AY2015 RCAPS SeminarAsia Pacific University

October 27th, 2012

Masa IshiiManaging Director –AZCA, Inc.

Visiting Professor –Waseda University Business School

Visiting Professor –Shizuoka University Graduate School of Engineering

Corporate Venturing and Open Innovation A Perspective from Silicon Valley

Silicon Valley Landscape

1

Silicon Valley’s Geography

2*- The term “Silicon Valley” was coined in 1971 by Don Hoefler in the column articles ”Silicon Valley in the USA” in the magazine Electronic

News.

50 Miles

Waves of High-technology

3Source: AZCA, Inc.

1950 1960 1970 1980 1990 2000 2005

Telecommunications, Internet

Semiconductor, IC

Computer Systems, Peripherals

Software

Healthcare 1.0

Nanotechnology

Greentech

World’s Defacto

Standards

1939

Healthcare

2.0

Pre-Internet age Internet age

Silicon Valley Today

4

People with diverse cultural background• 37% of the people are foreign born

• 50% of the people speak languages other than English at home

• 55% of engineering professional are foreign born

High education level• Universities and research institutions such as Stanford University, UC Berkeley,

PARC, SRI International, Lawrence Berkeley National Labs, etc.

• 44% of people have bachelor or higher degrees (US average 27%)

Abundant financial source to back venture activity• $24.2B VC money invested in 2014 - 48% of US total ($49.3B)

• Over 300 VC firms – 635 VC firms in total US in 2014

Hub of high-tech industries• 17,000 high-tech companies

• 200 thousand people working in science and engineering out of 1.5 million jobs

(total population 2.6 million)

• 0.8% (2.6 million) of the US population, 14% of patents registered

Source: NVCA; Silicon Valley Indicators; AZCA estimate

VC Investments by State

5Source: NVCA

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 2000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

100% ($Billion) =

8.0 105.0 23.2 27.6 32.1 30.4 20.4 23.4 29.9 27.6 30.1 49.3

California

Silicon Valley

Other California

New England

Other Region

Midwest

Texas

NY Metro

Northwest

Innovation Ecosystem of Silicon Valley

6Source: AZCA

起業家

VC優れた大学・研究

機関

弁護士事務所

会計事務所

コンサルタント

ヘッドハンター

投資銀行

調査会社

etc.

Entrepreneurs

VCsUniversities and

Research

Institutions

Innovation Ecosystem

Incubators

Accelarators

Lawyer

Accountant

Consultant

Executive Search

Investment Bank

Research Firm

etc.

Notable Players in Silicon Valley

7

AZCA

William Hewlett &David Packard

Elon Musk

Andy Grove(3rd employee)

Pierre Omidyar(French-born Iranian-American )

Larry Ellison

Steven Jobs

Bill Gates

William Shockley

Sergey Brin

Jerry Yang

Mark ZuckerbergReid Hoffman

Source: AZCA

In essence…

8

More Money

• More people

• More information

• More technology

Accumulation of

Knowledge

Key Word 1: Openness

Openness to people with diverse background, strangers (regardless of

the affiliation, title)

Openness to new ideas (technology, solution, business model)

“Out of the Box Thinking”

Key Word 2: Tolerance for Failure

Failure = Opportunity to learn

Many, many attempts behind a few success

Low risk high return for entrepreneurs

Keys to Continued Innovation

9

Open Innovation

10Source: Henry Chesbrough

Closed Innovation Open Innovation

Most of the smart people in our field work for us

Not all of the smart people work for us, so we must find and tap into the knowledge and expertise of bright individuals outside our company

To profit from R&D, we must discover, develop and ship ourselves

External R&D can create significant value; internal R&D is needed to claim some portion of that value

If we discover it, we will get it to market first We don't have to originate the research in order to profit from it

If we are the first to commercialize we will win Building a better business model is better than getting to market first

If we create the most and the best ideas in the industry, we will win

If we make the best use of internal and externalideas we will win

We should control our intellectual property (IP) so that our competitors don't profit from our ideas

We should profit from others' use of our IP, and we should buy others' IP whenever it advances our own business model

Closed Innovation vs. Open Innovation

11Source: Henry Chesbrough

A Couple of Cases

12Source: GE, Samsung

GE

• Ecoimagination challenges

• Partnership with LocalMotors (https://localmotors.com )

• Partnership with FirstBuild (https://firstbuild.com )

• “This global co-creation paired with a microfactory on site will

innovate and bring products to market faster than ever before.”

-- Chip Blankesh, CEO of GE Appliances

• GE Open Innovation (www.ge.com/about-us/opneinnovation)

Samsung

• Samsung Open Innovation Center (www.samsung.com/us/ssic/ )

• Partnership Team

• Venture Group

• M&A Team

• Accelerators

Japan’s Case (many closed)

13

Lost position of

Japanese

corporations in the

world market (esp.

electronics)

• Too much vertical

integration (“Black Box”)

• Japan market first,

overseas market second

• Lack of ecosystem level

business model

• Lack of top-down decision

making process

Lack of open

innovation thinking

R&D and Alliance (Open Innovation)

Source: AZCA analysis14

Method of R&D InvestmentUniqueness

of technology

Speed of Development

Risk

Licensing in Low Low High Low

Contract R&D Medium Medium High Medium

Collaborative R&D Medium Medium Medium Medium

Acquisition of Venture

High High Medium Medium

Establish own R&D Organization

High High Low High

Alliance with

ventures,

universities

and research

institutions

Corporate Venturing in Silicon Valley

Source: AZCA15

High

Low

Utilize local market research firms and consultants

Utilize brokers and trading companies

Utilize resident employees

Collect information by visiting from Japan

Attend exhibitions and conferences

Access publicly available information

Establish CVC

Establish Incubator

Strategic alliance with ventures (technology

licensing, equity investment, M&A, etc.) – Open

Innovation

LP investment in existing VC ｰ “Window of

Technology”

Carve-out internal project

Corporate

Venturing

Value of what

you get

Level of

resource

commitment

Corporate Venturing

16Source: AZCA

Growth Strategy

Corporate

Vision

Corporate

Strategy

Growth

Objective

Existing

BusinessNew Business

Utilization of

Outside

Resource

Internal

Venture

Corporate Venturing• To develop new businesses through

various forms of investments• Utilize outside resource as apposed to

internal ventures

• Spin out internal projects and grow as a new venture (carve-out)

• Various forms of alliance with existing outside ventures (technology licensing (Open Innovation), contract R&D, collaborative R&D, equity participation, M&A)

• Make LP investments in existing VC funds as a means to access early stage ventures

• Establish own incubation facility to allow access to new ventures with high potential to grow

• CVC

CVC

Making strategic investments into ventures. Can be

operated as an independent VC fund or operated as

a part of the corporate (necessary money is from

the corporate BS).

17

Corporate Venturing in the Value Chain

Corporate venturing can be used

Raw material supplier

Materialmaker

Set MakerComponent

maker

Research Development

Marketing

Commercialization

Distribution Channel

A Case of material industry

Source: AZCA analysis

Methodology for Corporate Growth

18Source: AZCA

Project for Strategy Development

• Derive a set of

recommendations by top-down approach Reach conclusions

in a given time frame

• Reached conclusions are

(correct) answers for today

may not be sustainable answers

in a quickly developing industry

• Effective in a steady state

industry domains

Corporate Venture Capital

• “Data mining” by bottom-up

approach Sustainable

framework that allows

continuous observation of

industry (domain) trend

• Provides a means to revise once

developed strategy

• May be able to access specific

venture opportunities in the

“deal flow”

• Effective method for new

entrants or to deal with a fast-

moving industry domain

Project Approach (Strategy Development)

19Source: AZCA

Preliminary collection of information and study enough o

be able to establish a set of hypotheses

Issue analyses (top down)

• Examine the highest level issue

• Break down issues to sub-issues (MECE)

• Further break down to sub issues, as necessary

• Establish hypothesis for each (sub)issue

Design Analysis Plan

• Clarify what analysis is required to prove the hypothesis

• Identify information sources required for analyses

• Define which team members are responsible, due date,

etc.

Analyses

• Collect appropriate information and conduct analyses

• Verify that the results of analyses proves the hypotheses

• (If many evidences found to disprove the hypothesis,

flip the original hypothesis)

Syntheses

• Position proven hypotheses as conclusion

• Combine conclusions to generate upper level conclusion

• Combine further the conclusions to generate the highest

level conclusion

Recommendation

Strategic Issue

Analysis

Synthesis

Deal flow (startups asking for funding)

stored in deal flow data base to follow up

over a long time

VC Framework for Corporate Venturing

20

Understand the big trend

in relevant fields and be

exposed to course

changing new

technologies or new

business model

Compliment its own R&D –

Virtual R&D

Enable entry into new and

rapidly growing fields –

discovery of specific

opportunities

Startups of interest

Fund portfolio (invested startups)

screening

Source: AZCA

screening

Framework for New Business Development

21

Strategic Game Board

Source: AZCA

New

Old

Technology

Market

Old New

Technology

S-Curve

New

applications

Current

Business

New Business

in the future

New organization,

new people, and new

money required

Can be developed

based on the existing

infrastructure

Discussion

22

Mr. Masazumi (“Masa”) Ishii is a Managing Director of AZCA, Inc., a professional firm based in Menlo Park, California, which provides consulting and investment banking services to technology based companies to achieve their corporate development objectives in the Asia-Pacific markets. Based on his over twenty-five years of experience as a professional in international business and high technology, Mr. Ishii has supported numerous companies in North America, as well as Japan and other parts of Asia, in formulating and implementing their strategies on international businesses and new venture development.

Mr. Ishii is also an active investor in emerging high technology companies. He served as a Managing Director of Noventi until 2010 as its Venture Partner until 205. Founded in 2002, Noventi manages early-stage technology venture capital investment funds. Noventi’s second fund, launched in 2006, targets the Greentech space. To date, Noventi has invested in early stage companies in the biodiesel, thin film PV, lighting control, and small wind areas. He is currently in the process of forming a strategic VC fund in the area of Healthcare.

Prior to establishing AZCA in 1985, Mr. Ishii was a senior management consultant at McKinsey & Company, Inc., where he planned and managed projects for numerous corporations in Japan, Europe and the United States, focusing on international diversification strategies. He was an active member of the firm’s Technology Practice and Electronics Practice. He was also instrumental in developing the firm’s Pacific Rim Practice in providing East-West links for companies entering new markets and establishing businesses on both sides of the Pacific.

Before joining McKinsey, Mr. Ishii was an influential contributor in the computer industry for more than a decade, including eight years with IBM in Japan. While at IBM, Mr. Ishii was involved in a broad range of technical and management activities, and co-authored two books on IBM’s database and data communications architecture.

Mr. Ishii serves on the board and the advisory board of several multinational companies. He also served or serves on the board of various associations, including the Japan Society of Northern California and the Japanese Chamber of Commerce in Northern California (President in 2007). He was a member of the US-Japan Innovation and Entrepreneurship Council.

He is a frequent speaker and writer on issues involving innovation and entrepreneurship as well as international corporate development, and is a well-recognized member of the Pacific Rim business infrastructure. He was also a Senior Executive Advisor to PARC (Palo Alto Research Center), a Xerox company, until 2012. He is a visiting professor at Waseda University Business School and at Graduate School of Engineering, Shizuoka University.

Mr. Ishii holds a Bachelor of Engineering in mathematical engineering and instrumentation physics from the University of Tokyo and a Master of Science in computer science from Stanford University.

Masa Ishii

23