Developing UK Growth Companies: A Case for Corporate Venturing

Developing UK Growth Companies: A Case for Corporate Venturing

The Role of Corporate Venturing Corporate Venturing is the investment by established businesses of corporate cash and / or resource into early stage technology businesses, with the win / win objectives of increasing the established business’s access to innovation and providing the early stage technology business with a channel to market. According to EY.com, as of April 2016, there were approximately 1,300 corporate venture funds worldwide and in 2015 US$28b of corporate venture capital (CVC) flowed into over 1,300 deals across a range of sectors. It was also noted that as the average lifespan of a company gets shorter – from 35 years in 1980 to 20 years in 2020 – “companies are investing in the so-called “bleeding edge” of innovation through corporate venture funds.” Globally, corporate venture capital groups participated in $32.1B of funding across 1,791 deals in 2017. Uschi Schreiber, EY’s Global Vice Chair ‒ Markets, goes on to add: “Innovation is crucial in today's marketplace, but turning disruptive ideas into reality is not always what large organizations are best at. The conditions that foster it – like small team sizes, cultures that encourage experimentation and failure, and a bias towards non-conformity – are not generally found to be flourishing in multi-billion dollar mature companies. CVC can be a route to bringing the outside in to make innovation real.” This white paper has been created as a collaboration between Charles Breese, director of Larpent Newton, and Hardy Giesler, director of CFPro Ventures, and aims to highlight Corporate Venturing as a growth opportunity for UK business in an increasingly challenging economic climate. In Part I of this document, Charles explores Corporate Venturing from the standpoint of a long-term investor while in Part II, CFPro Ventures Director Hardy Giesler discusses the hurdles faced by both parties involved in a corporate venturing transaction and how they assist the overcoming of those hurdles.

PART 1: The case for corporate venturing from the standpoint of a long-term investor: Charles Breese For the last 35 years Charles has focused on investing in B2B UK disruptive technologies that have global application (i.e. exporters), competing on value not price (i.e. they improve the productivity of their direct and indirect customers) and have a business model which produces a growing stream of recurring income. He refers to such companies as SMARTCO’s, - an analogy equivalent to the ‘rising tide which lifts all boats’ – an aphorism associated with the idea that improvements in the general economy will benefit all participants in that economy, and that economic policy, particularly government economic policy, should therefore focus on the general macroeconomic environment first and foremost. The Key Characteristics of SMARTCO’s

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Commercialising game changing technology with the potential to provide solutions to global problems ie exporters.

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Providing economic benefits to their direct and indirect customers i.e. competing on the basis of value rather than

price, through improving customer productivity.

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A team containing senior industry relevant

experience gained within a large corporate

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Potential to be grown to a value of at least £100m, and significantly beyond that figure

with successful ongoing execution of the strategy.

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The business must have the ability to build partnership

relationships with customers, based on

exceptional knowledge. They must also be prepared to work with customers at the product development stage through to

volume manufacturing.

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Pursuing a ‘product as a service’ business model

thereby generating a growing stream of predictable income,

resulting in less resource needing to be deployed on

ongoing lead generation (which provides no value to customers) and more resource on product development (which benefits

customers).

An example of a long-established SMARTCO is Arm Holdings, a British multinational semiconductor and software design company, now owned by SoftBank Group and its Vision Fund). “Every so often, I come across a business which is playing a role in the process of developing SMARTCO’s”, he mentions. “Recently, I re-discovered (albeit I have known one of the founders for over 30 years) CFPro Ventures which seeks to help growth companies access talent and funding. They also help established businesses to access innovation - the latter is a service to companies seeking to use corporate venturing as part of their toolkit for achieving growth. Part I of this article sets out why I, as an investor, believe that corporate venturing has such an important role to play in strengthening the UK economy.”

The UK is an excellent developer of disruptive technologies but over many years has generally been weak at commercialising them, thereby not realising their full potential. Readers may ask why this matters, since many of us live perfectly comfortably as we are. I invest in growth businesses which are net exporters because:

1 Through a toxic reliance on borrowing which in turn has led to asset price inflation, the post WWII baby boomers are bequeathing to today’s youngsters a very challenging outlook. In order to be able to look my children (aged in their twenties) in the eye, I feel the need to be able to demonstrate that I invest in a way which will improve the economy for their generation through increasing both exports and also the pool of higher quality jobs.

2

The position described above is exacerbated by two other factors, namely: • The onset of the 4th Industrial Revolution

[www.weforum.org/agenda/2016/01/the-fourth-industrial-revolution-what-it-means-and-how-to-respond/] which is going to involve a huge amount of change for most of us e.g. driverless vehicles, personalised medicine, automation etc. One of the key impacts will be that many of today’s large companies will not survive in their present form, with consequences for both their employees and their shareholders;

• The impact of Brexit has seen a significant weakening of sterling, which is a potent challenge for an economy which has consistently run a trade deficit.

The UK’s existing business base simply cannot, on its own, solve the problems described above. However, as a nation, we have an amazing opportunity to build businesses which develop productivity enhancing tools capable of both improving productivity in the UK and also of being sold internationally to generate exports.

In order to realise this opportunity, we need to recognise that:

1. There are many more early stage disruptive technology businesses than there are management teams who understand how to build a business from very early stage into a sizeable business. This means that the scarce management resource needs to be shared across the early stage companies targeting similar markets - in other words, there is a need for the return of the highly focused mini-conglomerate.

2. One of the most expensive and time-consuming activities for an emerging business is winning customers. This challenge can be ameliorated by the emerging business developing a win/win relationship with an established business which (a) already has relationships with the customers being targeted by the emerging business and (b) is looking to access innovation to enhance the value which it can provide to its customers.

“As an investor, I like investing in profitable SMARTCO’s which are undertaking developments which have the potential to provide

transformational growth in profitability.”

One such example that Charles refers to is AIM-listed Omega Diagnostics, in which Charles is a shareholder, a healthcare diagnostics company working in the Allergy, Food Intolerance, and Infectious Disease sectors. An example of Omega Diagnostics’ corporate venturing was the 2012 exclusive licensing from the Burnet Institute in Australia, for a point of care diagnostic IP that measures the level CD4 in HIV patients. This IP stands to bring the benefit of identifying which HIV patients need treatment and which do not. This data can save significant cost by, inter alia, avoiding treating patients unnecessarily. The work to convert the academic IP into a ‘commercialisable’ product has involved significant scientific challenges, with CE marking being achieved in November 2017. Modest sales are expected through to March 2019, with significant growth anticipated thereafter once World Health Organisation approval has been obtained. Unless the Burnet Institute had found a commercial third party to collaborate with, its IP would have stood very little chance of benefiting both patients and taxpayers.

PART 2: Implementing a corporate venturing strategy: Hardy Giesler

Should we?

“The first question your organisation is likely to ask could be: Is this right for us? I think the starting point has to be ‘yes’, since there are few markets and industries in the UK where technology and new ways of working are not going to have a significant impact.”

The United Kingdom has a track record of successful inventions. Not only is our history filled with products that have become staple requirements around the world, but as recently as June 2017, the annual Global Innovation Index ranked our performance as 5th in the world.

You may recall that Isaac Newton invented the reflecting telescope, Michael Faraday the electric motor, Alexander Graham Bell the telephone, John Logie Baird the television and Tim Berners-Lee the World Wide Web in 1989. Add to that cement, the toothbrush, hydraulic press, steam engine, chocolate bar, hypodermic syringe, pneumatic tyre, thermos flask, electric vacuum cleaner (twice!), disk brakes, cats-eyes, jet engine, electronic programmable computer, hovercraft, floating glass, hip replacements, carbon fibre, the collapsible baby buggy and the ATM.

It’s fair to say that the UK does not lack initiative and creative thought. The UK’s ability to innovate is recognised globally and continues to attract significant investments. At the same time, product development cycles are shortening, making it even more important to be involved, and to do so from the early stages of development. This is not an area that corporations cannot afford to ignore. But how do you persuade your board to invest? Here are some reasons to consider: Increase your visibility of game-changing

technologies and developments: The speed with which new technologies are being introduced is increasing. Even more traditional industries, such as hospitality, are not immune – as Airbnb has shown. While corporate venturing is no guarantee of gaining visibility of all new developments, carefully selected ventures will result in deeper insights into relevant developments.

Build new revenue streams, augment existing

ones: Successful ventures will provide new revenue streams, typically with higher margins. You will have access to products and services with high-growth potential. In addition to this, carefully selected ones will also increase sales of existing products and services, through synergies in client base, product differentiation, reduced cost of selling and supply chain integration. One of the original examples of corporate venturing goes back to 1914, when Pierre S. du Pont, President of chemical and plastics manufacturer DuPont, invested in a still private 6-year-old automobile start-up named General Motors. Not only was this an excellent investment with stocks increasing in value seven-fold over the course of World War I – the cash injected also expanded the demand for DuPont’s own goods, including artificial leather, plastics, and paints used by GM in their cars.

In regulated industries, corporate venturing can provide access to associated but non-regulated revenue streams with higher margins and growth potential. And if you’re not engaged, your competitors may well be.

Attract and retain talented people:

In June 2017, Larry Alton wrote in Forbes that ‘by about 2020, nearly half the working population will be composed of millennials, and individuals within this generation will be starting and managing their own companies more frequently’. The next generation seems to place more value on fulfilling the creative, innovative and entrepreneurial aspects of their career. It is also interesting to note that well-known shared workspace business WeWork is being used as a resource by large corporations to provide working space - not as a temporary measure but as a means to provide a stimulating working environment to attract young, talented people. The importance of catering for millennials is recognised. Through corporate venturing, your millennials will have the opportunity to identify ideas for their employers to consider. It also offers them the opportunity to participate in growing young ventures, providing a more stimulating working environment.

How to Get Started Corporate Venturing is not new – corporate venture capital can be traced back to the earliest days of America’s business giants. Much has been written about it – a good example is Josh Lerner’s article in the October 2013 issue of Harvard Business Review (https://hbr.org/2013/10/corporate-venturing) where he discusses some of the earliest Coporate Venture Capital adopters. A few golden rules when formalising your strategy are: i Focus on products and services that are strategically aligned to

your business Investments should meet both strategic and financial goals. Apart from the benefits of synergy and growth at later stages, corporate venturing is likely to be challenged at annual budget reviews – someone is likely to ask: ‘why are we doing this again?’

i Commit to the programme and accept that start-up environ-

ment is likely to be very different from your corporate environment

Make a commitment – ask a Board member to take personal responsibility for the programme. Clearing a corner of an office for the Corporate Ventures team is not going to work. The challenges around culture, speed of decision-making and compensation models are well-documented. Corporate Venturing has to be managed as a stand-alone programme, run by an experienced team. i Seek help CFPro Ventures run a corporate venturing programme and will manage the whole process for you – from identifying potential targets, helping them prepare for their introduction to you and managing their growth on your behalf. With over 80 highly experienced people in our Partner Network, we have the necessary resources to support young ventures. We can also manage a programme of involvement of your people, providing valuable exposure and learning experiences.

So, how do we improve your success rate? The CFPro Ventures team of over 80 Partners, representing over 2,000 years of experience, has learnt the following: We focus on the people, not just the idea:

We see a large number of new ideas and many of these are clever, clearly differentiated and some are market-tested. In supporting your selection, we will focus on the person or team behind the idea. Ultimately it is their creativity, their ability to learn, stamina and sheer determination that will make the difference.

We test the business plan:

There is only one opportunity to create a strong first impression. Corporations will ask some challenging questions and if the business plan is not developed in detail, it will show. Generating quality investor material - such as an Information Memorandum - requires a solid business plan. The majority we see require significant amounts of work.

We provide day-to-day support:

Bringing a new product or service to market will have significant challenges. Issues that appear to be “show-stoppers” will be there on a regular basis - sometimes daily. By providing support in areas where functional expertise is required, CFPro Ventures enables the management team to focus on areas they excel in – monitoring the competition, developing client relationships, understanding markets and developing products or services. Our Partner Network will focus on the ‘business infrastructure’ – areas such as protecting IP, tax, financial reporting, corporate governance, regulatory requirements, systems, developing the supply chain and creating the right operating culture.

We help ventures through failure and rejection:

Being an entrepreneur and business leader can be a lonely place, especially at times of failure and rejection. The team will need support from people who have been there and done that. The Dyson story is a good example - in 2016, the company recorded sales of £2.5 billion and generated a record £631m of earnings before interest, tax, depreciation and amortisation. That’s a great headline, but James Dyson produced 5,127 prototypes over 15 years before his vacuum cleaner became a commercial success. In his own words: “There are countless times an inventor can give up on an idea. By the time I made my 15th prototype, my third child was born. By 2,627, my wife and I were really counting our pennies. By 3,727, my wife was giving art lessons for some extra cash. These were tough times, but each failure brought me closer to solving the problem. It wasn't the final prototype that made the struggle worth it. The process bore the fruit. I just kept at it.”

We keep you focused on the end game:

Corporate Venturing is more than just being a commercial success, with both strategic and financial goals to meet. CFPro Ventures, as your representative, will ensure the venture team stays focused on your goals and objectives. As the business grows, we will prepare it for integration into the corporation.

If you’re ready to explore Corporate Venturing and need a tried and tested partner to facilitate the process for you,

then it’s time to speak to CFPro Ventures.

About Charles Breese

Charles Breese has over 30 years of experience of investing in start-up, early stage and quoted smaller companies, harnessing technology to derive competitive advantage. He previously worked for KPMG and then became the Managing Director of Larpent Newton & Co Ltd. Larpent Newton provides the resources required to assist technology-based companies wanting to develop from being unquoted through to an AIM listing and ultimately to achieving a trade sale.

About Hardy Giesler

Hardy is an experienced executive with a track record in delivering accelerated growth and performance transformation. Results have been achieved across a broad base of sectors and industries, having worked in public and private sectors, manufacturing and service industries. He has over 25 years of experience gained in more than 30 countries, particularly in EMEA, North America, Far East and the FSU. With over 30 years’ experience in general management and business development. Hardy has been involved in several divestments, acquisitions and fundraisings.

About CFPro Ventures CFPro Ventures bridges the gap between businesses seeking growth opportunities, and the investment community, through providing business support and infrastructure in a no-nonsense, transparent approach that enables and supports exponential business growth. We’re an experienced team of industry experts who also have a strong track record in interacting with financial institutions, be this during management buyouts, acquisitions, mergers, IPO’s or other forms of third party funding. Simply put, we speak the language of both industry and the investor community, and support those wishing to secure growth funding. We prepare you and your business for the process of approaching relevant investors, since there is only one opportunity to make a great first impression. We use our extensive network to help you secure the right investment. CFPro Ventures support continuous post investment until a successful exit is achieved. For more information about what we do, please visit www.cfproventures.com

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