Considerations for a sustainable corporate venture program by Robert Ackerman, Allegis Capital
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Reputation is Key to the Success/Failure of a CVC Program * Corporate Venturing is Here to Stay * Increased Scrutiny Requires Deliberate Steps * Model will Evolve Based on Lessons Learned * Working with the Venture Community is Critical * Every Transaction, Every Engagement, Every Partnership contributes to the Corporate Reputation
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Considerations for a sustainable corporate venture program by Robert Ackerman, Allegis Capital
- 1. Corporate Venture Capital Building a Model for Sustainability Robert R. Ackerman, Jr. Managing Director & Co-Founder © Allegis Capital
- 2. Corporate Venture Capital…. The Pace of Innovation “Accelerates & Globalizes” Corporate Innovation Models MUST Respond Critical to achieve More with Less Margin Pressures erase R & D “luxuries” Focus shifts to “nearer term” returns/results The Imperatives are Clear & Compelling Significant Shift in Value Creation to Small – Efficient Innovators Company Size 1981 1989 1999 2005 < 1000 employees 4.4 % 9.2% 22.5% 24.1% 1,000 – 4,999 6.1 % 7.6 % 13.6% 15.5% 5,000 – 9,999 5.8 % 5.5% 9.0% 8.0% 10,000 – 24,999 13.1% 10.0% 13.6% 14.8% 25,000 + 70.7% 67.7% 41.3% 37.6% Sources: National Science Foundation, Science Resource Studies, Survey of Industrial Research Development, 1991, 1999, 2001, 2006. CONFIDENTIAL & TRADE SECRET © Allegis Capital 2
- 3. Corporate Venture Capital… Dramatic Increase in Corporate Venturing a Natural Response Leveraging Brand/Market Knowledge/Distribution against Aggressive Innovation Key to Sustainable Competitive Advantage & Must be Sustainable to be Viable & Effective Unfortunately…. A History of Starts and Stops 15.7% 16,506 Calculated Percentage of 15.0% Dollars Coming 8,107 from CVCs 12.1% 4,916 8.3% 7.7% 8.1% 8.8% 6.5% 6.6% 6.6% 7.3% 7.3% 8.4% 8.6% Total CVC 5.2% 6.2% 6.5% 1,934 1,285 1,493 1,527 1,945 2,442 2222 1428 1972 1852 1,706 Investment $M 414 700 969 „95 „96 „97 „98 „99 „00 „01 „02 „03 „04 „05 „06 „07 „08 „09 „10 ‟11Q3 The Challenge: Impedance Mismatch Corporations Driven by Short Term Results & Low Risk Tolerance Venture Innovation is Inherently Volatile – Failure is a FACT! Lemons Ripen Fast – Success Takes Time CONFIDENTIAL & TRADE SECRET © Allegis Capital 3
- 4. The Challenges… The “Easier” Ones People – Finding, Holding, Compensating the “Right” People Respected Corporate Navigators Trust Agents – Inside & OUTSIDE the Corporation Standard Rotation of Staff can be a Killer This is a Relationship & Experience Driven Business Strategic Engagement & Shared Ownership Sustainable “C” Level Support Engaging Key Power Brokers in the Process R & D can see the Venture Process as Competitive Line of Business Management MUST be Champions THE CFO Hates This Idea Financial Volatility – Lack of Predictability Being Seen as a Value-Added Partner by the VC Community Stability, Transparency, Reliability, Consistency CONFIDENTIAL & TRADE SECRET © Allegis Capital 4
- 5. The Big Challenge… Alignment of: Capital Deployment Tolerance for Volatility (& Risk) Stage of Investment Ability to Derive Strategic Value Ability to Deliver Strategic Value Balancing Risk/Reward Building a Network of Trusted & Active Co-Investors Need to See “The Best” Deal Flow The 3-Tier Model A Platform for Long Term Sustainability CONFIDENTIAL & TRADE SECRET © Allegis Capital 5
- 6. Strategy for Managing Risks… High High Low Capital Commitment Corporate Leverage Valuation Volatility Venture Funds Low Low High CONFIDENTIAL & TRADE SECRET © Allegis Capital 6
- 7. Tier 1 - Partner with Venture Funds ($)… Balancing Strategic Goals with Risk Management Develop a Broad Understanding of Innovation and Market Dynamics Work with Partners “Inside the Industry” Leverage other People‟s Money and Talent Cast a Wide Net Place Holders for Potential Direct Investments Manage Risk Historical Financial Returns CONFIDENTIAL & TRADE SECRET © Allegis Capital 7
- 8. Rules to Implement Tier 1 Strategy… Careful Selection of Venture Capital Funds Complimentary Investment Focus History of Successful Corporate Venture Capital Collaboration Process to Ensure Close Collaboration Appropriate Staffing (Skills and Experience) Deal Flow from Venture Firm Access to Portfolio Companies Check the References – Other Corporate Investors Commit Resources to the “Partnership” CONFIDENTIAL & TRADE SECRET © Allegis Capital 8
- 9. Strategy for Managing Risks… High High Low Capital Commitment Corporate Leverage Valuation Volatility Direct Investments Late Venture Funds Low Low High CONFIDENTIAL & TRADE SECRET © Allegis Capital 9
- 10. Tier 2 – Select Direct Investments ($$)… Applying Corporate Leverage Where & When it Can Drive Value Opportunity to Watch Companies Develop Venture “Partner(s)” Should be an Asset Develop a Shared Strategic Vision Participate in Value Being Created through Partnership and Shared Equity Company is Focused on Execution Corporate Partners Add Significant Value Development Risk is Mitigated CONFIDENTIAL & TRADE SECRET © Allegis Capital 10
- 11. Rules to Implement Tier 2 Strategy… Align Investment Criteria with Corporate Strategy “What we Want” – “What we can Deliver” Develop Rigorous Processes and Analytics “How do we Measure Success” – Financial & Strategic Returns Finance through Operating Unit Budgets Treat as an R & D Expense if Possible, or Separate Corporate Venture Budgets Develop Relationships with Management & Other Investors It’s a Club – Driven by Trust & Predictability Think about the Value Transfer to Operating Units Secure Operating Unit Buy-In / Sponsorship CONFIDENTIAL & TRADE SECRET © Allegis Capital 11
- 12. Strategy for Managing Risks… High High Low Acquisitions Capital Commitment Corporate Leverage Valuation Volatility Direct Investments Venture Funds Low Low High CONFIDENTIAL & TRADE SECRET © Allegis Capital 12
- 13. Tier 3 – Acquisitions ($$$)… Critical to Corporation’s Market Position Builds on Knowledge Gained through Venture and Direct Investment activities Key to Significant Competitive Advantage Purchase what you Perceive to be Core Asset before a Competitor M&A – Corporate Development Function Remember – The Acquisition is the Easy Part Most Acquisitions FAIL – Strategically and Financially CONFIDENTIAL & TRADE SECRET © Allegis Capital 13
- 14. Rules to Implement Tier 3 Strategy… Can be Stage Agnostic – But Typically More Mature Opportunities The More Disruptive – The Earlier the Acquisition Need an Integration Team a la Cisco Holding Talent is the Most Significant Challenge Culture Compensation May Require Large Amounts of Capital Can be a Balance Sheet Transaction Integration Issues are the Highest Hurdle CONFIDENTIAL & TRADE SECRET © Allegis Capital 14
- 15. An Integrated Strategy… High High Low Late Acquisitions Stage of Investment Capital Commitment Corporate Leverage Valuation Volatility Direct Investments Late Venture Funds Low Low High Early CONFIDENTIAL & TRADE SECRET © Allegis Capital 15
- 16. Summary… Corporate Venturing is Here to Stay Key to Sustainable Competitive Innovation Increased Scrutiny Requires Deliberate Steps Alignment of Risk and Reward Model will Evolve Based on Lessons Learned Corporations should play to their Strengths Corporations will need to Re-think Structure & Process Working with the Venture Community is Critical Alignment of Interests, Skills, Resources while Managing Risks Every Transaction, Every Engagement, Every Partnership Contributes to the Corporate Reputation Reputation is Key to the Success/Failure of a CVC Program CONFIDENTIAL & TRADE SECRET © Allegis Capital 16
- 17. Questions? Robert R. Ackerman, Jr. Managing Director & Co-Founder ackerman@allegiscapitsal.com © Allegis Capital