Corporate Venture Capital Innovation Funding

Transcription

1 PDFaid.com #1 pdf solutions online Corporate Venture Capital Innovation Funding Innovation Lab 2014 Innovation Lab: Corporate Venture Capital

2 Team Vincenzo Terracciano (Coordinator) Letizia Gabbrielli Professionals Intesa Sanpaolo Selex ES Davide Cristiano Veronica Tottone Lucia Marchisio Telecom Italia Marco Russo Gabriele Torti Academics Michele Serri Piero Tonelli Roberto Barontini Scuola Superiore Sant Anna Andrea Piccaluga Scuola Superiore Sant Anna Dream Team

3 Table of contents Definition & Mission Global Market Analysis Seeding a future growth: Investment Goal 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 Back up Table of contents

4 Corporate Venture Capital: Definition & Mission 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) 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) 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. Definition & Mission

5 CVC: Cross National Comparative Analysis CVC 2012 spending (million USD) 2571,8 >65% of CVC global number 2,77% r&d/gdp Strong public support for startups 504,3 15% of CVC global number 1,94% r&d/gdp Attractive valuation (lower median multiples than US) Fragmented tax policy 50,4 <2% of CVC global number 4,38% r&d/gdp Strong public support for high tech start-up and R&D 344,6 4% of CVC global number 1,97% r&d/gdp Developed market of later stage investments 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 USA is the main corporate venture capital market. Despite its numbers the European market is growing and present great investment opportunities. Global Market Analysis

6 Corporate Investment Goals: Strategic vs Financial Operational link EMERGENT Focus on exit value of ventures strictly related to Corporate core business Long term goal, possibility to: explore white-spaces leverage underutilized technology experiment new capabilities develop back up technology DRIVING Focus on achieving impact strategy through integration of ventures with the core business Exploitation innovation strategy, unable to produce disruptive innovation Common benefits: promoting standard, improve market share and technology efficiency CVC preferred objective 50% 15% 15% 20% PASSIVE Focus on exit value of ventures Pro-cyclic investments: opportunistic to positive economic cycle (Bull market) No immediately clear benefit for corporate BU Stakeholders ENABLING Focus on core business market proximity Exploration-exploitation innovation strategy Develop ecosystem network Stimulate corporate demand by offering complementary products/services Strategic More Strategic than Financial Financial Corporate Venture Capital, Seeking Innovation and Strategic Growth- NIST, 2008 CVC Investments strictly depend on investor s goal The strategic focus is predominant in CVC investment. CVC literature evidences investments not only strictly linked with core business but also in cross sectors. More Financial than Strategic Seeding a future growth: investment goal

7 Corporate Venture Capital Models CVC Model Key Dimensions Structure Observations Corporate/direct investments Objective : Strategic Level of Innovation: Explotation Risk of investment: Low Risk Maintains control of all investment decisions. Receive all strategic returns. Risk of inefficiency due to the absence of professional VCs. External Subsidiary Fund Objective : Primarily Strategic Level of Innovation: Explotation & Exploration Risk of investment: High Risk Greater opportunity to discover new emerging businesses and technologies. Requires greater resources and committment. External indipendent Fund Objective : Primarily Financial Level of Innovation: Exploration Risk of investment: High Risk Greater opportunity for disruptive innovation. No investment decision-making power The key is selecting the right model for the intended CVC goals. Three Key Dimensions should be considered: Objective, Innovation and Risk of Investment. Structure & Governance

8 Governance: Organization & Team Competencies Organization Report CTO 22% CFO 25% R&D 3% Global corporate venture capital survey E&Y CEO 14% Investment board 12% Business Unit 6% Business developer M&A 18% Know-How Investment Team Performance Team Technology Team Financial Team Cross Competencies: Technical, Commercial and Economical Strategic & Emerging Business Opportunities Valuation Business Performance & Results Valuation New Technology & Technical developments Valuation Financial Sustainability Valuation Compensation Fixed salary plus carried interest, 7% Only fixed salary, 5% Intel Capital Different competencies Treasury Investment Fixed salary plus company bonus, 73% Fixed salary plus bonus similar to carried interest, 15% M&A Corporate venture capital group Survey- EVCA 2012 Business Development Marketing 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. Cross Competencies are required to manage a CVC fund. Structure & Governance

9 Portfolio Strategy: Investment Key Dimensions Stage of Investment Percentage of Deals by Stage of Investment Sector of Investment Percentage of Total CVC Industry Transactions by Target Industry 4% 43% 29% Private Equity 24% Stock Market Corporate Venture Capital Entrepreneur FFF Venture capital Crowdfunding Incubator Accellerator Angels Seed Early Extension Later Consolidate PwC Money Tree report, data: Thomson Reuters 2013 Business Stage Boston Consulting Group 2012 CVC represents a link between investors in financial Markets and Investors in seed stage. The CVC investment focus is expanding. Companies explore market adjacences going beyond their core competencies. Portfolio Strategy: Investment Management

10 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. Identifying partnership/alliance opportunities Access to R&D teams and facilities Marketing, Sales and Distributions CVC Supporting Services Fundraising assistance Global expansion/ operations Global corporate venture capital survey E&Y Compared to other forms of financing, CVC can help Start-ups to fill the strategic and operative gap. Portfolio Strategy: Investments Managment

11 CVC Models in a Snapshot CVC Strategic Model CVC Financial Model Structure Internal dedicated fund External Independent fund Governance Compensation Portfolio Start-ups Support services Success Measures Internal corporate resources Fixed + Bonus on Strategic KPI Enabling/ Driving investment Focus on Expansion and Later Start-ups Based on Corporate Start-ups synergy Measurements of direct strategic inputs 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 IRR, ROI CVC Models in a Snapshot & Case Analysis

12 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». Source Corporate Venture Capital Fund Profiles Structure and Investment models Maximum Investment (MM): 4.16 N of Companies currently in Portfolio: 224 Portfolio Strategy With a specific focus on Healthcare In particular Medical Devices & Diagnostics Pharmaceuticals & Biotechnology Consumer Products Source Corporate Venture Capital Fund Source Corporate Venture Capital Fund Profiles Healthcare 95% Source Dow Jones Business/Cons umer/retail 3% IT 1% Other 1% Operational link EMERGENT DRIVING Geographical Distribution JJDC invests primarily in North America and Europe. Israel 5% Europe 10% North America 84% PASSIVE ENABLING Asia 1% Investment Stage JJDC considers all the investment stages. Source Dow Jones Seed 4% Early 17% Expansion 20% Later 37% CVC Models in a Snapshot & Case Analysis

13 Case Analysis 2 Corporate: Google Year of foundation: 2009 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 invest for financial return». Source Corporate Venture Capital Fund Profiles Structure and Investment models Total Assets Under Management: $1,5 billion N of Companies currently in Portfolio: 209 Portfolio Strategy With a specific focus on IT, Mobile, Energy and Healthcare In particular Medical Devices & Diagnostics Biopharmaceuticals & Biotechnology, Energy, Consumer Products, Media Source Corporate Venture Capital Fund Profiles Source Dow Jones Operational link EMERGENT DRIVING Geographical Distribution Google invests primarily in North America, with particular focus in California. PASSIVE ENABLING Investment Stage Google considers all the investment stages. Source Dow Jones Seed 17% Early 43% Expansion 16% Later 19% CVC Models in a Snapshot & Case Analysis

14 Our Proposal Vertical Corporate Venture Capital CVC Models in a Snapshot & Case Analysis

15 Italian Key Elements for CVC prospects Few but important CVC players Italian structural aspects (2014) (2000) (2002) Industrial overview Media for Equity (2013) (2013) 100 industrial districts SME s = 99,9% Large companies = 0,1% Italian competitive market VC & PE Attractiveness Index (OECD ) 34th place Tax deduction Corporate Investor: 20% of the investment (27% for social and green start-up) investment upper limit Individual Investor: 19% of the investment (25% for social and green start-up) investment upper limit Italian districts Fashion Automation Furniture Agroindustrial Other 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. Italian Scenario

16 Our Proposal: Vertical Corporate Venture Capital 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. Vertical Market Second Level Suppliers Fund Public Investors Portfolio FUND HIGHLIGHTS. Mission: Develop a cross national and cross industry innovation network to speed up investor innovation process. First Level Suppliers Manifacturer Fund Leaders Distribution VERTICAL CORPORATE FUND Financial Institution START UP #1 Core Sector START UP #2 Core Sector START UP #N Cross Sector Key aspects: External Subsidiary fund Cross industry investments to exploit complementarities and synergy for the all the investors. Strong investors commitment for start-up Business Development. Corporate resources to fill start-up competence gap. Our proposal: Vertical Corporate Venture Capital

17 Vertical CVC Governance Investment Board and Strategic Committee are designed to balance investors financial commitment and minor investor boardroom presence. AD Selection and Investment Approval. Composed by CEO and CFO of fund partner companies. Investment Board Strategical Valuation and Fund Coordination AD Strategic Committee Strategical Valuation. Composed by CTO, CIO and Business Developer of fund partner companies. Scouting Team Start-up Investment Selection and Negotiation. Composed by External Professionals. Engineering & R&D Business Development Marketing Finance Supporting Teams HR Flexible teams established ad hoc in order to help start-up growing up according to their organizational and business needs. Composed by Partner Firms competencies. Our proposal: Vertical Corporate Venture Capital

18 Vertical CVC: Investment Decision Process Scouting Screening Evaluation of technoloqy,business model, market and financials. Due Diligence Checklist to identify concrete business opportunity. Scouting Team Negotiation of investment contract Final Deal Evaluation Strategic and technology evaluation of each deal. Funding Approval Investment board reviews each investment proposal and approves funding. Start up s Supporting Process According to their organizational and business needs. Strategic Committee Investment Board Supporting Teams Final Exit Our proposal: Vertical Corporate Venture Capital

19 Vertical CVC: Automotive Example Second Level Suppliers 2 Mln 35 Mln 35 Mln First Level Suppliers 15 Mln 40 Mln Manufacturer Main Investor 50 Mln VERTICAL CORPORATE FUND 200 mln Investment Board 2 Members: FCA BOSCH SAMSUNG SIEMENS 1 Member: BREMBO MAGNETI-MARELLI AD and Scouting Team 2,5 Mln 20 Mln Strategic Committee Supporting Teams 500 K Our proposal: Vertical Corporate Venture Capital

20 Vertical CVC: Investment Dimensions Three relevant dimension to evaluate the investment portfolio: Target industries Investment Stage Investment Areas Investment target industries Investment stage Investors in Automotive ecosystem Example of adjacencies Interest sector Innovation Area HealthCare TLC NanoTech User comfort Infotainment System Automotive Network Control Units Contactless Locks Start-up technology/strategic value prevails over development stage in the investment decisions. Investment areas Material Science Innovative Materials Investors in Vertical CVC will take advantage of technology developed in adjacency sectors. Vertical CVC aims to develop a cross national industrial district. Our proposal: Vertical Corporate Venture Capital

21 Vertical CVC: Compensation Goals KPI Ecosystem network development 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 R&D Effectiveness Number of patents registered Value of licenced royalties Number of technologies collaboration agreements Products time to market Ecosystem business development Change in market share of investors technology standards/products Perceived investors images as innovator Manager MBO is strictly alligned to fund main objectives by the right mix of performance indicators. Our proposal: Vertical Corporate Venture Capital

22 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. Survey Survey The main 600 companies performing CVC activity and the 100 Corporate venturing Executives taken from the Global CVC Powerlist 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. Report Example of some respondents: Surveys Process Results

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24 Appendix Further deepening: 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 Vertical CVC Terms & Conditions Back up

25 Global CVC Investments Trend Global Trend of CVC investments ($ Mln) Global Trend of Number of Deals % % % 80% 70% 60% 50% 40% 30% 20% 10% % 80% 70% 60% 50% 40% 30% 20% 10% 0 0% 0 0% % coming from CVCs Tot Investment CVC Investment % 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 After the dot-com bubble in 2000, total investments stabilize over 25 billions $ a year. The average number of CVC deals is about 15% of VC ones. CVC investment represents about 8% of total investments in Venture Capital. Back up

26 Global CVC Investments: Sector & Geographic Region Total Investments by Sector 30% 27,7% Total Investment by Geagraphic Area Oceania; 7 25% Asia Pacific; 27 20% 17,7% Japan; 48 15% 10% 5% 0% 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% China; 45 India; 36 Middle East; 27 Africa; 2 South America; 10 Europe; 155 USA; 766 National Venture Capital Association: MoneyTree Report', Thomson Reuters PwC 2014 Canada; 14 Biotech and software industry account for more than 50% of total CVC deals. Retailling/Distribution presents the higher average investment per deal. National Venture Capital Association: MoneyTree Report', Thomson Reuters PwC 2014 USA account for more than 65% of global CVC deals distribution. Back up

27 Main reasons to do Corporate Venture Capital Strategic impact factors Financial Goals Map emerging innovations and technical development 4,7 CVC activity 18% Overall financial results 31% Window on new market opportunities 4,6 Import or enhance innovation within existing business units 4,2 CVC output 15% Develop new products 3,9 Provide additional revenue growth opportunities for parent companies Develop relationships with IVCs 3,8 3,7 Value-added contribution to business units 17% Global Corporate Venture Capital survey , E&Y Performance of individual investments 19% Identify and establish partnership and joint ventures 3,7 Identify acquisition candidates Leverage internal technological developments Global Corporate Venture Capital survey , E&Y 3,2 3,4 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. Back up

28 Terms & Conditions Benefits for Corporate investors It gives investor a lot of power because it has veto right over Start-ups initiatives. It allows the investor to influence Start-ups activity taking a full voting member seat on them board. 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. Investor gets the chance to be paid first in case of such events as liquidation or company sale. Global corporate venture capital survey E&Y It allows investor to defend his share when other investors decide to finance the start- ups. It s a balance between the control of the Corporates and the start-ups freedom. Back up

29 CVC Final Acts Preferred Exit Strategy Holding Period (yr) Avg CVC 4,5 yr Avg VC 5,8 yr Global Corporate Venture Capital survey , E&Y Global Corporate Venture Capital survey , 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. Back up

30 Comparison of best measures for investors and start-ups Each country is characterized by a particular measure of success for investors and start-ups. Public Funding Cofunding in R&D Tax benefits Exemptions from corporate legislation Exemptions from labor law legislation Territorial programs Best practice USA Reduction of 50% of the cost for the patent application. GERMANY ISRAEL High level of competitiveness of the taxation and particular benefits for companies. Governmental support of $ 300 million for hi-tech enterprises and R&D. CHINA Territorial program to attract investors in high-tech areas. FRANCE ITALY Tax concession for start-ups covers up to 30% of all annual costs of R&D. 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. Back up

31 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. List of requirements In addition, one of the following conditions must be met: 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 value. Must have not been formed by a merger, corporate split or as a result of the sale of the business or business unit. 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. Source: Art. 25 del D.L. n. 179/2012 converted in L. n. 221/2012. Back up

32 Italian measures to encourage start-ups: Decreto Crescita 2.0 If the requirements are met, Innovative Start-Ups benefit the following measures: Low establishment costs and favoured system on losses. 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. Back up

33 Vertical CVC: Terms & Conds Dilution Protection It protects start-up s owners avoiding equity reduction in case of external investor capital participation. Direct coinvestment option It allows 2 or more industrial partners of the fund to invest together whether avoiding possible conflicts or giving more financial resources to the smallest partners. Liquidation preference It helps protect Corporates (even the Small and Medium ones) from losing money by making sure they get their initial investments back before other parties. The 3 best terms and conditions to be applied to protect and benefit Corporate, especially the smaller ones, and Start-ups. Our proposal: Vertical Corporate Venture Capital