk
Objective : Primarily Financial
Level of Innovation:
The key is selecting the right model for the intended CVC goals.
Three Key Dimensions should be considered: Objective, Innovation and Risk of Investment.
External
indipendent Fund
Greater opportunity for disruptive innovation.
No investment decision-making power
Level of Innovation: Exploration
Risk of investment: High Risk
Business developer CTO 22% R&D 3% CEO 14% Investment board 12% Report Cross Competencies: Technical, Commercial and Economical
Investment Team
Investment Team
Performance Team
Performance Team
Strategic & Emerging Business Opportunities Valuation
Business Performance & Results Valuation
Governance: Organization & Team Competencies
Organization
Know-How
developer M&A 18% Business Unit 6% CFO 25% CompensationTechnology Team
Technology Team
Financial Team
Financial Team
New Technology & Technical developments Valuation Financial Sustainability Valuation Treasury Investment
Intel Capital
Different competenciesGlobal corporate venture capital survey 2008-2009- E&Y
Fixed salary plus carried interest,
7%
Only fixed salary, 5%
For the success of a CVC fund, a key aspect
is to align the cvc goals with the reporting and
the compensation’s system of the CVC Team
.
Corporate venture capital group Survey- EVCA 2012
Cross Competencies are required to manage
a CVC fund.
Marketing Business
Development M&A
Fixed salary plus bonus similar to carried interest,
15% Fixed salary plus
company bonus, 73%
Portfolio Strategy: Investment Key Dimensions
Private Equity
Stock Market
Stage of Investment
Sector of Investment
Percentage of Total CVC Industry Transactions by Target Industry
24% 29%
4% 43%
Percentage of Deals by Stage of Investment
Corporate Venture Capital
Business Stage Seed Early Extension Later Consolidate
Entrepreneur FFF Incubator Accellerator Angels Crowdfunding Venture capital Private Equity Business Stage
The CVC investment focus is expanding.
Companies explore market adjacences going
beyond their core competencies.
CVC represents a link between investors in
financial Markets and Investors in seed stage.
Boston Consulting Group 2012
Portfolio Strategy: Investment Management
Identifying partnership/alliance opportunities Identifying partnership/alliance opportunities
CVC Supporting Services:
Business Development Opportunity
There are many advantages to working with CVCs. They can offer funding as well as access to new customers, more advantageous supply chain relationships and skilled expertise in business areas required.
CVC
Supporting
Services
CVC
Supporting
Services
Marketing, Sales and Distributions Marketing, Sales and Distributions Access to R&D teams and facilities Access to R&D teams and facilities Fundraising Fundraising opportunities opportunities Fundraising assistance Fundraising assistance Global expansion/ operations Global expansion/ operationsCompared to other forms of financing, CVC can
help Start-ups to fill the strategic and operative gap.
Global corporate venture capital survey 2008-2009- E&Y
CVC Models in a Snapshot
External Independent fund
Structure
CVC Financial Model
Internal dedicated fund
CVC Strategic Model
Experienced VCs and potential
secondees from corporate
Fixed + Bonus on Financial KPI
Passive investments
Focus on Seed and Early
Start-ups
Based on CVC fund
competences
Governance
Compensation
Portfolio
Start-ups Support services
Internal corporate resources
Fixed + Bonus on Strategic KPI
Enabling/ Driving investment
Focus on Expansion and Later
Start-ups
Based on Corporate Start-ups
synergy
CVC Models in a Snapshot & Case Analysis
competences
IRR, ROI
Success Measures
synergy
Measurements of direct
strategic inputs
Healthcare 95% Business/Cons umer/Retail 3%
Case Analysis 1
Corporate:
Johnson&Johnson
Year of foundation:
1973
Mission
«JJDC determines the success of an investment’s performance not only in financial returns, but also in the viability of
providing strategic
growth options for Johnson & Johnson».Maximum Investment (MM):
€ 4.16
N
°
°
°
°
of Companies currently in Portfolio:
224
Portfolio Strategy
With a specific focus on Healthcare
In particular
Medical Devices &
Geographical Distribution
IT 1% 95% Other 1% Europe 10% Israel 5% North America 84% JJDC invests primarily in North America and Europe. Johnson & Johnson».Source Corporate Venture Capital Fund Profiles
O p e ra ti o n a l lin k EMERGENT DRIVING
Source Dow Jones
Medical Devices & Diagnostics
Pharmaceuticals & Biotechnology Consumer Products
Source Corporate Venture Capital Fund Source Corporate Venture Capital Fund Profiles
Structure and Investment models
Seed
4%
Seed
4%
Early 17% Early 17% Asia 1% Expansion 20% Expansion 20%Later
37%
Later
37%
Investment Stage
JJDC considers all the investment stages.
O p e ra ti o n a l PASSIVE ENABLING
Source Dow Jones
Portfolio Strategy
With a specific focus on IT, Mobile, Energy and Healthcare
In particular
Corporate:
Year of foundation:
2009
Total Assets Under Management:
$1,5 billion
N
°
°
°
°
of Companies currently in Portfolio:
209
Mission
«We look for entrepreneurs with a healthy disregard for the impossible. Our team is so divers and so is our appetite for investing – we work with companies in virtually any sector and at any stage of the journey. We
Case Analysis 2
In particular
Medical Devices & Diagnostics
Biopharmaceuticals & Biotechnology, Energy,
Consumer Products, Media
Source Corporate Venture Capital Fund Profiles
Geographical Distribution
Source Dow Jones virtually any sector and at any stage of the journey. We
invest for financial return».
Source Corporate Venture Capital Fund Profiles
Google invests primarily in North America, with
particular focus in California. O p e ra ti o n a l lin k EMERGENT DRIVING
Structure and Investment models
Seed
17%
Seed
17%
Early 43% Early 43% Expansion 16% Expansion 16%Later
19%
Later
19%
Source Dow JonesInvestment Stage
Google considers all the investment stages.
O p e ra ti o n a l PASSIVE ENABLING
Our Proposal
Vertical Corporate Venture Capital
Italian Key Elements for CVC prospects
Few but important CVC players
Italian structural aspects
100 industrial districts
Industrial overview
Media
(2014) (2000) (2002)
Corporate Investor: 20% of
the investment (27% for social and green start-up)
100 industrial districts SME’s = 99,9% Large companies = 0,1% 34th place
Tax deduction
VC & PE Attractiveness Index (OECD - 2014)Media
for
Equity
(2013) (2013)Italian competitive market
FashionAutomation Furniture Agroindustrial Other Italian districts
Italian Scenario
Following the introduction of a Tax deduction
on investments and due to its industrial
structure, Italy would need a CVC model
appropriate to its characteristics.
social and green start-up) investment upper limit €1.800.000.
Individual Investor: 19% of
the investment (25% for social and green start-up) investment upper limit €500.000.
Our Proposal: Vertical Corporate Venture Capital
Vertical Market
Second Level
.
Mission: Develop a cross national and cross industry
FUND HIGHLIGHTS
FUND HIGHLIGHTS
Public Investors
We propose to apply the Vertical Corporate Venture Capital as the best way to introduce this financial instrument and exploit the potentiality of the Italian production system that is based on industrial districts and many SME’s.
Fund
Portfolio
VERTICAL
CORPORATE
FUND
First Level
Suppliers
Manifacturer
Fund Leaders
Second Level
Suppliers
START UP #1
Core Sector
START UP #N
Cross Sector
national and cross industry innovation network to speed up investor innovation process.
Key aspects:
External Subsidiary fund
Cross industry investments to
exploit complementarities and synergy for the all the investors.
Strong investors commitment
Public Investors
START UP #2
Core Sector
Our proposal: Vertical Corporate Venture Capital
Distribution
Cross Sector
Strong investors commitment for start-up BusinessDevelopment.
Corporate resources to fill start-up competence gap.
Financial Institution
Strategical Valuation. Composed by
CTO, CIO and Business Developer of fund partner companies.
AD Selection and Investment
Approval. Composed by CEO and CFO
of fund partner
Strategic
Strategic
Vertical CVC Governance
Investment Board and Strategic Committee are designed to balance investors financial commitment and minor investor boardroom presence.
Strategical Valuation and Fund Coordination
fund partner companies.
of fund partner companies.
Start-up Investment Selection and Negotiation.
Composed by External Professionals.
Scouting
Team
Scouting
Team
AD
AD
Investment
Board
Investment
Board
Strategic
Committee
Strategic
Committee
Flexible teams established ad
Supporting
Teams
Supporting
Teams
Flexible teams hoc in order to help start-up established adgrowing up according to their
organizational and business needs. Composed by Partner Firms competencies. Engineering & R&D Engineering & R&D Business Development Business
Development
Marketing
Marketing
Finance
Finance
HR
HR
Our proposal: Vertical Corporate Venture Capital
Teams
Teams
Vertical CVC: Investment Decision Process
Scouting Scouting
Scouting Team
Screening
Evaluation of technoloqy,business model, market and financials.
Screening
Evaluation of technoloqy,business model, market and financials.
Due Diligence Due Diligence
Investment Board
Strategic Committee
Scouting Team
Due DiligenceChecklist to identify concrete business opportunity.
Due Diligence
Checklist to identify concrete business opportunity.
Negotiation of investment contract Negotiation of investment contract
Final Deal Evaluation
Strategic and technology evaluation of each deal.
Final Deal Evaluation
Strategic and technology evaluation of each deal.
Funding Approval
Investment board reviews each investment proposal and approves funding.
Funding Approval
Investment board reviews each investment proposal and approves funding.
Supporting Teams
Start up’s Supporting Process
According to their organizational and business needs.
Start up’s Supporting Process
According to their organizational and business needs.
Final Exit Final Exit
Vertical CVC: Automotive Example
First Level
Suppliers
2 Members:
FCA BOSCH SAMSUNG2 Members:
FCA BOSCH SAMSUNGInvestment Board
Investment Board
Second
Level Suppliers
2 Mln €VERTICAL
CORPORATE
FUND
200 mln €
40 Mln € SAMSUNG SIEMENS1 Member:
BREMBO MAGNETI-MARELLI SAMSUNG SIEMENS1 Member:
BREMBO MAGNETI-MARELLIStrategic Committee
Strategic Committee
AD and Scouting
Team
AD and Scouting
Team
Manufacturer
35 Mln € 35 Mln € Main Investor 50 Mln € 15 Mln € 2 Mln € 2,5 Mln € 20 Mln €Strategic Committee
Strategic Committee
Supporting Teams
Supporting Teams
2,5 Mln € 500 K €Three relevant dimension to evaluate the investment portfolio:
Target industries
Investment Stage
Investment Areas
Investment target industries
Investment target industries Investment stageInvestment stage
Vertical CVC: Investment Dimensions
Start-up technology/strategic value prevails over development stage in the investment decisions.
Investment areas Investment areas Investors in Automotive ecosystem Example of adjacencies Interest sector Innovation Area
HealthCare User comfort
TLC
Infotainment System
Automotive Network Control Units
Vertical CVC aims to develop a cross national industrial district.
Investors in Vertical CVC will take advantage of technology developed in adjacency sectors.
NanoTech
Contactless Locks
Material Science Innovative Materials
Goals
KPI
Number of technology agreements
Number of distribution agreements
Number of co-marketing agreements
Cost saving to shared production
Number of startups acquired by fund partners Ecosystem
network development
Vertical CVC: Compensation
Number of patents registered
Value of licenced royalties
Number of technologies collaboration agreements
Products time to market R&D
Effectiveness
Change in market share of investors technology Ecosystem Change in market share of investors technology
standards/products
Perceived investors images as innovator Ecosystem
business development
Manager MBO is strictly alligned to fund main objectives by the right mix of performance
indicators.
Surveys’ Process Results
Preparation
• Literature analysis.
• Preparation and dispatch of 2 surveys for CVC and NO CVC companies in such sectors as Utilities, Energy, Healthcare, Consumer, Financial,
Industry, IT, Media, Service and Telco.
• Literature analysis.
• Preparation and dispatch of 2 surveys for CVC and NO CVC companies in such sectors as Utilities, Energy, Healthcare, Consumer, Financial,
Industry, IT, Media, Service and Telco.
Survey
Survey
• The main 600 companies performing CVC activity and the 100 Corporate
venturing Executives taken from the ‘Global CVC Powerlist 100’.
• 2500 European companies NOT performing CVC activity taken from the ‘Amadeus’ database (Top 250 per sector for revenue).
• The main 600 companies performing CVC activity and the 100 Corporate
venturing Executives taken from the ‘Global CVC Powerlist 100’.
• 2500 European companies NOT performing CVC activity taken from the ‘Amadeus’ database (Top 250 per sector for revenue).
Report
• Elaboration of results.
• Dispatch of a CVC report showing the relative positioning of the respondents compared to the average sample results.
• Elaboration of results.
• Dispatch of a CVC report showing the relative positioning of the respondents compared to the average sample results.
Report
Surveys’ Process Results
Appendix
Further deepening:
Corporate Venture Capital Main Trends
Corporate Venture Capital Main Trends
Main Reasons to do Corporate Venture Capital
CVC Terms and Conditions
CVC Final Acts
Comparison of measures for investors and start-ups
Italian laws and fiscal aspects
Back up
Italian laws and fiscal aspects
Global CVC Investments Trend
80% 90% 100% 100.000 120.000 80% 90% 100% 7.000 8.000 9.000Global Trend of CVC investments
($ Mln)
Global Trend of Number of Deals
0% 10% 20% 30% 40% 50% 60% 70% 80% 0 20.000 40.000 60.000 80.000
% coming from CVCs Tot Investment CVC Investment
0% 10% 20% 30% 40% 50% 60% 70% 80% 0 1.000 2.000 3.000 4.000 5.000 6.000 7.000
% with Corporate involvement Tot # # of CVC deals
National Venture Capital Association: MoneyTree™ Report', Thomson Reuters – PwC 2014 National Venture Capital Association: MoneyTree™ Report', Thomson Reuters – PwC 2014
The average number of CVC deals is about 15% of VC ones.
After the dot-com bubble in 2000, total investments stabilize over 25 billions $ a year.
CVC investment represents about 8% of total investments in Venture Capital.
Global CVC Investments: Sector & Geographic Region
17,7% 27,7% 20% 25% 30% Japan; 48 Asia Pacific; 27 Oceania; 7Total Investment by Geagraphic Area
Total Investments by Sector
17,7% 1,9% 2,5% 0,9% 0,9% 1,2% 11,6% 8,2% 6,5% 9,3% 0,8% 4,0% 3,8% 2,7% 0% 5% 10% 15% 20% USA; 766 South America; 10 Europe; 155 Africa; 2 Middle East; 27 India; 36 China; 45 Japan; 48
Biotech and software industry account for more than 50% of total CVC deals.
Retailling/Distribution presents the higher average investment per deal.
USA account for more than 65% of global CVC deals distribution.
Canada; 14
National Venture Capital Association: MoneyTree™ Report', Thomson Reuters – PwC 2014
National Venture Capital Association: MoneyTree™ Report', Thomson Reuters – PwC 2014
Main reasons to do Corporate Venture Capital
4,6 4,7
Window on new market opportunities Map emerging innovations and
technical development
Strategic impact factors
Financial Goals
Overall financial results 31% CVC activity 18% 3,7 3,7 3,8 3,9 4,2 4,6
Identify and establish partnership and joint ventures Develop relationships with IVCs Provide additional revenue growth opportunities for parent companies
Develop new products Import or enhance innovation within
existing business units Window on new market opportunities
Performance of individual investments 19% Value-added contribution to business units 17% CVC output 15%
Global Corporate Venture Capital survey 2008-09, E&Y
The main CVC strategic aims deal with the increasing of company innovation level and discovering new market opportunities.
The most agreed financial objective focuses on achieving overall financial results.
3,2 3,4
Leverage internal technological developments Identify acquisition candidates
Global Corporate Venture Capital survey 2008-09, E&Y
Terms & Conditions
Benefits for
Corporate investors
It allows the investor to influence Start-ups activity taking a full voting member seat on them board.
them board. It gives investor a lot of power
because
it has veto right over Start-ups initiatives.
Investor gets the option to invest directly in a start-up with a partner reducing his financial effort.
It postpones the value of the investor’s equity simplifyng the negotiation with Start-ups.
It allows investor to defend his share when other investors decide to finance the start-ups.
ups. Investor gets the chance to be paid first in
case of such events as liquidation or company sale.
It’s a balance between the control of the Corporates and the start-ups’ freedom.
Global corporate venture capital survey 2008-2009- E&Y
CVC Final Acts
Avg VC 5,8 yr
Avg CVC 4,5 yr
Preferred Exit Strategy
Holding Period
(yr)
Global Corporate Venture Capital survey 2008-09, E&Y Global Corporate Venture Capital survey 2008-09, E&Y
Trade sale is the most common exit strategy in CVC. CVC average holding period is significantly lower than VC due to support provided with several services and extensive network.
Average CVC holding period is around 4 years.
Global Corporate Venture Capital survey 2008-09, E&Y Global Corporate Venture Capital survey 2008-09, E&Y
Comparison of best measures for investors and start-ups
Public Funding Co-funding in R&D Tax benefits Exemptions from corporate legislation Exemptions from labor law legislationTerritorial
programs Best practice
√ √ √ √ − √ Reduction of 50% of the cost
Each country is characterized by a particular measure of success for investors and start-ups.
USA √ √ √ √ − √ Reduction of 50% of the cost
for the patent application.
GERMANY √ √ √ √ − √
High level of competitiveness of the taxation and particular
benefits for companies.
ISRAEL √ √ √ − − −
Governmental support of $ 300 million for hi-tech enterprises and R&D.
CHINA − √ − √ − √ Territorial program to attract
investors in high-tech areas.
− √ √ √ − √ Tax concession for start-ups
FRANCE − √ √ √ − √
Tax concession for start-ups covers up to 30% of all annual
costs of R&D.
ITALY √√√√ −−−− √√√√ √√√√ √√√√ −−−−
Tax benefits in favor of investors and measures to
encourage start-ups.
Source: Studio I-Com per Fondazione Lily (2013), “Presenza ed impatto economico delle start-up innovative di successo: un confronto internazionale.
Innovative start-up requirements - Italy
The Decree Law, n. 179/2012 entitled "Further urgent measures for the growth of the Country", converted with
amendments by Law n. 221/2012, introduced in the Italian legislative framework the definition and the specific
requirements of innovative start-ups.
In addition, one of the following
List of requirements
Must not be listed and almost 51% controlled by individual shareholders.
Must have been incorporated for no longer than 48 months.
Must have reached total annual revenues of no more than €5 million;
Must never have distributed dividends.
Its statutory object primarily provides for the production and marketing of innovative products or services of high technological
R&D must not be less than 20% of the higher value between cost and total revenues of the innovative start-up.
No less than one third of the total labor force must be composed by employees or associates with a PhD or still attending a PhD course.
The start-up must be the owner, the licensee or the user of an industrial patent.
In addition, one of the following
conditions must be met:
List of requirements
Source: Art. 25 del D.L. n. 179/2012 converted in L. n. 221/2012.
Back up
products or services of high technological value.
Must have not been formed by a merger, corporate split or as a result of the sale of the business or business unit.
Italian measures to encourage start-ups:
Decreto Crescita 2.0
Low establishment costs and favoured system on losses.
If the requirements are met, Innovative Start-Ups benefit the following measures:
Regulations on fixed-term work more flexible than other firms.
Management incentives: stock option and work for equity.
Tax credit of 35% for permanent employment of highly qualified personnel.
Free access to the ‘Fondo Centrale di Garanzia’ for the state guarantee (up to 80%) on bank
lending without additional guarantees.
Collection of risk capital through online portals (equity crowdfunding).
Simplified procedures for liquidation and closure.
Source: Ministero dello Sviluppo economico (2013), “Per un’Italia sempre più a misura di startup: Stato di attuazione della policy a sostegno delle startup innovative a un anno del Decreto Crescita 2.0.