SENEGALESE MUSIC and BRAZILIAN FOOTBALL
In Search of Global Growth in 2003
November 11, 2002
Private Equity Group
London Business School
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.
© 2008 Jim de Wilde. All Rights Reserved.
Private Equity Group
London Business School
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.
© 2008 Jim de Wilde. All Rights Reserved.
