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SENEGALESE
MUSIC and BRAZILIAN
FOOTBALL
In
Search of Global Growth in 2003
November
11, 2002
Private
Equity Group
London
Business School
Jim
de Wilde jim_dewilde@yahoo.ca
Jim
de Wilde is a Canadian venture capitalist.
Since 1993, he has divided his time between Montreal
and Toronto,
focusing on the commercialization of early-stage technologies
through JdW Strategic Ventures.
Four things happened this morning that interrupted
the writing of this speech.
First, I received a phone-call about Michael Lewis’
defense of the 1990s in the New York Times magazine yesterday
http://www.nytimes.com/2002/10/27/magazine/27DEFENSE.html
.
Second, I
received an email asking me how a venture capital fund run
by a former student of mine could justify the expectation
of an IRR of 40% + over the next five years and “did I have
any statistics?”
Third, I received a phone call from
Switzerland concerning
the lack of analysis of world funds investing in new capital
markets (specifically Burma
) and asking why there is such a gap
in “globalization” discussions between development issues
and the development of well-regulated capital markets in
emerging economies.
Fourth, I
was trying to make the translation software work to gain
a better understanding of some Chinese venture capital portfolios
that I wanted to analyze for this discussion.
SECTION
ONE: VENTURE CAPITAL
AS A SOURCE OF INNOVATION AND NEW VALUE
I
have entitled this piece deliberately.
It is meant to suggest that excellence can be found
anywhere. Brazilian
football, Senegalese music, Iranian film have different
economic models, but all represent the concentration of
a local talent which has come to penetrate the global scene.
They will not replace Microsoft or Nokia as global
business models or approach them in scale, but they represent
something quite new, the emergence of business models in
a post Lexus and Olive Tree world.
Microsoft, Nokia, Lego, Bombardier are all triumphs
of entrepreneurship, intellectual capital and innovative
business models over economic geography.
Discovering the global excellence in the next Seattles,
Tamperes, Copenhagens and Montreals represents the challenge
to the next generation of venture capitalists.
Michael
Lewis is right about another big thing:
the John Doerrs of the world are not failures, but
people whose success is so overwhelming that it is time
to go on to the next act.
The internet economy is a mature success, and yes,
it was revolutionary.
It also created billions of dollars/pounds/markkas
or value for many people including those who participated
in the share economy as employee stock-option holders or
as depositors to pension-funds.
It was a success few would have predicted in 1992.
Now is the time to dare to predict the next generation
of success.
The
1990s started off brilliantly.
Empowered with capital, innovative entrepreneurs
created value from imagination and improved human capacities.
Venture capital was exciting and sufficiently intoxicating
that some labeled it revolutionary.
By the late 1990s,
hype and greed had overloaded and corrupted the revolutionary
entrepreneurs and a system designed for well-managed companies
to obtain access had been swamped by such populist fallacies
as “day-trading”, “built-to-flip”,
“casino investing”, and MASH-unit companies, built
to be dismantled for another day.
The early 1990s were great.
Globalization meant liberating inventive talents,
linking them to capital and inventing a durable, fast-growing
economy. The late
1990s were less great, and globalization meant volatile
markets destroying infrastructure, poorly-planned business
strategies and poorly-executing management.
Michael Lewis is right in that the attempt to “criminalize”
routine if unacceptable behavior will destabilize the economic
recovery. But
those of us who want to create a global venture capital
capability must ensure that the firewalls that protect against
hype, greed and, tulip fever
are re-built to manage an era of a globalization
based on shared prosperity.
This means that expectations have to be brought into
perspective. Currently,
we are mining the globe for growth opportunities.
Conrad de Aenlle writes in the October 27th,
2002 New York Times of
the sophisticated portfolio managers scanning Eastern and
Central Europe for companies which will be advantaged by
entry into the European Community,
citing Mark Robinson at J.P.Morgan Fleming’s interest
Estonian banks like Hansabank (outperforming its
sector) and Mark Moebius’ interest in the Polish refinery
PKN. http://www.nytimes.com/2002/10/27/business/yourmoney/27EAST.html
You work hard for 40% in the current capital markets
and it would be helpful, I tell my friend, if we could manage
expectations and focus on durable growth.
There came a moment in analyst-calls in the late
1990s which we called the “China moment”, when Telco valuations
were justified by “we are only just beginning our entry
into the China market”.
Globalization required the cultivation and development
of well-regulated capital markets, matching entrepreneurs
to opportunities in Benin and Burma and ensuring that the
benefits of resource-rents and debt-to-equity swaps went
into the hands of well-managed pension funds that paid out
to their depositors. In
the shouting that constitutes globalization debates at G8
meetings, we have a long way to go to bridge the gap between
globalization as a market for soft drinks and globalization
as a network of exchange which benefits everyone and ensures
the preconditions for a shared prosperity are there in Benin,
Burma and inner city communities in the United States and
aboriginal communities in Canada.
There are few global networks and players in the
new-growth areas. Perhaps
this is as it should be, with localized expertise ensuring
that we have aggregated domestic competences into a capacity
to grow. Perhaps
the 21st Century will be characterized by a new
localism, but the ingredients of growing using best practices
from around the world remains an exciting challenge.
SECTION
TWO: SOME NEW SPACES THAT WEREN’T HOT FIVE YEARS AGO DURING
THE DOTCOM BOOM
I
have tried to pick ten interesting spaces within which well-managed,
well-financed companies may be able to build a Bausch and
Lomb or a Scientific Atlanta
(or even a Kellogg’s) and because they demonstrate
untapped potential in not-yet-commercialized areas of science.
I pick them not because they are necessarily going
to create billions of dollars in assets but because they
are overlooked spaces and therefore could create millions
of dollars in assets.
NEW
SPACE NUMBER ONE: Biodegradable
plastics and food packaging.
The market need for a more efficient means of food-packaging
drives a number of considerations about environmental technologies,
the economics of food distribution, and the new economics
of an environmentally-driven marketplace
(I am trying to avoid sustainable development in
this sentence because it seems to have become a misleading
buzzword). In Canada,
a company like www.sunblush.com
developed in an attempt to fill this space.
An interesting Australian opportunity, Plantic has
commercialized technology in this space.
(http://www.theage.com.au/handheld/2002/02/04/FFX319TP7XC
NEW
SPACE NUMBER TWO: Cheaper
safer endoscopy and safer, cheaper medicine as a driver
of innovation.
Given Imaging is not the kind of company one usually
uses to discuss interesting venture opportunities, but life
sciences investment is starting to be driven by two new
realizations: (i)
diagnostic technologies can be profitable in a world where
medicine and medicinal choices are increasingly customized;
(ii) cost savings drive the consumer (HMO, government, patient,
insurance company) decision-making in life sciences.
Therefore a promising and reliable company like the
Israeli start-up with photographic endoscopy is worth looking
at. www.givenimaging.com
NEW
SPACE NUMBER THREE:
Digital streaming and digital technology enablers.
“Waiting for broadband” has been a good way to lose
money recently. The
current Red Herring (www.herring.com)
contains an excellent analysis of the industry as it is
now structured. As
a venture capitalist, playing the technology, one can either
focus on hardware, content or innovative delivery systems.
This is a sector ripe for consolidation and requiring
a business model which allows us to wait for broadband.
Navic Networks offers an example of a technology
play, Nibblebox a content play.
Early innovators like Brilliant Digital Entertainment
(www.bde3d.com)
provide examples of the difficulty of sustaining a business
model in this space given the current pattern of consumption
of digital products. http://www.navic.tv/flash.html
www.nibblebox.com
NEW
SPACE NUMBERS FOUR The
German engineering sector and manufacturing innovation.
In Canada, we have tried to create a capacity to
invest in specialized advanced industrial technologies through
initiatives like RBC’s Primaxis (www.primaxis.com).
On manufacturing technologies, the German venture
capital scene has proven to be highly innovative.
Polytechnos is a German VC with a concentration in
this space (www.polytechnos.com
).
NEW
SPACE NUMBER FIVE Nanotechnology.
Nanotechnology is an area where the expression patient
capital needs to be emphasized.
While there is some serious investor interest, we
are still developing the applications, which may be driven
by medical research (http://www.redherring.com/mag/issue107/341.html)
and may be driven by the need for new materials for making
instinctive software/embedded software work.
www.nanomuscle.com
www.mmei.com
www.amr-ltd.com
http://biz.yahoo.com/cnw/020719/amr_tech_singapore_1.html
NEW
SPACE NUMBER SIX
Wireless video.
Wireless video and the integration of camera and
mobile phone is an area which has interested venture capitalists
and corporate strategists a great deal recently.
The extent of the market for wireless video has yet
to be demonstrated, but it drives a number of interesting
business models (and Mission:
Impossible plots).
www.hantro.com
NEW
SPACE NUMBER SEVEN Danish
wind-turbines and alternative energy technologies.
The Danish wind turbine industry (www.vestas,com)
has created a strategic engineering cluster which is worth
examining from the perspective of technological “clusters”
and the capacity of a concentrated expertise to produce
globally-competitive commercialized technologies even from
a small base. The
alternate energy space has drawn a significant amount of
investor attention. Venture
firms like www.nthfund.com
and www.hqcapitech.com
have
built a role in the space.
Other start-ups in new energy technologies include
www.metallicpower.com,
www.nxtphase.com,
www.realenergy.com
, www.serveron.com
, www.uspowersolutions.com
NEW
SPACE NUMBER EIGHT Alternative
medicine and bioproductivity.
There has been an interest
in cost-saving and effective medial products and
procedures. Alternative
medicines are a complicated investment category, but have
produced some business-models and interest in the conventional
medical research areas.
www.herbicureindia.com
www.naturalhealthlink.com
NEW
SPACE NUMBER NINE Telematics.
The business proposition that derives from improving
transportation efficiency has a number of potential business
models which derive from it.
The development of “smart roads” in the Ontario context
is definitely one of them.
www.herring.com/mag/issue110/1713.html
NEW
SPACE NUMBER TEN Police
and security technologies space.
Some of this is obvious, such as a supposed spike
in the demand for videoconferencing and enhanced encryption
technologies. Some
of it (the demand for translation technologies at fast indexing
of compressed video is more interesting to the V.C. community).
The CIA has a de facto corporate venturing unit (http://www.in-q-tel.com)
SECTION
THREE: WAYS TO
ORGANIZE VENTURE CAPITAL STRATEGIES TO MAXIMIZE OUR INVOLVEMENT
IN NEW AREAS OF GROWTH
This discussion suggests that the best venture capitalists
in the next decade will be opportunistic and surround themselves
with diverse opportunities.
This will not be just the personal network-driven
venture capital of the Silicon Valley community in the 1990s.
Nor will it simply be the sectorally-driven strategies
of successful corporate ventures like Intel Ventures and
MDS Ventures.
First,
there will continue to be examples of
growth in
telecom, life sciences and internet related activities.
These deals will continue to do well if valuations
are real, expectations are managed and the “space” is one
where there are serious opportunities to create value and
solve real problems.
Let us take five case studies that grow out of the
discussion above and show that there is still value to be
generated from the deals of the 1990s:
Example
1. www.givenimaging.com
(how do we use advanced imaging to provide cost-saving
diagnostic technologies?)
This just is the beginning of a medical sciences
investing strategy which emphasizes reliability, customization
of health management, efficiency of medical procedures as
opposed to simply commercializing headline-grabbing research
for magic bullets.
Example
2. www.ekahau.com
(wireless technologies have to enhance productivity
or they run the risk of becoming expensive gimmicks).
Productivity-enhancing uses of wireless networks
for metering, monitoring, auction-pricing all raise some
interesting opportunities in an environment where the deals
are appropriately and realistically valued providing management
with an opportunity to build companies)
Example
3. www.hantro.com
(the revenue model for wireless video remains elusive,
but venture capitalists intuitively (an important word)
know that there are opportunities to create business from
portable transmission and the expansion of new media possibilities.
There is a long term proposition for growth but the
opportunities for well-managed companies are considerable).
Example
4. www.azanda.com
(nothing wrong with the old Silicon Valley
model without the excesses of the hyperventilating capital
markets. Serial
entrepreneurship combined with smart patient venture capital
and innovative technology means that there can still be
innovation within the information technology space, but
the slowing capacity of the market to absorb new technologies
has to be factored into the business model)
Example
5. www.springtoys.com
(gaming provides a stable revenue stream to build
new entertainment products that are private, customized
and high-volume)
Example
6. www.1747.net
(providing a business model for doing clinical trials
on pharmaceutical products that addresses a fundamental
issue about a traffic jam in pharmaceutical research, this
firm was backed by Eli Lilly Ventures).
Second,
there will be sectorally-driven growth driven by demand
for radically different energy-supply, energy management
and environmental technologies required to make energy-intensive
economies work. The
changing economics of food production and the new growth
opportunities which will come from the intersection of food,
environmental and health innovations.
The March 2002 Upside has an excellent analysis of
the environmental biotech market opportunities (and risks)
http://www.upside.com/texis/mvm/story?id=3c8fdefa1
http://www.upside.com/texis/mvm/story?id=3c8fe02b1
.
I
think that this is a particularly Canadian cluster of expertise,
with venture firms like www.foragen.com
in the agrisciences area and Ontario Power Generation alternate
energy investments www.opg.com/ops/vent_portfolio.asp,
and www.hqcapitech.com
in the energy technologies area.
Global players include www.nthfund.com,
www.envenergy.com
Example
1. www.hedleytech.com
(how do we solve the problem of
using insecticide in silo-stored
grain)
Example
2. www.sunblush.com
(how do we extend the shelf-life of fruits and vegetables?)
Example
3. www.vestas.com
(how do we commercialize wind turbine technology?)
Example
4 www.neahpower.com
(distributed generation and portable power business
models cannot go wrong unless they overestimate the speed
of consumer adaptation to the new technology)
Example
5 www.xantrex.com
(playing the market in distributed power, new sources
of generation and positioning for long-term changes in the
pattern of energy distribution).
Third,
the geographical markets of China, India, Africa, countries
like Brazil, Turkey and Iran will drive global demand and
create new private equity/venture capital opportunities,
if this time we manage globalization as an opportunity to
invent a shared propserity rather than a destabilizing swing
of capital.. Wherever
intellectual talent is undercapitalized, there are significant
growth opportunities, whether that is researcher in nanotechnology
in Silicon Valley four years ago
or entrepreneurs in sub-Saharan Africa
today searching for business models (even when they are
not called business models).
This is when the shift comes from
Senegalese music to Senegalese football and Brazilian
football to Brazilian music.
Our centers of excellence evolve.
In
China ,
for example, there are a number of venture opportunities,
www.newmargin.com,
www.chengwei.com
. The portfolios
are interesting examinations of emerging growth opportunities.
SECTION FOUR: GLOBAL
VENTURE CAPITAL AND A CAPITAL MARKET THAT COMMERCIALIZES
TALENT NAD INVENTIVENESS
For
private equity/venture capital firms to succeed in the current
environment, the strategy has to include and understanding
of the potential
for globally-sourced innovation.
Developing water purification technologies that are
applicable to the social geography of Ivory Coast is a business
opportunity, not simply as a social entrepreneurship exercise
(although that alone would justify the strategic exercise.
There are markets
in trace detection of chemicals in a new global security
environment or a different market-assessment for videoconferencing
capabilities in a post-September 11th world.
These patterns in the operation of the global capital
markets will create fundamentally different business models
for entrepreneurs.
It is not simply the Brazilian football model, where
Brazilians develop talent (intellectual capital) and export
it to metropolitan markets, or the Senegalese music model
where a global product develops from global music, or the
Iranian film model, where a cluster of excellence creates
a niche market. It
is a gradual awareness that the opportunities to expand
the sales of Nokia or Nortel require an acceptance of global
product in a number of new market places and that globalization
is not simply about privatizing Russian or Philippine telecommunications
carriers as too many people believed in the 1990s.
Inventive sources in a world driven by the economics
of sharing prosperity change dramatically and we may be
talking in a decade about Iranian football,
Brazilian music and Senegalese film as niches of
investable excellence.
We are starting to see some extremely creative and
innovative portfolio management among globally-oriented
venture capital firms and private equity companies.
The core of the venture capital experience is to
discern markets for technologies which have not previously
been commercialized
The development
of bioinsecticides to ameliorate malaria and other bacteriological
illnesses will be one of the significant innovations of
the 21st Century,
the application of wireless technologies to security
devices and to global communications will continue to revolutionize
information channels and make a more stable, secure and
interesting world for the next generation.
The exciting
deals in these spaces will be done by investment bankers
and corporate strategists, consolidators of venture-capital
backed genomic research which will create a GM, Ford, Chrysler
and then a Toyota and Honda of genomics as we learn from
business history. For
those who like the frontiers,
there are new sciences coming onstream and new questions
of human organization.
Fields as diverse as industrial ecology and marine
biology will trigger sophisticated investment and venture
capital activities and the knowledge base is global.
In the
2000s, we need new sources of institutional capital, both
as exits for commercialized technology and as investors
in regional entrepreneurs.
In another context, I am advocating an African Bank
for Reconstruction and Development which would provide (among
other things) venture capital as the CDP in Quebec did from
1965-1990 (when Quebec pioneered a model of economic growth).
The significance for venture capital is that this
will create new sources of financial partners for the commercialization
of inventive sources globally.
Similarly,
corporate venture capital will become a more frequent partner
and source of exits for venture capitalists than it was
in the last decade. That
means that venture capitalists need to align our portfolio
strategies with anticipated corporate needs.
It also means that we should be aware of and encourage
alliances between multinational corporations to facilitate
innovation in venture consortia (e.g. on nanotechnology
or Chrysalix
www.chrysalix.com
) where longterm
durability requires a visible exit in place and takes corporate
venturing to the next strategic phase.
The business models of the 2000s will be more realistic
about the respective roles of public and private capital.
Broadband in Africa is not a venture capital deal
any more than building the Suez Canal was.
The bondholders will roll over the invented financial
instrument and the Liverpool and Marseilles shipping companies
will become billionaires (in 2002 equivalence).
Lego and Bombardier may be replaced in the lecture
someone will deliver here in the year 2012 by a Brazilian
football/media company with an equivalent valuation to Manchester
United or Galatasaray,
a Senegalese media/music company with an equivalent
valuation to Kazaa or EMI and an Iranian film production
company may have an equivalent valuation as Miramax or Atlantis
Alliance, a Botswana trust based on the capitalized intellectual
property of Botswanans knowledgeable about the diet-control
benefits of Kalahari cactus plants in the manner that Decode
(www.decode.com)
capitalized the intellectual property of
Icelandic genetic history.
New inventive sources, new intellectual property
waiting to be commercialized,
are everywhere in a global economy.
Now we need the venture capital imagination and rigour
to make them happen.
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