FirstCapital Seminar: Corporate Venturers - Friend or Foe?

London, 15 February 2001

More than 100 invited guests squeezed into the exclusive facilities of CMS Cameron McKenna’s offices for a breakfast seminar titled “Corporate Venturers - Friend or Foe?”

Jason Purcell, CEO of FirstCapital set the scene by asserting that he feels the prime factor behind the growth of Corporate Venturing activity is the need to survive during a period of disruptive technology change. However the real question is whether Corporates will be an enduring force in European Venture capital industry.

The panel for the event comprised Pierre Suhrcke, Head of Origination at Deutsche Bank eVentures, Christian Hackett, Manager with Enron Broadband Investments, Norman Fiore, Partner with the Reuter’s Greenhouse fund and Dr. Simon Murdoch, founder of Episode 1 Partners, representing both the VC industry and also speaking as a former entrepreneur.

Each of the panelists made a short presentation on their own operations, and then took questions from the floor.

What has driven corporates to set up separate funds for venture capital?

According to Pierre Suhrcke, Deutsche Bank set up DB eVentures because they wanted to derive a measure of protection from the “Digital Revolution”. Each one of their investments is strategically aligned to the needs of one of Deutsche Bank’s different divisions and the company derives enormous strategic benefit. The second major benefit to Deutsche was that having a venturing arm is a great way of helping the Bank differentiate itself in the market from the other investment banks.

Christian from Enron agreed, saying that each one of Enron’s 22 venture investments (totaling $110m) have fed directly into the goals of the greater organization which are network hardware, storage and digital content management.

What do Corporate Venturers bring to the table?

Pierre Suhrcke said that Deutsche Bank would always be a customer of an investee company. In fact DB eVentures will only invest in a start up if it has a product that can be used immediately by an internal Deutche Bank dept.

Norman Fiore of Reuters Greenhouse said that Reuters becoming a customer of the investee company was one of the aims of the fund, and of the 85 companies that Reuters has invested in, one third are selling to Reuters and a further one third are working with other companies in the portfolio. Furthermore Reuter’s most recent product, “Callens” has been built using the technology of four of the greenhouse companies.

Dr Simon Murdoch, from the venture capital perspective, agreed that for an entrepreneur corporates can be a “friendly customer” and can help open doors. However, he argued that a start-up under the wing of a large corporate is unlikely to find custom from its investor’s rival i.e. corporates may be a short-term customer but longer-term this may restrict the target customer base.

Meanwhile from the investor point of view, corporates do offer benefits to VCs, bringing technical knowledge and providing traction for their funds. However in order to avoid corporates competing with a VC and pushing up valuations Simon stressed that the more a corporate can act like a pure VC the better. So long as each investor remains professional and don’t get into an auction environment, valuations will remain sensible.

Internal Employee Buy-in

A question from the floor asked whether any of the panelists have a problem with internal ownership, because internal corporate buy-in can be a big issue for corporates.

Pierre told how, when starting up the Deutsche Bank eVentures unit, it took a great deal of time and effort to sell their division to departments in order to win support. They had to win the support of 1 or 2 key members in every department. Once they had obtained this level of buy-in, take up was easy.

Reuters Greenhouse have recently got two senior technologists (former CTO & CMO from Reuters) to come and work for them to do some due diligence, and to help them to sell internally to Reuters. This greatly facilitates uptake of Greenhouse company products. He said that the success of previous investments (e.g. Yahoo) really helps to get internal buy-in.

Christian too agreed that this was a very pertinent issue, and at Enron Broadband one person was employed full-time to be the “internal champion” of all the investee companies.

Does the need to make a financial return eclipse any benefit from a strategic investment?

At the start, Reuters look for a commercial investment rather than a capital gain investment. This was done originally with Yahoo which was originally intended as a commercial and advertising channel and most recently with Infoseek (as Reuters needed to search through large tranches of unstructured data). However the Greenhouse is not the procurement arm of Reuters, so once an investment has been made, it will be managed in exactly the same way as any venture capital investment.

Will Corporate Ventures be an enduring force in European Venture capital?

Jason Purcell pointed to data assembled by FirstCapital which indicates that since June 2000 European Corporate Venturers have raised around EUR 4,868million ($4.4 billion). This is a strong indication that the growth experienced in the USA, from $392 million in 1996 to $18 billion in 2000, will be emulated in Europe, despite the market's present cautious sentiment.

Jason went on to say "Corporate venturing offers benefits in allowing traditional companies to keep pace with fast changing technology and exploit the potential returns to be gained. While some cynics may say the corporates are jumping on the VC bandwagon having seen record returns we believe they are here to stay as a force in European venture capital.”