NVCA Today

By Stephen Socolof, Managing Partner, New Venture Partners

We are in the worst economic downturn since the Great Depression.  Broad-based, global, every industry finds itself challenged.  Corporations in industries like automotive, construction, and financial services even find themselves at risk for their survival.  Certain core technology sectors, like semiconductors, are seeing demand fall 20-30 percent.  This situation has focused management attention on reducing cost, ensuring that the company is right-sized and has adequate reserves to weather the current storm.  However, this environment can provide a real opportunity for the venture community in partnering with large corporations on innovation.

Even during the worst times, the best companies will not forget that their ultimate health and success depends on growth.  While more disciplined with regard to spending money, they will still keep in mind how to delight and expand their customer base and gain ground against their competition.  They know that innovation in bringing new products and services to the market is the engine of this growth, and even in the context of overall cost reductions will protect these resources as much as possible.  Two global studies released in the last six months (The EU Industrial R&D Scoreboard and Booz & Co. Global Innovation 1000) indicated that corporate spending on research and development (R&D) increased last year almost 9 percent, reaching $285B.  In fact, looking at US National Institute of Standards and Technology data shows that R&D spending has generally grown GDP plus or minus for 50 years (with a few more years plus than minus).  Only three times, following falls in GDP, has growth in R&D spending gone flat or down, but never more than a couple percent decrease.  One might expect a similar story for this year.  The January-February issue of Research-Technology Management, the journal of the Industrial Research Institute, published a forecast of R&D trends for 2009 based on a member survey.  65 percent predicted basically flat R&D spending for this year.

Industrial R&D Spending Growth versus GDP Growth

Source: NIST

Over the last 5 years, there has been an increasing trend towards open innovation, a term coined by Professor Hank Chesbrough in his book by that title.  The notion is that a corporation can leverage its own internal innovation resources by seeking ideas from the outside, leveraging business partners, suppliers, even customers themselves, as well as a broader innovation community.  Further, the corporation may find that internal innovations may be more effectively brought to market, contributing to the corporation's business ecosystem, by partnering with external innovation investment partners.  These are ways the venture community can play.  In this environment, as corporations limit spending on internal innovation resources, they will be even more open to identifying and partnering with external sources of innovation, like ventures, to bring new products and services to their customers.  Venture companies can also serve as a way to bring external funding to helping commercialize innovations from inside the corporation.

While venture capitalists worry about the exit environment, this time will provide more opportunities for developing their portfolio companies, perhaps setting them up for an even better exit when the time is right.  As the NVCA has reported, M&A exits are down 25 percent in the last quarter, and the average pricing is only $125M.  This means good returns require very capital efficient ventures.  One way to achieve this is through working more closely with corporate partners, with their customer and channel access and scale, where each can bring their unique capabilities.  

Interviews with three of the NVCA member companies highlight these thoughts.  I spoke to Phil Giesler of Physic Ventures, where Unilever is an anchor investor, Claudia Fan Munce of IBM's Venture Capital Group, and Dennis Merens of Dow Chemical's Corporate Venture Capital Group.

Unilever is one of the world's leading consumer packaged goods companies with over €60 billion of revenues.  Often, people don't appreciate the innovation intensity of companies in this space.  Unilever spends over €800 million on R&D per year. Recognizing that "innovation is the root to success," Unilever has committed to maintaining its R&D spending, although there is some focusing and redeployment across sectors and geographies.  There is also a new high-level demand for discovery-type innovation, as the R&D community is being asked for disruptive, game-changing innovations that can be delivered in a 2-4 year time frame.  In addition, there is a reinforced commitment to open innovation.  A director with specific R&D resources has been appointed with a mandate to support open innovation across all of Unilever's categories.  As part of this commitment, Unilever is looking to its corporate venture group to establish external links, seek new growth options, and help unlock hidden value through the venture capital community.  So, while Unilever is very cognizant and concerned about the economic environment, it's not letting it detract from its long-term vision for growth, and this can provide new opportunities for the venture community.

IBM's R&D spend is roughly 40% exploratory, with the balance aligned with specific business opportunities.  The exploratory part, which is longer-term by nature, is relatively unaffected by the current economic environment.  While there is no significant reduction in the aligned spending, there is more scrutiny.  As a result, this economic cycle has added even more relevance for the venture capital community.  IBM can't afford to reinvent the wheel; there is a higher level of need to fill gaps, address white spaces, and identify new opportunities by leveraging external capabilities and ecosystems.  One area of interest, for example, is how to find the best capabilities for supporting emerging market needs around cloud computing like new software deployment models or how to bring higher value-added services to a private or public cloud infrastructure.          

Dow Chemical, a $60B player in chemicals and industrial markets, is also trying to be more disciplined about spending in the current economic environment.  However, their external search efforts for partnerships and interesting technologies have not abated.  While still open to acquisitions, the criteria and hurdles may be higher, but the desire for partnerships to bring new solutions to the market has not changed.

While leading innovators like IBM, Unilever, and Dow Chemical are maintaining their direct R&D investment during this market environment, increased discipline and spending focus are reinforcing their commitment to open innovation.  So, while these companies may place a higher hurdle on the number and pricing of acquisitions in this environment, this may be a good time to develop our venture companies by seeking open innovation partnerships with leading large corporations.

Stephen J. Socolof ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it ) is a founder and managing partner of New Venture Partners, a global venture capital firm dedicated to corporate technology spinouts that is headquartered in Murray Hill, New Jersey