Investing in Breakthrough: Corporate Venture Capital

Investing in Breakthrough Corporate Venture Capital

VOL ANS

Contents

The Big Idea

Forewords

Volans

1

Global Corporate Venturing

2

Social Investment Business

3

Investing in Breakthrough: Corporate Venture Capital is a research project undertaken by Volans and Global Corporate Venturing, with support from the Social Investment Business and the John D. and Catherine T. MacArthur Foundation, to better understand how some corporate venture capital (CVC) funds are investing in deals which provide both financial return as well as social and / or environmental impact— and how more might do so. This impact, we believe, is increasingly critical to the survival (and future competitiveness) of the CVC parent companies.

Introduction

Where Worlds Collide

4

Chapters 1 The Context

7

The Audience This report was written for both a corporate audience (corporate venture capitalists, research and development teams, executive leadership teams) and the impact sector (investors, entrepreneurs and intermediaries).

We also hope policymakers and innovationcentric organizations find value in the research.

2 The New Wave

19

3 Breaking New Ground

30

4 Breakthrough Investment Syndicates

44

5 What’s Next?

50

The Research In this report, we explore and test three hypotheses:

A Survey Process

56

B References

56

1 CVCs are (increasingly) investing in deals that generate social and / or environmental impact.

C Reading List

60

D Acknowledgements

60

E Publication Details

61

F Volans Publications

61

Appendices

2 CVCs are willing to partner with impact investors.

3 CVCs have a lot to offer these partnerships beyond capital: access to new markets, supply chains and specialist expertise.

Our guiding question: how might we align the corporate venture capital and impact investment communities around their shared ambitions, objectives and outcomes?

Our findings are outlined through the report, with the final chapter focusing on next steps designed to encourage greater collaboration and syndication to spur and support breakthrough impact ventures. A glossary of terms can be found on page 18.

Breakthrough Capitalism

Foreword Volans The recent economic downturn has seen capitalism come under growing public scrutiny — with critics using terms like ‘conscious,’ ‘impact,’ ‘regenerative,’ ‘responsible’ and ‘sustainable’ capitalism to signal the direction in which they want change to happen.

A couple of years back, in 2012, we organized the first Breakthrough Capitalism Forum1 in London, to explore the agendas of some of these emerging movements — and to spotlight some of the innovators, leaders, businesses, investors and initiatives that aim to break through to new forms of wealth creation, truly fit for the twenty-first century.

Our roster of speakers included a number of leaders from the financial world, including David Blood and Colin le Duc of Generation Investment Management, Caroline Mason (formerly of Big Society Capital) and Jen Morgan of the Finance Innovation Lab. But we did not feature anyone from the corporate venture capital world — an omission, in retrospect, that we can now begin to put right, thanks to the work reported in the following pages. We warmly thank the John D. and Catherine T. MacArthur Foundation, the Social Investment Business and Global Corporate Venturing for their support.

Amanda Feldman Director, Impact & Innovation

Charmian Love Co-Founder & Director

Many of the companies featured here are among the most recognized brands in the world, but might be better known for their efforts in such domains as corporate citizenship, corporate social responsibility, shared value and / or sustainability than they are for their venture investing. In what we hope may prove to be a series of such documents, we zero-in on an investment strategy, which — in terms of the expenditures made and outcomes achieved in the four domains flagged above — is something of an invisible (or at least stealthy) giant.

Given the current extent of cash hoarding on corporate balance sheets, coupled with the poor rates of return, this approach often earns and the growing need for longterm solutions to social and environmental business challenges, corporate venture capital represents a very significant potential source of funding, expertise and channels to market for breakthrough solutions.

For many companies spotlighted here, a better alignment between their venture capital operations and the ‘strong’ version2 of the sustainability agenda would produce benefits many orders of magnitude greater than anything they are likely to do under the citizenship, CSR or shared value banners alone.

John Elkington Co-Founder & Executive Chairman

Sasha Afanasieva On Purpose Associate

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Foreword Global Corporate Venturing Project Partner When the wonderful team at Volans approached us to do a report on the intersection between corporate venturing and impact investing, all of our team at Global Corporate Venturing loved the idea.

In many ways venture capital is often about impact investing, in a broad sense. It involves providing the rocket fuel of capital to entrepreneurs who often have bold ideas of how to change society through business and technology. Institutionalizing this, by embracing impact investing, is arguably a small variation from the day job for those investing in venturing.

We are truly excited that this report will be presented at our fourth Global Corporate Venturing Symposium in London. The team of Amanda, Charmian and Sasha have done great research, and we are very hopeful that they will spark and challenge our audience to go above and beyond in their commitments to make an impact. Corporate venture capital has already had some pioneers around impact investing, as the Volans team ably document. After the publication of this report, it is hoped that impact investing will begin to go mainstream in corporate venturing. To help raise interest in this important area has been truly an honor.

Corporate venturing is perhaps even more suited to more closely align with impact investing, as modern corporations often have commitments to be impactful, and so it made perfect sense to us to look further at this activity. Corporate venturing units also seek to measure both financial return and strategic return, so practitioners will likely be more comfortable with the addition of societal and environmental metrics compared to other purely financially focused investors.

James Mawson Founder

Tim Lafferty Managing Director

2 Investing in Breakthrough Forewords

Toby Lewis Editor

Foreword Social Investment Business Project Sponsor Corporations in the UK and around the world are facing multiple headwinds to their business practices. Rapid changes in technology, demography and environment are presenting a growing number of challenges. And yet major corporates are sitting on record cash piles, actively exploring ways to deploy this capital effectively to address these challenges.

The social economy provides a natural area for corporates to explore. The nature and pace of social entrepreneurs’ innovations and approaches create real potential for partnership and investment. At the Social Investment Business, where we have invested in over 1,300 social enterprises and charities since 2002, we are keen to understand how these two worlds might better interact; and are pleased to have co-funded this piece of work towards achieving this.

Increased engagement with the private sector has long been on the radar of the social sector.

Arguably most of the attention has been on the mainstream financial services sector, but as this report shows, there needs to be a greater focus on major corporations, such as those highlighted here. In particular, their movement to extend beyond traditional (and sometimes antiquated) forms of corporate social responsibility (CSR) towards corporate venture capital (CVC) represents new areas to explore.

CVC introduces multiple routes for potential interaction. Human talent and financial capital, in particular, offer great areas for collaboration directly into front-line organizations.

Caroline Forster Group Director of Investments

Jonathan Jenkins Chief Executive

Further, working with social investment finance intermediaries through co-investment or direct fund investment allows for different parties to align their skills and capital, and not attempt to reinvent the wheel once more. Indeed we are in the process of signing a partnership with a large corporate to explore how such a unique partnership may work in practice. With total UK CVC funding of USD$540 million in 2013, this amount appears set to grow.3 Challenges remain, however, including adopting long time horizons, attaining corporate leadership buy-in and having a more nuanced understanding of the role of grants alongside patient capital. But with the right energy, ideas and people, these challenges can be overcome. This report highlights many examples of what might be achieved.

We would like to thank the team at Volans for their tireless efforts in writing this piece. In addition, the work of the steering committee and various other contributors has given the report a rounded perspective, and we are grateful to all those involved.

Corporate venture capital will increasingly play a role in the social economy. Too often, sector insiders spend a lot of time insulated alongside each other, and so the report’s call for deeper connections and convening is welcomed. We look forward to working and learning from others, and ultimately getting more resources to front-line charities and social enterprises to help them deliver greater social impact.

Seb Elsworth Director of Partnerships and Communications

Vinay Nair Director of Business Development

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Introduction Where Worlds Collide

4 Investing in Breakthrough Introduction

We are living through the early stages of a market revolution — where business leaders will need to adapt and thrive in the face of emerging 21st century demands.

These demands will come as no great surprise to well-informed leaders and organizations.

Resource constraints are demanding greater supply chain efficiency and transparency than ever before. Public service providers, in the face of ballooning government debt, are looking to market-based solutions to deliver essential citizen needs such as access to health and education. In emerging economies, last-mile market demand is transforming distribution networks globally.

There are substantial upsides for those with the eyes to see where the future is headed.

The key to today’s corporates thriving amongst these changing demands will be, in no small part, how well they invest in viable solutions that both ‘future-proof’ the business as well as the communities in which they operate.

Like the jet pilots who encountered the Sound Barrier in the 1940s and 50s, society now faces a complex nexus of challenges that seem impossible to push through — among them poverty and disease, rising global consumption, ageing populations and climate change.

As ever, in developing solutions that work at the necessary scale, leaders will need to take big risks to drive big rewards. The alternative is a ‘change-as-usual’ strategy — which risks brewing backlash around the gap between what is needed and what is actually being done by multinational corporates to internalize these trends in their overall strategy.

The C-Suite — a collective label for all the C-level roles within a business, ranging from the Chief Executive Officer to roles like the Chief Sustainability Officer — is slowly, but surely, waking up to the implications of these trends on their business strategy, their employees, their customers and their families.

As conditions change, so must strategy; and as strategy changes, so must the generation and distribution of capital.

While human nature may drive us to do more of what has worked in the past, the winners are increasingly betting on a new order of ownership, co-creation, accountability, transparency and human rights — taking a wider, systemic view of the nature of these challenges. The good news is that action is happening, but not always where we would expect to see it.

“$20 Million & Change is the internal fund set up by Patagonia Works to help likeminded start-up companies.

The fund’s name is a nod to the fact that $20 million is the starting amount with the ability to grow and, more importantly, with the ability to ‘change’ the way business is done.”

Patagonia 5

Enter the Corporate Venture Capitalist

Enter the Impact Investor

In the wake of the 2008 market crash, we have seen companies hoarding cash on their balance sheets in an attempt to build a protective buffer around the business.

Leadership teams — and investors — are exploring better ways to use this cash.

We set out on this project to explore how this capital flow could complement and syndicate with the growing, global impact investment movement. Impact investors are focused on scaling positive social and environmental outcomes, while achieving a financial return — albeit perhaps not as the primary focus. They come with a range of compatible investment products and an in-depth knowledge of social and environmental issues in key markets, including potential deal flow.

We first came across the world of corporate venture capital at an annual Symposium hosted by Global Corporate Venturing in 2013 (see Figure 14 on page 34 for the ‘Top 10’ takeaways from this event). We met investors who work within (or alongside) large corporations, in roles which involve taking an equity stake in an individual business or a portfolio of innovative, external companies.

Applying similar investment skills as VCs, corporate venture capitalists not only invest money but also their expertise to help their investments grow. But what differentiates this group of investors from traditional VCs is their focus on both financial returns as well as alignment with the strategy of the parent company.

While corporate venture capitalists may not always hold investments for 10 years, let alone 30–50 years into the future, they must understand transformative change in order to find and back successful early-stage companies. And while a minority are explicitly talking about how their investments tackle these challenges, increasingly we are seeing this capital flow into deals with potentially breakthrough outcomes for businesses and communities worldwide.

“Global trends are having a ‘PacMan effect’ on business models — and those who are not paying attention are being up-ended.”

Deborah Hopkins Citi Ventures

6 Investing in Breakthrough Introduction

Our guiding question: how might we align these two communities around their shared ambitions, objectives and outcomes?

Investing in Breakthrough To this end, Investing in Breakthrough reviews the role of corporate venture capital, and how it could help address some of the greatest social and environmental challenges we face. Corporate venture capital will not singlehandedly solve all the world’s problems, clearly, but by understanding the nature, motivation and risk appetite of this sort of capital, the impact investment community can start to explore co-investments, syndicates and partnerships that may help transform the way we collectively think about future global challenges — and bring promising, viable and effective solutions to scale.

Chapter 1 The Context What is corporate venture capital, and how can it drive a new wave of breakthrough innovation?

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Figure 1 Investment Trajectory Source: Volans

Corporate venture capital investment can vary across different stages of the company, providing syndication opportunities with venture capital as well as private equity funds.

Revenue Stock Market Private Equity Corporate Venture Capital

Venture Capital

Crowdfunding Angels Entrepreneur / Friends / Family

Seed

Incubator / Accelerator Early

Growth

Mature

Consolidate Business Stages

What is Breakthrough?

There is a growing consensus that key parts of our current economic system are unfit for purpose in a world of 7-going-on-10 billion people by 2050. Breakthrough Capitalism 4 is a call for transformative action by business and other key players to address a growing array of environmental, social and governance challenges that rarely fit comfortably within conventional economies, business models or competitive strategies. Our evolving agenda aligns well with concepts like ‘conscious’, ‘impact’, ‘regenerative’ and Generation’s ‘sustainable’ capitalism5, but underscores the need for disruptive change to get us there.

8 Investing in Breakthrough Chapter 1

Over time, for good reasons and bad, the media spotlight has progressively looked to different parts of the financial world — including banks, development finance institutions, accountants, auditors, insurance and reinsurance companies, venture capital and private equity funds, high net worth individuals and philanthropy — to drive innovation and impact in global markets.

We have observed varied results. In a world of stagnant growth and increasing inequality, many of these investment models are now going through an identity crisis. So which models stack up? Where should we focus our efforts to address the world’s greatest challenges?

Pair these questions in the investment community with a brewing catharsis within businesses — a feeling that they need to be doing more to earn their license to operate, innovate and lead within today’s complex market — and we have a perfect storm brewing.

While still something of a ‘cottage industry’ (as one interviewee called it, in relation to broader private equity and financial markets), corporate venture capital takes a portfolio approach to innovation. As companies grapple with the future of their business, their communities and the biosphere, this model of investment could prove more useful than ever — especially if it can leverage other forms of capital, focused on the same challenges.

CVC performance and success rest on both strategic and financial metrics.

The Basics So, what is corporate venture capital (CVC)? It is generally understood to be an equity investment by a corporate fund, or a designated investment entity, into external start-up companies. As opposed to the traditional venture capitalist’s overriding objective of an above-market financial return, the corporate venture capitalist typically has two goals: 1 Finance Providing financial return for the corporation. With increasing cash on balance sheets, financially-driven CVC investments are looking to take some risk in exchange for high returns.

2 Strategy Developing capabilities, access and / or markets of the parent company, aligning with long-term strategy. Multiple CVC units may be created to focus on different aspects of the strategy — and they often adapt and evolve over time.

A strategic CVC investment will identify and amplify synergies between itself and the venture. To do so, it will provide management skills and other forms of expertise to the investee. Increasingly, we see an emphasis on issues that have previously been in the realm of CSR or sustainability maturing into the strategic imperatives of the company.

At the end of the day, financial objectives are necessary to maintain internal support, while CVC’s ability in meeting strategic objectives will be vital to long-term success. Each fund decides how they want to balance these strategic and financial outcomes. Although financial metrics are usually well-established, companies recognize there are ‘intangible’ returns that the business captures are a strategic level, which are difficult 6 — and in some cases impossible — to quantify in the short- and medium-term.

9

Horses for Courses Corporate Venturing can refer to (1) an internal business development activity within the parent company that identifies, incubates and accelerates ideas, technology and innovation for key business lines and / or (2) an ecosystem-building activity that directly or indirectly affects core business, but does not involve an equity stake. In some cases, corporate venturing can act as a pipeline for later-stage investment by corporate venture capital funds — but the models are distinct.

Corporate Venture Capital is a discrete investment activity in an independent company or a portfolio of companies with the goal of driving both financial and strategic returns for the parent company. Corporate venture capital may either invest in ideas that are spun-out from corporate venturing activities, or invest in external businesses in order to bring their core competencies closer to the company.

As featured in Figure 1, corporate venture capital can invest across a wide spectrum of business sizes — while having the freedom to make large investments.

Figure 2 Corporate Venturing, Corporate Venture Capital and M&A Source: Volans Internal to the parent company R&D

CVC

Corporate Development / M&A Division

Equity investment of corporate funds into external businesses and start-ups

Acquisition of external businesses

Corporate Venturing — Incubators — Accelerators — Internal projects

External to the parent company

10 Investing in Breakthrough Chapter 1

Many companies, of course, do both. “Both corporate venturing and corporate venture capital can have tremendous impact,” notes Mark Muth of PwC, previously at GE Equity and Unilever Ventures. “Corporate venturing is the general rubric for the range of activities, while corporate venture capitalists invest in companies that have developed products or services with real applications and defined markets.”

CVC may also connect with merger and acquisition strategy (M&A), as portfolio ventures could eventually become fully acquired by the parent company. Please see Figure 2 for more detail.

“Both corporate venturing and corporate venture capital can have tremendous impact.

Corporate venturing is the general rubric for the range of activities, while corporate venture capitalists invest in companies that have developed products or services with real applications and defined markets.”

Mark Muth PwC

Figure 3 The Corporate Venture Capital Models Source: BVCA Corporate/ Direct Investment Balance Sheet

Internal Dedicated Fund GP Model

External Fund LP Model

Purpose

Gain direct business and technology experience in emerging areas.

Emerging business and technology with more autonomy for step out options.

Develop internal VC capabilities whilst gaining market awareness and understanding.

Structure

Direct investment funding each deal, closely related to business divisions and future opportunities.

Corporate acts as LP in a captive fund. Greater fund autonomy.

GP external firm LP corporate part investor. Decision on investment GP in fund parameters.

Talent

Internal corporate talent.

Mixture of external VC hired and internal corporate talent.

Experienced VCs and potential secondees from corporate.

Success Measures

Measurements of direct strategic inputs.

Primarily financial Predominantly ROI. with a level of strategic exposure.

Examples

BP Bosch Panasonic

Unilever Ventures Siemens Venture Reed Elsevier Ventures Capital (SVC) Bloomberg Beta

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The Figures So, what kind of numbers are we looking at?

Global corporate venture capital investment amounted to 1,068 investment deals worth $19.6bn in 2013.7 The overall venture capital industry has been estimated at USD$48.5bn in 2013, with 5,753 transactions,8 which would make corporate venture capital involved in nearly 20% of deals, covering 40% of transaction value. In 2013, there were 98 exits worth USD$9.8bn — this figure has been volatile in the past, with 2012 at 247 exits worth USD$36.2bn, although the Facebook IPO accounted for more than half of the value in this particular year.

Investment Hotbeds Overall, the USA remains the most active CVC hotbed, with 65% of corporate venture capital deals. Europe had 15% of CVC deals with the UK (4%) and Germany (4%) as the most active regions. The next key CVC investment region was Asia with China (4%) and Japan (4%) and India (3%) as the main contributors.

At an infrastructural level, countries have been actively establishing innovation clusters — such as Skolkovo near Moscow, Tech City 9 and Level39 10 in London and Nupharo Park in the Czech Republic — to incubate investible companies.11

Figure 4 Global Corporate Venturing Activity 2013 Source: Global Corporate Venturing, 2013 Data Analysis Iceland 2

USA Canada14

766

Brazil 9

Argentina 1

12 Investing in Breakthrough Chapter 1

UK

34

Ireland 7 Netherlands 6 Belgium 5

France

17

Spain 4

Norway Swe Denmar

Ge

Austria

Switzerla

Nigeria 1 Ghana 1

Activity by Sector The largest sectors for CVC deals continued to be information technology and healthcare, accounting for more than 30% and 16% of deals respectively in 2013. These sectors have historically been the pioneers of CVC investment, as corporates searched for innovation outside the internal R&D divisions.

y 5 Finland 6 eden 5 Estonia 1 rk 1 Poland 1

Czech Republic 1 17 Turkey 2

and

UK is one of the most active geographies in Europe, with nearly a quarter of deals, amounting to USD$540 million. Healthcare was the most prominent sector with approximately 23% of transactions, followed by consumer, media and cleantech with 12% each.12

Russia12

ermany 4

Spotlight: UK

Israel22

46

China Japan 45

India

Dubai 1 United Arab Emirates 1 Saudi Arabia 1

48

Korea 2

34

Thailand 2

Taiwan 5 Phillippines 3

Singapore10 Indonesia 5

Australia 5 New Zealand 2

13

The Players

CVC Team

Recent reports by BCG,13 the British Venture Capital Association (BVCA),14 the Royal Society of the Arts (RSA)15 and Global Corporate Venturing16 — see our reading list in Appendix C — highlight that there is more to this sector than the numbers. We must also look at the people involved in the deals.

In terms of roles, corporate venture capital teams are critical in providing the interface with entrepreneurs ‘at the coal face’ of innovation.

They act as brokers, translators and coaches.

They must be highly ambidextrous, able to balance relationships both inside and outside the company at the same time. The teams can sit within the parent company and / or operate externally — providing varying degrees of autonomy. The key is selecting the right model, or a hybrid, for the intended goals of the CVC. The British Venture Capital Association Guide Series on Corporate Venture Capital, published in 2012, outlines common models and how they align with the structure of the investment vehicle, talent recruitment and success measures. The innovation, they point out in their analysis, often happens where these models fuse.17

This is not just about individuals, but an ecosystem of players — each helping ensure the success of both the CVC fund and the entrepreneurs who become investees.

So, in this section, we will look at three key categories of players in corporate venture capital and how they connect to one another (as illustrated in Figure 5): 1 CVC Team 2 Parent Company Internal partners 3 Ecosystem External relationships

Figure 5 The Players Source: Volans

14 Investing in Breakthrough Chapter 1

Where’s the accountability? Regardless of their proximity to the company operations, CVC teams generally report to a management executive committee and / or have a sponsor on the operating board. These sponsors can be connected to the Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Technology Officer (CTO) or Chairman’s office.

Internal Player

CVC Player

External Player

Parent Company

Ecosystem

Within parent companies there tend to be a range of supportive relationships that CVC teams cultivate to benefit their fund’s success. These include:

Outside the corporation there are a series of external partners that CVC teams need to work closely alongside, including:

— Executive Teams The senior leadership of a company is a critical enabler for the activities of a CVC fund. Not only can this team approve and allocate the financial resources, but they also set the corporate strategy which guide focus areas for investment.

— Research and Development Teams CVCs sometimes invest in projects from within the company that have a higher level of risk than the typical business units can take on, or require further external investment, and end up spinning out.

When this is the case, R&D teams can be a strong source of deal flow for CVCs by providing them with access to high risk, and potentially high return, ideas.

R&D teams can also provide support and lend expertise to highly technical deals that benefit from accessing otherwise protected IP, equipment, networks and mentorship from industry specialists.

— Strategy Teams In order to regularly connect investment priorities of the CVC with the future needs of the business, corporate strategy can provide internal briefings on the longerterm outlook for the business and assess key market trends.

— Corporate Development Teams Connecting with the Corporate Development and M&A teams can help CVCs onboard investees and plan a ‘trade sale’ exit for their investments. This division is also able to assess potential synergies of acquiring and integrating the venture (see Figure 2).

— Entrepreneurs CVCs are constantly looking for new deals that meet their investment criteria.

The most important partnerships for these investors to develop are with entrepreneurs who can absorb capital and are poised to scale in a direction that aligns with the CVC investment priorities.

— Incubators and Accelerators Finding high potential entrepreneurs is one of the biggest challenges faced by corporate and independent venture capitalists alike. Incubators and accelerators, such as Y Combinator, provide early-stage investment and mentorship to entrepreneurs who will graduate from the programs. Ideally these entrepreneurs will be ready to take on additional funding from next round investors. Many new models of incubators and accelerators are being designed specifically to scale businesses focused on social and environmental impact.

These include the Unreasonable Institute in the USA18 and Bethnal Green Ventures in the UK.19 — Academic Institutions Universities can be an excellent source of deal flow for CVCs, and our research has identified many examples of coinvestment between university venturing units and CVCs. This includes working with tech transfer offices. For example, Isis Innovation Ltd. is wholly owned by the University of Oxford, and helps the university researchers to commercialize intellectual property arising from their research.20

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— Governments Policymakers are actively developing programs to support corporate investment in new ventures — especially those that can demonstrate the creation of economic opportunities through their investments, and those where there is a social and / or environmental impact. In the UK, for example, the Technology Strategy Board supports entrepreneurs moving ‘from concept to commercialisation’ by supporting and investing in innovative businesses 21 — while Big Society Capital,22 a fund-of-funds established by the UK Cabinet Office and capitalized with up to GBP£600 million, invests in social investment intermediaries.

— Other CVCs and VCs Many CVCs co-invest in order to share risk and talent. They seek partners that can bring additional expertise to the investment in order to give the investees the greatest chance of success. While they often avoid investing with competitors, they will actively partner with CVCs with complementary and relevant skill sets.

— Foundations There is growing interest among some CVCs to align their investments alongside large foundations. Advantages to this can include access to relevant deals for their business, as well as co-investment with specific market expertise. Progressive foundations, such as the Omidyar Network,23 are strong candidates for this form of collaboration. Certain foundations have return-focused investment subsidiaries that can bring significant expertise as well as capital — for instance, one of our interviewees, Syncona Partners, an independent subsidiary of Wellcome Trust.

— Wild Cards There are a range of ‘unusual’ partnerships that CVCs proactively look for in order to generate deal flow opportunities and to better understand market trends. These might include technology partners, subject matter experts, angel investors and prize funds.

16 Investing in Breakthrough Chapter 1

Nature Abhors a Vacuum: Restrictions on Bank Involvement in CVC In the aftermath of the financial crisis, regulators around the world have sought to reduce the amount of capital that global banks can commit to illiquid or risky asset classes.

A general industry perception is that initiatives such as Dodd-Frank, the Volcker Rule and Basel 2 have made it prohibitively expensive for banks to commit their own capital to venture funds. The effect is a reduction in the potential universe of financial investors for traditional VC. Other financial investors, such as fund-offunds, also reduced their allocations to riskier illiquid assets such as venture capital, in the wake of the financial crisis.

In sub-sectors like biotechnology, corporate venture capital has increasingly filled the void.

Institutions such as the Wellcome Trust are establishing their own funds, and the majority of major pharmaceutical companies are now investing as LP’s in life sciences funds and making direct investments via internal venture groups.

“Executive management recognizes that although venture investing is inherently risky, the greatest risk is not to invest at all.”

Corporate Venture Capital: Avoid the Risk, Miss the Rewards BCG

Figure 6 Introduction Cards Source: Volans

“Hello. I’m a corporate venture capitalist.”

I invest in businesses using funds that are allocated by my parent company.

I’m interested in both financial returns as well as the strategic relevance of the business to what my company does today, and will do in the future.

I apply traditional financial metrics as well as articulate the measurement of more ‘intangible’ impacts that result from my deals.

I have much more to offer entrepreneurs than just money, including the expertise of the people at my company and access to market distribution channels.

I make many different kinds of investments: sometimes at a direct level and sometimes as a fund of fund (depending on the structure of my fund).

There are a range of ways in which I can make my investments, using debt, equity or quasiequity products.

I’m interested in helping my investees scale quickly and appreciate that working with corporations can be a great way to do this.

A potential breakthrough initiative in my sector is a G8 Social Impact Investment Task Force, chaired

by Founding Partner and former Chairman of Apax Partners, Sir Ronald Cohen.

“Hello. I’m an impact investor.”

I’m interested in sectors where there is more than a financial reward. I make investments in enterprises that focus on, and measure, their social and environmental impact.

I can invest in for-profit as well as non-profit businesses (depending on the type of impact investment fund). I’m also able to explore deals that experiment with new legal structure models: CICs in the UK and B-Corps in the USA.

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Investment Committee A fund’s governing body which may advise on the investment Breakthrough A process of transformation in policy selected and implemented. They the way our economic and financial systems, or authorize the release of capital for specific our cultures, operate by stretching across five investments. key dimensions: time horizon, scope, analysis, ambition and level of change (see Figure 8).

LP (Limited Partner) The legal status of an investor in a venture capital fund. Partners in Corporate Venture Capital The practice of the fund, with limited rights and obligations. large companies taking an equity stake in an individual business or portfolio of innovative, Off-Balance-Sheet An asset, debt or external companies, to which it will also provide financing activity that is not on the company’s expertise. The objectives are financial and balance sheet — for example, investments via strategic — and driving long-term outcomes. partnership in a stand-alone fund. Companies will often use off-balance-sheet financing to Corporate Venturing An internal business keep their debt-to-equity and leverage ratios development activity to identify, incubate and low. accelerate ideas, technologies and innovations — testing and scaling to see if they will work.

Return on Investment A performance Can act as a pipeline for later-stage investment measure used to compare a number of by corporate venture capital funds. investments, usually defined as net gains from an investment versus its cost.

Due Diligence A comprehensive appraisal of a business undertaken by a prospective buyer or Risk-Return Ratio A ratio used by investors investor, especially to evaluate its commercial to compare expected returns of an investment potential. to the amount of risk undertaken to capture these returns. Also known as the risk-reward Exit When an investor sells their stake in a firm ratio. to realize either a gain or loss. Generally, the possible exit is considered at the time of the Social Innovation Products, services and investment and may be included in the firm’s models that simultaneously meet social and overall plan. Common exits include a trade sale environmental needs (more effectively than (acquisition) or the investee ‘going public’ on a alternatives) and create new relationships or listed exchange. collaborations. Key design features: impact, scale and durability.

GP (General Partner) A venture capital fund manager, or team of people, that manage an Syndicate A temporary association of two investment. A GP can have multiple funds or more individuals or firms to carry out a under management at once. Often judged by specific business venture, allowing companies potential LPs according to track record, team to pool their resources and share risks. Not history and strategy. to be confused with alternative definition: the affiliation of gangsters in charge of organized Impact Investment Any investment made to criminal activities. generate a measurable, beneficial social and / or environmental impact alongside a financial Venture Capital Money and expertise return.24 Social investment specifically directs provided by investors to start-ups and small capital to social sector organizations to achieve businesses with perceived long-term growth these returns.25 potential.

A Common Glossary

Impact Venture A deal that generates measurable, beneficial economic, social and environmental outcomes.

18 Investing in Breakthrough Chapter 1

Venture Philanthropy A form of philanthropy that works to build stronger social purpose organizations by providing them with both financial and non-financial support in order to increase their societal impact.26

Chapter 2 The New Wave What are the latest trends in CVC activity?

“CVCs need to commit to the space. It can’t be fly-by-night, and it’s not for the faint of heart.

Corporates that bounce in and out of venturing disrupt the ecosystem.”

Colleen Calhoun GE Ventures 19

The first CVC wave was driven by the success of the private venture capital model Volans has tracked a series of societal pressure and, as corporations grew in size and scope in the 1960s, a need to diversify. They waves impacting governments, business and focused on internal ventures or external startnow financial markets (see Figure 7). With the ups; the emergence of spin-out businesses next 40 years likely to shape the future over centuries and even millennia, the 10 years from benefiting from wider parent company 2015 to 2025 — what we call the Breakthrough support was yet to come. The activity was mainly in innovation-intensive industries such Decade — will be make-or-break. as technology and pharmaceuticals. The collapse of the IPO market and the 1970s oil We are not alone when it comes to tracking such waves — so for example, when it comes shocks marked its demise. to the emergence of corporate venture capital since the 1960s, BCG,27 BVCA28 and others have already begun to identify the waves, and we have gratefully built upon their analyses when developing our views on what comes next.

The Waves

Figure 7 The Breakthrough Decade Source: Volans, BCG and BCVA

1995 1995

1985 1985

1990

1980 1980

1990

1975 1975

1970

1965

1960

Environmental Wave

Green Wave

Waves of Societal Pressure

1970

1965

1960

20 Investing in Breakthrough Chapter 2

Wave 3

Stock market crash

Wave 2

Wave 1

IPO market collapse

Waves of CVC Activity

The third CVC wave boomed in investment levels around the time of the dotcom bubble, fuelled by the seemingly limitless potential of the Internet and rising stock markets — and fell victim to the bubble’s pop in the early 2000s.

In this wave, corporations in Europe and emerging markets entered the venture investing arena for the first time.

This is a welcome sign. Those surfing the latest wave say they have absorbed the lessons of the past, though we will see. The newest wave focuses on strategic alignment, with longerterm return horizons. So far, it seems to be paying off — with the good track records of the top 50 global CVC units going back over a decade or more, exceptionally long compared to past waves.29

2025

2030

2035

2025

2030

2035

2020

2015

2020

2015

Breakthrough Decade

2010 2010

2005

Wave 4

2005

Anti-globalisation Wave 2000 Economic crisis 2000

Breakthrough Decade

In retrospect, it seems that earlier corporate venture capital cycles have shadowed broader economic up-and-down cycles. And yet, today, some of the most forward-looking businesses are responding proactively to market trends with changes to their CVC investment priorities and signalling a willingness to partner with different kinds of ventures than before.

Sustainability Wave

CVC activity was relatively limited in the early 1980s — until the re-emergence of venture capitalists, driven by the relaxation of pension fund regulations and tax cuts. Aiming to match the venture capital returns, CVC returned into the market. This second CVC wave focused on technology and biotech, but suffered during the financial crash of 1987.

21

What’s Driving the New Wave?

Through this research, and ongoing conversations with senior leaders in global corporations, we propose that the new wave of future-friendly investment is driven by a combination of the following factors: Evolving Consumer Demand Environmentally conscious consumers are driving P&G, L’Oréal and others to invest in and acquire responsible product brands like Warby Parker, TOMS Shoes, Body Shop, Milky Moo and Ben & Jerry’s. At the same time, base-ofpyramid markets are still largely out of reach.

We are seeing companies such as Danone Foods building products and services for this market through joint venture partnerships with front-line specialist organizations, such as Grameen Bank.30

Push for Market-Based Public Services Funding may be decreasing in developed economies for traditionally government-funded programs and services (such as in health, education, social care and public housing), but experts in both developed and developing words alike are looking for new, efficient ways to provide basic rights to a booming (and ageing) population.

Pressure on Natural Resources Clean technology, which includes investments in renewable energy, water, resource efficiency and smart grids, in order to reduce reliance on natural resources, has captured CVC attention.

The trend, though it has had its fair share of wobbles, has been driven by the expected long-term financial viability (especially as the value of natural resources are quantified 31), the potential for business integration, and the growing support of some governments via market policies and subsidies.

Figure 8 Why Corporate Venture Capital?

Source: Volans

We asked CVC professionals why their companies choose to invest this using a corporate venture model, over other available options. Their answers can be summarized across our five dimensions of breakthrough.35

1 From Narrower to Wider Scope

2 From Shallower to Deeper Analysis

CVCs have an external view on what is happening at an industry level, as well as in sectors that may become more directly relevant for the business in the future. This wider scope — and the networks and partnerships that the CVC team harvest, as a result — help keep the business connected to macro-level trends.

CVCs must probe intensively into business models before making an investment. Although some of the decision-making will be based on intuition, refined by experience and strategy, CVCs need to understand how a business will meet financial and strategic objectives, at scale, before writing a check. You can also never really understand something unless you are doing it — so CVCs give companies a chance to experiment in areas that might be outside core competencies.

22 Investing in Breakthrough Chapter 2

Business Model Innovation Concepts like the circular economy32 and collaborative consumption33 are challenging existing business models.34 This is being driven by an increasing market demands for not only transparency and accountability, but also more holistic value creation.

Less CSR, More Social Innovation Social responsibility is moving from its traditional role at the business periphery — resigned to CSR departments — into a core strategy for the business. As this shift happens, investments and capital flows will also shift, amplified by the interests of today’s top talent (especially millennial workers).

3 From Lower to Higher Ambition

4 From Shorter to Longer Timescale

5 From Incremental to Systemic Change

CVCs provide a way of diversifying risk for a company, by keeping it autonomous from the main business without limiting the potential for high return. With the [whispered] expectation of an 80:20 failure:success ratio of corporate venture capital deals, these are big bets on ambitious goals — with high rewards for the winners.

CVCs align with a long-term strategy, providing an alternative to the valuation volatility that can deeply affect more traditional M&A strategy.

CVCs encourage disruptive innovation in the face of market-wide challenges — across financial, strategic, social, environmental dimensions — that may not be clearly defined within a current operating strategy.

This stretch may manifest through new products, technologies, services or business models which can help transform a company’s core business and ultimately shift the overall system in which the business operates.

23

Figure 9 Most Active Corporate Venturers 2013 Source: Global Corporate Venturing, 2013 Data Analysis Organisation

Deals

Intel 146 Google 78 Qualcomm 69 SR One (GlaxoSmithKline) 32 Samsung >30 IDG 29 SAP 24 AOL / Crunchfund 24 Deutsche Telekom / T-Venture 23 GE 21 Norwest Venture Partners 21 Cisco 19 Novartis 19 BP Ventures 18 Amex Ventures 16 Juniper Networks 15 Comcast 15 Siemens 15 Salesforce 14 Verizon 14 In-Q-Tel 13 Bertelsmann 13 CyberAgent 13 Goldman Sachs 13 Itochu 12 Softbank 12 Advance Publications / Conde Nast 11 NTT Docomo 10 Time Warner 10 O’Reilly 10 General Motors 10

24 Investing in Breakthrough Chapter 2

Organisation Hearst Novartis Novo Saudi Aramco Citi Nokia Reed Elsevier Energy Technology Ventures Celgene SingTel Ascension Lux Capital Mitsui Motorola Solutions Citrix VMware Northgate Capital ConocoPhillips Legend Microsoft Rakuten Roche Tencent Tengelmann Robert Bosch Amgen Johnson & Johnson NRG Roche Tata PayPal Alibaba Mitsubishi UFJ Merck

Deals 9 9 9 9 8 8 8 8 7 7 7 7 7 7 7 6 6 6 6 6 6 6 6 6 6 5 5 5 5 5 5 5 5 5

The Sectors We have identified 6 sectors that have a high propensity for long-term thinking and acting, affecting businesses, citizens and the biosphere. They include: (1) cleantech, (2) education, (3) health, (4) urban infrastructure and transportation, (5) financial inclusion and (6) agriculture and food. Unsurprisingly, these are also areas where we are also seeing activity and investments made by impact investors.

Sector 1 Cleantech

Cleantech investment has traditionally focused on technology that will reduce our dependence on fossil fuels — and ideally, pre-empt consumer demand and government legislation.

This has been evidenced by a BASF investment in Renmatrix, which develops technology that produces bio-based chemicals and fuels.36 Shell has also formed a strategic partnership with Husk Power Systems, a biomass electricity generator for rural households in We believe these sectors provide a starting point to explore co-investment, where CVC and India, which has received funding from Cisco Ventures and Draper Fisher Jurvetson, as well impact investment can potentially converge. as Acumen and Oasis Fund.37 Relevant sector deals are outlined below, only to provide a sense of context around corporate But cleantech can mean so much more. activity in each sector. Figure 10 shows the Corporates are also looking to improve the cost breakdown of CVC transactions by sector in effectiveness and environmental sustainability 2010. of their supply chain. For instance, Nike and IKEA GreenFund invested in Dye Coo Textile Systems, a process which eliminates chemicals and water from the textile drying process and reduces energy use.38 Cleantech also overlaps with other sectors.

For instance, communication infrastructure has been a major barrier in driving economic development in emerging markets. Intel Capital invested in Altobridge alongside the International Finance Corporation (IFC) of the World Bank Group and Enterprise Ireland, a government organization. Altobridge is a leading provider of energy-efficient, solar-powered 2G / 3G solutions to remote communities, helping increase economic growth.39

Winners and Losers We also appreciate that the examples we use in these sector overviews have very little Dealing with Demons data attached to them, and do not include We realize that in these sector overviews we an assessment of their likelihood of success. reference industries and corporations that are often attacked by NGOs and the media for their This is partially due to the early nature of some business practices. However, within reason, we of the investment relationships, and thus the believe that in order to solve global challenges, lack of information available. In part, too, it is because some of these relationships are we will need to work across the system, confidential. Only time will tell which of these leveraging all available resources (human, examples will be winners, which will fail — and financial and other resources) to unlock the which of those failures will stall or accelerate innovation needed to break through. the longer term breakthrough process.

Disclaimer

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Sector 2 Education

Sector 3 Health

Rising education costs in developed markets have been a critical issue, especially in light of the financial crisis. Several start-ups aim to bridge this gap in the market through providing online solutions for mass educational content distribution, student performance tracking and communication and collaborative learning.

Corporate venture capital funds are active in the sector as it is seen to be gaining scale and on its way to reaching commercial maturity. For instance, Comcast Ventures has invested in Quad Learning, an online two-year bachelor degree programme;40 Google Capital’s investment in Renaissance Learning, computer tracked student assessment technology;41 and Intel Capital and Pearson’s investment in DimensionU, a multiplayer video game focusing on core skills in mathematics and literacy.42

Increasing life expectancy, as well as the growing prevalence of chronic diseases such as cardiovascular disease and diabetes, is increasing the net costs of healthcare provision.

One of the key trends in tackling these issues has been the emergence of technology start-ups that improve access to healthcare and engage consumers preventatively, while generating commercial revenues to attract venture capital investment.

Some corporates are investing into education programmes in order to gain greater access to emerging markets. Examples include Benesse’s investment in InOpen Technologies, an Indian education start-up that offers content to government and private schools, through its Social Investment Facility.

The facility invests in companies focused on social issues in education, child care and other related fields in emerging Asian countries and Japan.43 Takaho Miki of Benesse credits global understanding of best practice in social investment, especially in the UK, as inspiration for this fund.

Similarly, the Pearson Affordable Learning Fund makes investments in for-profit companies that provide affordable education services in developing markets, such as Omega Schools in Ghana.44 Pearson, the corporate parent, is also the biggest limited partner in Learn Capital, a venture capital fund that supports education start-ups including Edmodo, AdvancePath Academy, Accept.ly, Bridge International Academies, and has started its own incubated start-up, Alleyoop.45

26 Investing in Breakthrough Chapter 2

Mobile health monitors like Nike FuelBand and Fitbit, the latter of which attracted investment from CVC funds SAP Ventures and Qualcomm Ventures among other investors, engage consumers to improve their fitness levels — and are increasingly encouraged by doctors and even employers.46 Online health portals such as Caring.com47 and HealthiNation,48 which have received investment from Intel Capital, are improving the availability of information on health and wellbeing and bringing together community insights to create more personalized advice.

Technology-based platforms improving costeffectiveness and customer service quality, such as One Medical Group, have received funding from Google Ventures.49 Platforms like Practice Fusion, with investment from Salesforce and Qualcomm Ventures, help to bring the medical ecosystem of medical professionals, patients, labs, billers online, streamlining healthcare services.50 As well as start-ups, there are collaborative models emerging between public healthcare providers and corporates: for instance, the partnership between Hitachi and the National Health Service (NHS) Manchester in the UK aims to improve public services through developing an informatics platform that enables security and analytics technologies to deliver several new high quality healthcare services. These include lifestyle improvement programs targeted at tackling diabetes.51 Partnerships like this can bring about innovative technologies and services that improve access to healthcare, while giving corporates like Hitachi an opportunity to develop and advance their solutions for other markets and build long-term provision contracts with healthcare providers.

Another partnership example is GE Ventures’ healthymagination team working with Clinton Health Matters Initiatives in the Transforming Cities program. This is designed to bring together a range of partners from across a city system (hospitals, employers, physicians, health insurers, community and public health officials) to improve the health of residents.52 We are also seeing corporate venture capital activity in healthcare focused on access in developing economies. For instance, Google invested into Eye-Q specialty eye hospitals in India through SONG Investment Advisors fund, also owned by Soros Economic Development Fund and Omidyar Network.53 This is an area that holds great promise in bridging CVC activity with impact investment.

Health has always been an area of interest for impact investors — for example, The Global Health Investment Fund (GHIF), a USD$108 million fund designed to finance late-stage global health technologies that have the potential to save millions of lives in low-income countries by fighting challenges such as malaria, tuberculosis, HIV / AIDS and maternal and infant mortality. GHIF is supported by The Bill & Melinda Gates Foundation, Grand Challenges Canada, The German Ministry of Economic Cooperation and Development (acting through KfW) and the Children’s Investment Fund Foundation. To help mitigate the risk of investing in the clinical development of new technologies, the Gates Foundation and the Swedish International Development Cooperation Agency have committed to partially offset potential losses in the Fund, which will seek a financial return for investors by targeting high-impact technologies with public health applications in both developed and emerging markets.54

Sector 4 Urban Infrastructure & Transportation New innovation in urban infrastructure has centred around community-sourced information and big data. Waze, a traffic information platform that sources data from its users enabling fuel and time savings, has been one of Google’s biggest acquisitions.55 Meanwhile, Comcast and Google Ventures have invested in NextDoor.com, an online community platform that focuses on building stronger and safer neighbourhoods.56 As well as having an impact on the community (reducing time in traffic and thus carbon emissions in the case of Waze, or building stronger, organic community support mechanisms in the case of NextDoor.com), these investments also have attractive financial return projections based on advertising streams which appeals to commercially-driven investors.

Other solutions in the urban infrastructure and transportation sector have surfaced in the smart-grid space. EnVerv, a fabless semiconductor company offering communication solutions for advanced metering infrastructure, has received financing from Cisco;57 while Autogrid Systems, which develops big data software systems for more effective energy use, has received investment from E.ON.58 Collaborative consumption is a hot topic among impact investors — and solutions such as car-sharing platforms are attracting investment to keep cities moving. Zilok Auto received investment from Ecomobilité Ventures, a fund created by French national railway operator SNCF, mobile telephone operator Orange and energy company Total, backed by EUR€25 million in capital. General Motors Ventures, Google Ventures and other VCs have backed RelayRides, an online peer-to-peer car sharing business.59 With increased urbanization, car sharing platforms have become commercially viable, as well as creating positive environmental impact. Electric car technology has also been an important segment. For example, BMW i Venture’s strategic investment into Chargemaster, UK’s leading provider of electric vehicle charging infrastructure.60

27

Impact investors are closely tracking community development as a way of measuring impact in urban investment.

For example, Bridges Ventures, a UK specialist fund manager dedicated to using an impact-driven investment approach, invested in The Gym. The Gym is a company that provides low cost health and fitness facilities — 50% of which are located in underserved areas.

The low price point and lack of a membership contract provides greater access to local community members. Bridges exited their majority shareholding in The Gym in June 2013, a transition that “represented 50% IRR and 3.7x multiple for investors in Bridges funds, of which a minority was rolled over to retain a 25% stake in the company.” 61

Figure 10 CVC Transaction Activity Breakdown by Sector in 2013 Source: Global Corporate Venturing, 2013 Data Analysis 50

60

70

28 Investing in Breakthrough Chapter 2

Utilities

Transport

16 15 11

80

7

Other

40

Clean-Tech

Media

Consumer

Health

IT

32

30

Financial

20

Industrial

10

Services

0

5 5

90 3 222

100

% of Global Deals

Sector 5 Financial Inclusion

Sector 6 Agriculture & Food

Financial inclusion focuses on helping low and moderate income families around the world access financial services such as credit, savings, insurance and payments. Foundations like Acción and the Aga Khan Foundation provide funding to microfinance institutions and other organisations developing financial inclusion services. Increasingly, corporates are also looking to build these services in the base of pyramid markets, recognizing its impact on communities and markets.

There has been much effort in the agriculture and food sector, focused on improving supply chain sustainability through rural community projects in developing countries. This is an area of interest for both impact investors and corporate venture capitalists alike.

Mumbai-based FINO (Financial Inclusion Network and Operations) provides financial and non-financial products and services in areas which remain unbanked. The company has identified an opportunity in the market and has subsequently received funding from HSBC, Intel Capital, IFC and ICICI Bank.62 Cemex’s Patrimonio Hoy is based on providing inclusive finance for lower-income families to purchase building materials through credit schemes, expanding their revenues during the economic downturn.63 Morgan Stanley has invested alongside the International Finance Corporation into eleni, which designs, builds and supports the commodity exchange eco-systems in frontier markets, enhancing the functionality and transparency of the African markets. Morgan Stanley aims to bring its expertise to help the business achieve both positive social and economic impact.64

For example, Danone Communities invested in La Laiterie du Berger, a Senegal-based family business, focusing on improving on the situation of the ‘Peuls’ people by providing a fixed source of income through a milk collection network.66 Unilever Pakistan has partnered with Acumen and Thardeep Rural Development Programme to incubate Micro Drip, a for-profit business providing affordable irrigation systems for smaller farmers in rural households. In addition to providing pilot funding, Unilever is also offering supply chain, sales and brand management expertise.67 Intel Capital and Grameen Trust have invested together to form Grameen Intel Social Business, which aims to provide IT solutions for rural entrepreneurs in sectors including agriculture, education and healthcare — for instance, analytics platforms to improve selection of seeds and fertilizer.68 Projects like this enable corporates to expand to rural markets where otherwise poor infrastructure would be a barrier to entry.

Vodafone’s M-Pesa has also had significant impact on the remote communities in the developing world through its low-cost transactional platform that enables lowincome customers to meet a range of payment needs.65

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Chapter 3 Breaking New Ground Corporate venture capital is evolving in the face of changing investment priorities.

Every sector described above, and many others, are undergoing transformational change in the face of the megatrends outlined on page 22. To future-proof business and society, we need to disrupt current value creation models — but how? Where will corporate venture capital place its bets? And where are impact-related trends brewing?

Prioritizing Impact

Figure 11 Investment Priorities Horizon Source: Volans

From our interviews, we observed that timescales played a telling role in CVC impact deals. These range from short-term deals that incrementally improve cost-effectiveness and resource-efficiency, to long-term investments that strongly align with the vision of the organisation, have a strategic and financial return and serve to disrupt products, services or markets. CVC invests in businesses that may work in the new system, or shape the system itself.

Short Term Product / service development via access to innovation and IP

Medium Term New product / service within current business model via technology advancement

Our interviewees have shared with us four categories of strategic investments, where the ventures they invest in align with either an implicit or explicit priority for impact. Generally, these businesses either directly complement a stated corporate internal strategy to improve production, supply chains, or develop new products / services — or they support the development of wider market ecosystems, such as new networks or experiments with new business models (see Figures 11 and 12).

Long Term New business model via access to new markets

Future-proofing the business Business model reinvention via resilient business ecosystems and communities

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Identifying Strategy and Integration Corporate venture capital funds vary in how they align with the core strategy of the parent company and its operations. The impact element of the investment is an additional filter in this framework — it can be perceived as a core strategic component and / or a financial opportunity as industries shift towards breakthrough.

The degree to which corporate venture capital funds are explicit about the outcomes they hope to achieve will be key going forward.

We are unearthing more syndication between CVCs and impact investors — almost exclusively when the motives and objectives of the investment are transparent. This is only possible when there is a stated purpose that articulates the impact desired.

The market’s push for both CVCs and impact investors to shift from a single bottom line to the triple bottom line, considering people, planet and profit — as well as the resulting push-and-pull between streamlined focus and wider exploration during resulting business model evolution — is an increasingly good reason to share risk and reward on the journey.

Using a series of qualitative case studies, we will look into what some CVCs seem to be prioritizing in their investment strategies, including some of the drivers behind breakthrough investments.

Figure 12 Driving Impact through Innovation Source: Volans Input Innovation Production and Supply Chain

Output Innovation Product or Service

Business Model Innovation Route To Market

Systems Innovation Network / Infrastructure

— Change manufacturing processes to reduce environmental footprint — Develop new raw material inputs — Establish new production methods — Improve service efficiency — Ensure better employee working conditions

— Design new products or services with positive impact — Provide information and data to enable better service — Service underserved market segments

— Establish affordable pricing frameworks — Deliver product or service through new distribution channels

— Establish communities to enable action — Connect different groups of individuals to collaborate on shared social / environmental challenges — Develop policy, physical, network, knowledge infrastructures

Dyecoo Waterless Textile Dyeing Process

Micro Drip Affordable irrigation systems for smallsized farms

CEMEX / Patrimonio Hoy Build materials for low-income families

M-Pesa mobile payment system for developing countries

32 Investing in Breakthrough Chapter 3

Adapted from Making Sense of Corporate Venture Capital, Henry Chesbrough, Harvard Business School Working Knowledge series

Figure 13 Impact Investment Framework

Integration into business operations

Emergent Impact Investments — Strong links with operations but low alignment with strategy — May offer upside if core strategy changes — Vodafone M-PESA Mobile

Driving Impact Investments — Focus on achieving impact strategy through development and integration of the ventures with the core business — Nike DyeCoo

Passive Impact Investments — Minimal integration with strategy and operations — Anticipated market shifts will drive exit value of ventures — SAP Ventures Fitbit

Enabling Impact Investments — Ventures strongly aligned with impact strategy — Not necessary to integrate into operations — Pearson Omega Schools

Alignment with business strategy

In 2012, Goldman Sachs also launched a USD$9.6 million social impact bond in partnership with Bloomberg Philanthropy. This Corporate venture capital represents one bond is focused on reducing the recidivism rate of a series of emerging financial models of men in New York. Bloomberg Philanthropies used by corporations to invest in social and environmental innovation. Other models include is providing a USD$7.2 million loan guarantee.70 new bond structures — such as the newly There is also increasing activity in corporate launched Unilever Green Sustainability Bond. foundations that apply the philosophy of This 4-year, GBP£250 million corporate bond venture philanthropy to their investment offers a 2% fixed rate. Funds will be used to strategy. As defined by the EVPA, the invest in projects “that improve the energy European Venture Philanthropy Association, and water efficiency in the company’s internal operations, where the threshold of each project venture philanthropy is a way of investing that “works to build stronger social purpose included is that it must reduce CO2 emissions organizations by providing them with both or water use by 50% if it is a new project, financial and non-financial support in order to or 30% if a retrofit against a 2008 baseline”. increase their societal impact.” 71 The EVPA is It was more than 3 times over-subscribed currently exploring overlaps between corporate within 3 hours, including some first-time buyers of corporate bonds who were attracted venturing and venture philanthropy. by the green aspect.69 33 Experiments in Corporate Finance

Figure 14 Top 10 Takeaways from the 2013 Global Corporate Venturing Symposium and Relevance for the Social Investment Sector

Takeaway

1 Corporate Venture Capital (CVC) is big — and growing As outlined on page 12, global corporate venture capital investment amounted to 1,068 investment deals worth USD$19.6 billion in 2013.

Relevancy There is a relatively huge pool of capital — some earmarked for direct investing, some for fund-of-funds. This means a potential for coinvestment in impact investment funds as well as syndications on a deal-by-deal basis.

Takeaway

6 Sector Focus of CVCs Healthcare services (nutrition, health informatics, diagnostics), energy services (cleantech, energy efficiency, resource efficiency), ICT / new media and performance materials all seem to be hot topics.

Relevancy Although many of the CVC investments seem to be in IP-backed products, there is an emergent trend towards products that enable better outcomes in sectors such as health and education (i.e. health informatics leading to overall better health outcomes).

34 Investing in Breakthrough Chapter 3

2 Composition of CVCs CVCs can take a range of forms (see page 11). They may play a merger and acquisition (M&A) function for the business — helping the parent company access innovations that can have a financial return and strategic impact (see page 11). They are often connected to an internal set of corporate venturing activities (e.g. open innovation networks, internal incubators, R&D functions).

Relevancy There are multiple contacts in the company for impact investors to engage — be it to help shape innovation from within, to broker deals that meet the social impact criteria, or to co-invest.

7 Ecosystem Support is Critical CVCs see the importance of nurturing a healthy ecosystem for their investment to flourish.

For example, IBM Ventures combines innovation centers with a global entrepreneurs program.

Relevancy CVCs, and their parent companies, could be engaged to help co-invest in and shape global marketbuilding activities.

3 Starting a CVC Early CVCs often start by ‘learning the business’ and acting as an LP (see Figure 3).

From there, they then begin co-investing until they build up the expertise and skills needed to make direct investments themselves.

4 Taking investment from CVCs Pros: CVCs have a longterm view and can become a lead customer. There is also the potential for CVC investments to influence the parent company strategy.

Cons: Exits are complex.

CVC investments can operate within a less efficient market, Relevancy Impact investors can involve ‘irrational’ decisions. could partner up with some Acting as a lead customer can companies at the beginning of be ‘like poison’ to other outside their journey and shape their investors, if they see it as a strategy towards more socially- barrier to access other, higher driven investments. value customers.

5 Deal flow: Open Innovation and Internal Innovation CVCs often source deals using ‘open innovation’ platforms and / or through employee innovation programs.

Relevancy Potential openness to collaborate with others, including non-traditional partners. This could lead to new social ventures that are either ‘spun in’ to the business or ‘spun out’ as social enterprises.

Relevancy By nature, CVCs take a long-term view on investments, which aligns with impact investing. In a partnership, CVCs could help social ventures reach new levels of scale by brokering new connections to existing customers — and connections to new customers.

8 Measuring Value CVCs already recognize the importance of at least some ‘intangible values’ of their investments. These include investments made for strategic reasons rather than a strictly financial return.

9 Emerging Markets Many of these CVCs have their eyes set on emerging market investments. One speaker said, “CEOs of companies in India and China are looking at finding solutions to problems that the West don’t even know exist.”

Relevancy CVCs struggle with valuations of intangibles the same way that many impact investors do. Perhaps there is something each can learn from one another?

Relevancy These investors are hyper-aware of the importance of local, on-the-ground knowledge. In many ways, this is an area where the domestic impact investment sector has a similar focus.

10 Senior Management Champions Several speakers referenced the ‘Office of the Chairman’ or the ‘Chairman’s Fund’ as the place where their company’s CVC group either began or now sits. The CEO, head of strategy, head of research, chief innovation officer and CFO can also play key roles in championing CVC. Relevancy This is the place to target. Engaging a CVC to shape its social investments, or better yet, to help develop a case for their own a stand-alone social corporate venture groups, needs to start at the top.

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Case Study 1 GE Ventures

Fund Overview Based in Silicon Valley, with offices in Boston, Houston and Israel, GE Ventures scales ideas that advance industries — and improve lives.

They combine investment capital with access to GE’s technical and commercial expertise, infrastructure, global network of business units, resources and customers across 170 countries with over 300,000 employees.

GE Ventures operates four separate funds: energy, healthcare, software (the internet of things) and advanced manufacturing. With a budget of up to USD$200 million per year to spend on equity and partnership deals, there is an openness to invest in seed through to growth-stage investments. Across the fund, check sizes average from USD$1 million — USD$15 million.

Fund History According to Colleen Calhoun — Senior Executive Director, Energy Ventures — GE has been in venture capital for more than 20 years through its GE Capital business. Prior to GE Ventures, GE Capital traditionally drove venturing activity under healthcare and energy verticals, primarily focused on financial return on investment.

“[GE Ventures, Healthcare] is the tip of the strategy spear.”

Robert Wells GE Ventures

In 2005, Jeff Immelt — Chairman and CEO of GE — committed to invest more resources in R&D, launch new solutions that save money and reduce environmental impact for customers and minimize GE’s environmental footprint. The commitment was called ecomagination. As ecomagination advanced through technology, partnerships and competitiveness, it also opened up GE to innovation outside the four walls of the company. The success of opening up and driving innovation led Immelt to launch healthymagination in 2009 to improve quality, access and affordability of healthcare globally.

Seeing the possibilities of connecting the GE Capital venture investing work with healthymagination and ecomagination, GE brought all venture investing together in 2013 to leverage connections and insights around health and energy and help the industrial business grow.

36 Investing in Breakthrough Chapter 3

GE Ventures was started in 2013. These two strategic focus areas — healthymagination and ecomagination — now link directly to the GE Ventures health and energy funds; for example, in the case of GE healthymagination and GE Ventures’ healthcare fund, these two groups merged to create GE Ventures, Healthcare.

People GE Ventures is led by Sue Siegel, who is also CEO of GE’s healthymagination program. As head of GE Ventures, she has four teams that invest across their focus areas: Rafael Torres is Head of Healthcare; Brett May leads Software; Karen Kerr, leads Advanced Manufacturing; and Colleen Calhoun leads Energy investing.

Robert Wells works with GE healthymagination, actively connecting the work of GE Ventures with healthymagination programs — pursuing quality, access and affordability in healthcare.

He brings to the team a background in both entrepreneurship and policy to complement the team’s financial skill set. His approach is twofold: (1) building and mapping the ecosystem, and (2) determining what GE should do, as a set of strategic activities, to motivate that ecosystem and build successful businesses.

As such, metrics cover both positive health outcomes and the emergence of new networks, collaborations and processes.

Transactions For GE Ventures, Healthcare, a stand-out investment in Veran Medical Technologies was profiled in a recent blog on ‘Disrupting the Affordability of Healthcare’. Lung cancer is one of the most deadly forms of cancer a person can develop, and yet the screening process has not yet been standardized by medical associations. Veran addresses a need in the market for faster detection; if lung cancer is identified early, a patient’s mortality rate reduces substantially from over 90% to 15%.

To do this, Veran develops a 3D roadmap of a patient’s anatomy so that physicians can better identify areas where there is a higher likelihood of lung cancer, and more precisely target where a biopsy is required.72

But GE Ventures does more than just invest in deals — it invests in programs that bring together key stakeholders around long-term (310 year), system-level agendas. Through their Transforming Cities initiative, the GE Ventures team works alongside the healthymagination team and in partnership with Clinton Health Matters Initiative to transform how healthcare is delivered in a select group of US cities where GE operates. This model is based on a belief that the health of city residents will be improved by bringing employers, hospitals, physicians, health insurance companies, communities and public health officials together. So far, the program has been piloted in Cincinnati, Ohio; Louisville, Kentucky; Erie, Pennsylvania; and, most recently announced, Houston, Texas.

Fund Strategy In one year, GE Ventures has been involved in more than 50 equity investments, technology and commercial collaborations — an impressive track record for such a young fund.

For example, GE Ventures, Healthcare aligns its investment strategy with the healthymagination priorities of improving quality, access and affordability in global health. The GE Ventures, Healthcare investment areas therefore are affordable medical procedures, healthcare IT and precision medicine. GE Ventures, Healthcare generally focus on mid / late stage investments (approximately 70% of their portfolio) with 30% allocated for early-stage deals. Their geographic focus areas are USA, Israel, China, Australia and India.73 Another example can be seen with GE Ventures, Energy, which aligns its investment strategy with the ecomagination priorities of improving efficiency and productivity outcomes for GE customers. GE Ventures, Energy investment areas therefore are oil & gas technology and commercial models and new technologies that improve power generation.

GE Ventures, Energy generally focus on mid / late stage investments (approximately 70% of their portfolio) with 30% allocated for earlystage deals. Their geographic focus areas are USA, Canada, Israel, and Europe.74 The GE Ventures team admits that GE, as big as it is, cannot do all of these things alone. Even if they had unlimited resources, partnerships provide a necessary layer of expertise and challenge.

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Case Study 2 Intel Capital

Fund Overview Intel Capital is Intel’s global investment arm. It directs the company’s external investments, mergers and acquisitions in support of Intel’s strategic objectives. Intel Capital’s stated mission is to invest across a broad spectrum of technology innovation to encourage the technologies of tomorrow.

This covers a range of sectors including; Internet of Things, Security, New Devices and Wearables, Datacenter Software, Cloud Infrastructure, Networking & Storage, Smartphones & Tablets, Ultrabook & Perceptual Computing, Services & Open Source, Internet & Digital Media and Manufacturing & Labs. Within the Intel Capital portfolio are a growing number of companies that generate social impact through health informatics, clean technology and enabling access to education.

In 2013, Intel Capital invested USD$333 million in 146 investments, with approximately 49 percent of funds invested outside North America.

Fund History Intel Capital is one of the oldest and most active corporate venture capital funds.

Started in 1991, Intel Capital has invested over USD$11 billion in over 1,340 companies in 55 countries around the world. Of these companies, more than 200 have gone public, and over 340 have been acquired or participated in a merger.75

“There has always been a social impact element to corporate venture capital. If you ask people why they are in the venture business, it’s because they want to work with brilliant entrepreneurs and participate in solving real world problems.”

Marc Yi Intel Capital 38 Investing in Breakthrough Chapter 3

People The Intel Capital team includes some 80 investment professionals worldwide. Arvind Sodhani is both Executive Vice President of Intel Corporation and President of Intel Capital. He first joined the company in 1981 as assistant treasurer for Intel Europe and entered his current role in 2005.

Intel Capital Managing Directors lead teams focused by sector and by geographies. They work together to find innovative businesses and technologies from around the world, and have invested in 55 countries. Marc Yi is a Vice President and Managing Director of Intel Capital, responsible for its Internet, Digital Media and Education sectors. He joined Intel Capital from the IFC (World Bank), where he made private equity investments in emerging markets.

Representative Transactions Energy Intel Capital is an investor in Indiabased Duron Energy Pvt. Ltd, a solar power products company. It designs, develops, manufacturers and distributes affordable, off-grid products, having emerged from California-based Idealab with a goal of addressing the global challenge of inadequate access to electricity.76 Another example in smart energy management is Enlighted, delivering people-smart energy efficiency solutions for commercial environments. Its first application — advanced lighting control, built on the Enlighted sensor and analytics platform — saves companies between 50% and 70% in energy costs while tuning individual workspaces for the comfort and efficiency of the people who work in them.

Health Caring.com is an Intel Capital investment focused on providing support and resources to caregivers. It features articles, tools, a comprehensive local directory and access to a community. The content includes advice from over 50 trusted leaders in geriatric medicine, law, finance, housing and other relevant areas.77 Education Intel Capital invested in the TurnerAgassi Charter School Fund in the USA. Charter schools have continued to emerge as an alternative to more traditional K-12 public education programs, but their #1 challenge is access to space. Intel Capital invested in the Charter School Fund alongside several nonprofit foundations, Citigroup and the University of Michigan to address this barrier.

Fund Strategy Intel Capital puts equal weight at a portfoliolevel on the financial return and strategic returns for Intel. There is often a clear connection between the investments made by the fund and the corresponding business relationships.

According to a 2013 BVCA analysis,78 it follows the general principles that a single investment team makes decisions, portfolio companies should develop independently, remuneration follows a VC-style discipline, and they do not buy to acquire — rather, aiming to improve the general business ecosystem.

What distinguishes Intel Capital when it comes to social impact is its deep understanding of how investing in education and healthcare technologies bring much greater efficiency to these critical areas of social need. Although these are not explicitly cited on their website as ‘categories of investment’, the trend emerges upon review of their current deals.

Intel has a series of programs that support their pipeline development and partnership outreach — including their annual Intel Capital Global Summit. At this event, innovators, key executives, thought leaders, government officials, professional services providers and an exclusive group of Global 2000 companies are invited to meet and find ways to collaborate.79 Intel Capital also supports its investments by facilitating introductions with potential customers by leveraging their market influence.

On Intel Capital Technology Days, 10-15 Intel-backed companies are brought faceto-face with key executives from companies that can provide feedback on products and presentations, as well as fast track potential sales and business partnerships.80 “Social impact may not be at the forefront of a corporate venture capitalist’s agenda, but it makes good business sense to invest in companies that are socially responsible and solving real world problems.”

Marc Yi Intel Capital

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Case Study 3 Pearson

Fund Overview The Pearson Affordable Learning Fund (PALF) is a for-profit venture fund based in London and New York. It launched in July 2012 after a multi-country evaluation reflecting the need for low-cost private education systems in the developing world. With a fund size of USD$15 million, it focuses on low income populations, currently in Kenya, Ghana, Philippines, India, South Africa and Brazil.

Fund History In early 2011, Marjorie Scardino, ex-CEO of Pearson, recruited Sir Michael Barber from McKinsey & Company, where he was head of the global education practice, to help design Pearson’s strategy for selling to bottom of the pyramid markets. After a career advising governments on how to improve their education systems, “he was struck by how governments were unable take the risks needed to produce the innovation required to change education systems.” 81 Sir Michael and Katelyn Donnelly (his chief of staff at the time) co-developed the fund to invest in private sector models that could show government how they could be part of the solution to ensuring every child has access to a high quality of education.

The PALF team now sources, develops and invests in innovative business models for affordable schools and other educational solutions. They do this in active collaboration with entrepreneurs, investors, governments, NGOs and other corporations.

“In any area where we invest, we actively work with governments to explore regulatory challenges and the role of the private sector in driving positive social outcomes.”

Katelyn Donnelly Pearson

40 Investing in Breakthrough Chapter 3

People Katelyn Donnelly, Managing Director, is an active advisor on Pearson’s global strategy, efficacy and innovation agenda. She joined Pearson from McKinsey, where she had worked on transformation of large technology companies and on educational reform in Pakistan.

Transactions One of their first investments was into Omega Schools in Ghana. Omega Schools is a privately held chain of affordable, forprofit, low-cost schools which provide more affordable access to education. For a student tuition fee of 1.5 Ghanaian Cedi (GHS), USD$0.75 per day, or 240 GHS (USD$80) per year, Omega provides a hot lunch, a school uniform, learning materials and some preventative medical treatments. The school also offers a ‘pay-as-you-learn’, all-inclusive daily fee to make education more accessible to families who cannot afford the term fees upfront. To date, they have enabled 20,000 students to gain access to education.82 In addition to the Pearson Affordable Learning Fund, Pearson, the parent company, has made fund-of-fund investments: for example, in Learn Capital, a venture fund that has invested in education start-ups including BloomBoard, Chromatik, Desmos and Edmondo.

Pearson believes deeply in the value of partnerships. Their role is about more than just providing money to entrepreneurs, but also getting to know the needs of the business over a long-term horizon. Similarly, they value working collaboratively with local co-investors and sector experts in order to give their investments the greatest chance at success. Their active talent-sharing with Village Capital in India is an example of this commitment.

The fund tracks financial metrics alongside the efficacy of their investments, which is included in the standard shareholder agreements. They solicit independent reports that track pupils’ term performance in comparison to government-provided schools and other community schools. They also closely monitor price of entry (affordability) and demographics, in an effort to demonstrate to governments that the private sector has a role to play in driving quality and access outcomes. The fundamental question they ask is: are pupils learning more for less money?

Fund Strategy All investments made by the Pearson Affordable Learning Fund must demonstrate the ability to make market competitive returns, while meeting the company’s strategic objectives around enabling greater access to education. For this reason, the activities of the fund remain tightly connected into the business, which is reflected in the overall governance; the fund investment committee includes Pearson’s Head of M&A, Global CEO and President of Emerging Markets, and the Chief Education Advisor.

In the deals Pearson Affordable Learning Fund commits to they require the ability to be a strategic, significant minority investor including a seat on the board of directors.

The Pearson Affordable Learning Fund typically invests USD$2-3 million in Series A rounds, taking 20-45% stakes. They will also invest USD$50,000 to USD$500,000 in seed investments, taking 10-20% equity stakes.

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Case Study 4 Patagonia “The fund will help entrepreneurs and innovators succeed in working with nature, rather than using it up.”

Yvon Chouinard Founder & Owner, Patagonia

Fund Overview The Patagonia $20 Million & Change fund is an internal fund set up to support startup companies that share the core values of Patagonia Inc. This includes quality, environmentalism, corporate transparency and “not being bound by convention”. With a potential for the endowment to grow over time, the $20 Million & Change fund sits within the holding Patagonia Works holding company.

Fund History The $20 Million & Change fund launched in 2013, with the specific aim of helping start-up companies to develop solutions to environmental challenges. This is a natural extension of one element of Patagonia’s three-part mission statement — which focuses on using business to inspire and implement solutions to the environmental crisis.83

People Rose Marcario is the CEO and President of Patagonia Works. Prior to this leadership position she served as COO and CFO. Her role includes a special emphasis on nurturing and mentoring start-up and emerging businesses.

Transactions The most recent deal made by the $20 Million & Change fund is an investment in Denverbased CO2Nexus, a textile processing company which has developed a sustainable method of cleaning and disinfecting garments using liquid carbon dioxide (the same CO2 which provides fizz in beverages). This means no water is used in the process and, because is does not require a separate dryer, the amount of energy required is significantly lower than traditional processes which can use up to 100 gallons of water (or more) for every pound of textile processed.

The investment capped a Series A round of investment for the company. Commenting on the partnership, CO2Nexus President & CEO Richard Kinsman said, “Patagonia is the perfect partner for us . . . their leadership and track record in both textile technology and environmental arenas is unparalleled.” 86 Fund Strategy

The $20 Million & Change fund has clear terms of investment to ensure the companies they invest in share the core values that are integral to the Patagonia strategy. In cases of larger When he announced the investment fund, ‘non-angel-level’ investments, this includes a Patagonia founder and owner, Yvon Chouinard, preference that their investees be organized said that the fund would help entrepreneurs as B Corps, be a member of the 1% for the and innovators succeed in “working with Planet 87 and utilize the Higg Index, developed 84 nature rather than using it up.” Since 1985 by the Sustainable Apparel Coalition (or other it has dedicated 1% of its sales each year appropriate footprint-based measurement of to environmental causes and was the first social and environmental performance).88 company in California to register as a B-Corp.85 In addition to capital, entrepreneurs that align themselves with this fund are offered access to shared corporate services which include legal, finance, technology, distribution and human resources support.

42 Investing in Breakthrough Chapter 3

Case Study 5 Blue Orange “We are small, flexible and quick, allowing us to bridge between the corporate world and entrepreneurs and nurture value creating business development through partnerships.”

Adrien Henry Blue Orange 89 Fund Overview Based in Paris, Blue Orange is Suez Environment’s corporate venture capital unit.

It is a 100% owned subsidiary of the parent company and sits within Suez Environment’s Open Innovation strategy. Blue Orange has an investment budget of EUR€50 million, which it can draw down over a period of 10 years in the form of both direct investments (and necessary follow-on investment rounds) as well as investments into funds.

Fund History Blue Orange was created in 2010 in response to a recognition at a CEO and operations level that the sector in which Suez Environment plays was changing very fast — and would likely continue to change with new regulations and rising energy and raw material prices.

There was also the awareness that many more entrepreneurs were beginning to start businesses in the field with solid technologies and new business models. With these factors in mind, it was felt that Suez needed to further develop an open innovation strategy in order to insure the company was well prepared for these changes and able to work with these trends to drive business growth.

People Adrien Henry is the Managing Director of Blue Orange, which he helped develop from the very beginning. Henry started his career with Ernst & Young’s Sustainability Services team and moved to Suez Environment in 2006 where, prior to Blue Orange, his roles included assistant to the Group’s Managing Director for Waste Operations.

Transactions Today, Blue Orange has 7 operations. This includes a combination of direct investments and an investment in a fund (Demeter 3).

Among Blue Orange’s projects count Redox Maritime Technologies (Norway, ballast water treatment), Sigrenea (France, remote monitoring of waste selective collection deposit points); Cogebio (France, decentralized energy production from biomass) or Agri-Esprit (France, precision agro-industry for reduced water, fertilizers and pesticides consumption).

In 2012, Blue Orange invested in the cleantech start-up fund Demeter 3 Amorcage, which focuses on eco-technologies including water, waste treatment and renewable energy.

Fund Strategy Blue Orange focuses exclusively on early and development stage waste and water, which includes deals in IT, chemistry and other technologies applied to the sector. All deals they make must meet the financial return criteria set by the fund, in line with standard VC return, and then pass through a filter that looks at the way in which the investment under consideration complements the company’s strategic objectives in the areas of waste and water innovation. The strategic focus is on differentiation from competitors through service contracts, as well as developing new markets in partnership with the portfolio businesses.

Since its inception, the team has received over 1,000 ideas sourced through a combination of external networking, internal company incubation and sector research by the Blue Orange team. Over the 10 year fund horizon, their intention is to make 10-15 investments, all of which must involve a co-investment partner.

Blue Orange requires a board seat in all of their deals in order to insure strategic alignment between the businesses and to reinforce the commitment to work together with their partners to win new markets.

The team at Blue Orange is willing to work with impact funds. Interestingly, they are in regular contact with Suez Environment Initiatives, which “sits across the hall.” Suez Environment Initiatives’ strategy is dedicated to social and development non-profit projects — such as water-based projects in developing countries.

Where appropriate, these two departments share deal flow and insights on their respective projects.

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Chapter 4 Breakthrough Investment Syndicates Opportunities and risks of syndication between CVC and impact investment.

“I do not see the social side and the business side as separate.

They must be aligned and combined, at scale.�

Deborah Hopkins Citi Ventures 44 Investing in Breakthrough Chapter 4

Our requests for interviews routinely received responses along the lines of: “We are not investing in impact”, or “We are primarily focused on shareholder value.” But what happens when shareholders start to value responsible business, or impact investment moves beyond a license-to-operate consideration to a condition for future competitiveness?

Our interviewees (see Appendix A) ranged from a small number who perceived no role for themselves or their organizations in this new wave through to those who were already riding it — providing insight on what works, what does not and how given strategies can help or hinder corporate venture capital in pursuit of breakthrough innovation.

Summarized below are a selection of findings from our questions on how CVCs are set up, how they are thinking about impact, why partnerships are so critical and where the greatest opportunities exist for stronger bridges between this community and the impact investment sector. It is also apparent that opportunities for shared return (both at financial and impact levels) are not without risk. So we have identified some critical considerations to take into account when kick-starting a collaboration.

Setting Expectations Getting Started We asked our interviewees what CVC characteristics are critical to get right in the beginning, allowing them to partner effectively with other stakeholders. Summarized in Figure 15, this list is far from exhaustive nor should be taken as general rule. Instead, it largely depends on how the fund is governed and structured, as well as the strategic priorities and the presence of a robust partnership strategy. Most importantly, these factors need to be considered within an overall fit into the existing corporate culture. As Peter Drucker famously said, “Culture will eat strategy for breakfast.” 90 So managing expectations around level of involvement, integration and timing is critical.

Figure 15 CVC Checklist Key Characteristics of Corporate Venture Capital Units 1 Senior leadership buy-in.

2 Clear investment goals and objectives.

3 Alignment and integration with parent company’s strategy, corporate development, R&D and other corporate venturing activities.

4 Support for investees beyond just capital funding: actionable relationships with the parent company’s business units and network of partners.

5 Co-investment strategy.

6 Pipeline of investment-ready deals.

7 Long time horizon for returns (typically 10+ years).

8 Investment experience on the team.

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Balancing Act How do CVC governance structures balance fund autonomy with connection to the parent company?

Balancing Returns How does the fund strategy weigh strategic and financial returns, and what is the time horizon?

Autonomy is important — allowing CVCs to move at a speed similar to the entrepreneurs they are investing in, and attract the insideout and outside-in networks and talent pools.

This can sometimes prove difficult for those CVCs that are purposefully integrated into the business units, typically to ensure strategic alignment remains a top priority and that there is good access to additional resources and relationships the investee might need.

Governance factors are critical to understand upfront, especially for co-investment partnerships where decisions sometimes need to be taken quickly.

Perhaps the most relevant factor for potential partnerships with CVCs involves understanding investment priorities. In some cases, CVCs are clear that financial return is paramount.

Other CVC funds have more flexibility on the financial returns and are willing to sacrifice this (up to a point) in exchange for a more strategic return in terms of the future of the business.

CVCs are typically tasked with meeting both these objectives, but partnerships will work best when based on a clear communication of priorities to ensure that expectations are aligned across the various players involved.

Balance Sheets Are funds allocated on- or off-balance sheet?

On-balance-sheet means investing money of the company through an annual budget and is listed as an expense line, whereas offbalance sheet investing involves a third party or separate fund where money is committed for a longer period of time. There are pros and cons to both models, although many CVCs we spoke to indicated that the model depended on the culture of the business.

Figure 16 For the (Social) Entrepreneur…

The Buck Stops Here Who supports the fund?

Regardless of the governance model, the structure and the strategy, the leadership team at the parent company — whether directed from a board level or from the executive leadership committee (or both) — must have confidence and support the activities of the fund. Given this level of trust and support, the CVC can develop the external partnerships it sees most relevant to the success of the investees, the fund and, correspondingly, the parent company.

Pros of taking CVC investment 1 CVCs can take a longer-term view than traditional investors, so pressure on exit can be less intense.

2 CVCs can become your lead customer and give you access to suppliers and customers from their own value chain.

46 Investing in Breakthrough Chapter 4

3 CVCs can provide you with access to special skills and expertise from within the business, as well as capital.

4 CVCs can give you an opportunity to have influence on the parent company’s business strategy.

Internal Partnerships Through partnerships with business units of the parent company, CVCs can gain access to Most of the CVCs we spoke to have clear new markets and drive growth. CVCs can also and deliberate strategies for partnership and co-investment. In some cases, it is an absolute spin out technology developed by its parent’s R&D department or develop new business requirement for any deal that there be another models using brands or expertise of the parent investor involved to create an investment syndicate (as long as they are not competitors), company. The spin-out takes the form of a new company, addressing markets that are not core and an easy way for the deal to link in with to the parent. existing internal operations. So what are the benefits?

Partnerships also help entrepreneurs access a diverse set of resources, beyond simply capital, Co-Investment Partnerships from a range of different groups. Ultimately Investing in a syndicate can bring greater these additional resources — including access market leverage to the table — CVCs can to skills, technologies, supply chains or share deals (and in some cases expensive mentors — can help ensure a greater likelihood sourcing and diligence costs) as well as share of success for the investor syndicate as well as the risks and jointly attract additional funding. for entrepreneurs themselves.

A key advantage of co-investment was seen An interesting example of this parent to be internal learning. By working with other investors, especially local ones in new markets, company strategy is Disrupt Unlimited, a seed CVC funds have a chance to better understand accelerator driving disruptive innovation across the apparel, textile and accessories industry. how to make these complex investments, Disrupt Unlimited is an independent company, and ultimately take lead roles in future deal led by Brandix, Sri Lanka’s leading apparel development. solutions company. Along with their financial commitment, which may be up to a 20% equity stake, Brandix and other industry partners will provide Disrupt entrepreneurs — who are often spun out of the core business through ‘disrupta-thons’ — with industry insights, mentors with years of experience, product validation, “We love partnership.” an extensive network of investors and supply chain partners, and association with a trusted Robert Wells brand.

Partnership is Critical

GE Ventures Cons of taking CVC investment 1 CVCs can limit the available exit options.

2 CVCs can contribute to a less ‘efficient’ environment: they can shield you from market signals that might otherwise be helpful inputs to your business plan development.

3 CVCs may negotiate monetary discounts and exclusivity with their partners.

Exclusivity can prohibit you from acquiring additional, potentially higher value, customers.

4 CVCs, given their corporate links, may move more slowly than you would expect and need them to.

5 CVCs can expect more control than you are comfortable giving (i.e. involvement on your board which might distract from business plan goals that extend beyond the relationship with your CVC investor).

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Eyes Wide Open However, even partnerships formed with the best of intentions can turn sour. Partnerships can take a long time to nurture and mature, and they largely revolve around people — all inherently risky factors. When expectations between co-investors are skewed, or there is a misalignment in the growth strategy or exit options, tensions can negatively affect the deal itself and potentially spread more widely into higher-level relationships within parent company and investment communities.

How to Make CVC and Impact Investment Compatible: the Impact Value Proposition We have seen how the strategic imperative for CVC is a critical consideration in structuring funds. We have also observed an increasingly clear case that links this strategic imperative to corporate transformations focused on future-proofing the business. It is hopeful to see the macro-level mega trends relating to urbanisation, resource scarcity, health system reform and growing global inequality connect directly with the investment priorities of CVC funds.

Our CVC interviewees have been unabashed about the need for cross-sector relationshipbuilding that happens with certain deals and markets — especially those with impact on education or health, as they are balancing private sector provision of services with (often) government-run programs and subsidies and / or non-profit initiatives.

Once the case is made for corporate strategic investing in businesses that produce financial returns as well as social and environmental impact, the next logical question is — how can we make this happen at an accelerated rate, if there is a willingness to navigate the risk and opportunity?

Figure 17 Who Said It? Answers on page 55

1

2

“The hardest thing to do is measure the ‘intangibles’ created by our investments.”

“One of the areas most primed for disruption is education. This is where we are focusing our investment capital.”

A Impact Investor B Corporate Venture Capitalist

A Impact Investor B Corporate Venture Capitalist

48 Investing in Breakthrough Chapter 4

3 To exchange expertise From CVCs, this might include their deeper insight into how more commercial These partnerships can take the form of new businesses scale. From impact investors, syndicate models. CVCs could and should this expertise might include how to manage invest alongside impact investors in deals that relationships with entrepreneurs who value meet the corporate’s financial and strategic the impact their business generates just return criteria, while also aligning with the social as much as the financial return (or more or environmental outcome requirements of so) as well as bringing measurement tools the impact investors. This is a relatively new that can be used to quantify the otherwise frontier for both CVCs and impact investors intangibles impacts of the investments. so the partnerships will require open and entrepreneurial teams ready to experiment — 4 To mitigate risk and willing to negotiate a value system they Bringing together partners who have can both agree on. unique and / or complementary skills and resources to contribute helps improve the Simply put, the objectives of these overall likelihood of success.

Breakthrough Investment Syndicates would be four-fold: One Possible Answer: Partner with Impact Investors

1 To share deal flow CVCs may have deals that impact investors might want to make. Impact investors have deals that CVCs might like to make.

Ultimately, the success and failure of funds of either kind depend on the quality and fit of the investee, so finding the right ventures to work with is something that adds value for everyone.

2 To leverage capital Working in partnership both directly and indirectly attracts more capital to the table for entrepreneurs to use in building their ventures, creating a virtuous flow of capital throughout the system and benefitting everyone involved in the deal.

3

4

5

“Resource scarcity is a critical issue.

We need to invest in new ways to do more with less.”

“Working in partnership is critical to make our investments a success.

We need to engage across the full ecosystem.”

“Our investments are about more than just the bottom line.

They need to have double and triple bottom line impacts for us to call them a success.”

A Impact Investor B Corporate Venture Capitalist

A Impact Investor B Corporate Venture Capitalist

A Impact Investor B Corporate Venture Capitalist 49

Chapter 5 What’s Next?

50 Investing in Breakthrough Chapter 5

1 Hypothesis 1 CVCs are (increasingly) investing in deals that generate social and / or When we started on this research project, we environmental impact had three core hypotheses in mind which we sough to test and explore with both CVCs and While CVCs may not necessarily refer to it as impact investment, they are investing impact investors. into sectors such as health, education, transportation and cleantech, driving We have tested these hypotheses through the positive growth trends in each of these course of this research project, and found them areas. to be good grounds for further investigation. Of course there are variations to every rule — but in general we found a sense of genuine warmth 2 Hypothesis 2 CVCs are willing to partner and openness amongst the CVC community, with impact investors including a willingness to speak candidly both Many CVCs that we interviewed voiced a ‘on’ and ‘off’ the record. willingess to work in concert with impact investors, and in some cases experiments are already taking place between these two groups. However, it is critical that motivations for return and impact are clearly articulated and steps taken to reduce a perception that impact investments are glorified ‘vanity projects’.

Our Three Hypotheses

3 Hypothesis 3 CVCs have a lot to offer these partnerships beyond capital: access to new markets, supply chains and specialist expertise Without exception, all the CVCs we spoke to referenced the value they deliver to ventures is more than just the size of the check they write. Our five case studies illustrate the type of deals that can benefit from this additional support.

“There is only so much foundation capital available. It therefore makes sense that those initiatives that are able to pay back to investors (impact or otherwise) because there is a market-based solution should do so, in order to protect the pure grant funding for those challenges where there is no market-based solution.”

Martin Rich Social Finance Ltd.

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Key Takeaways

For Parent Companies

We hope our five primary audience groups are able to take away the following insights from our research:

— If you do not already have a CVC fund, you should consider starting one. The best way to join the game is to start small and find existing funds to invest in. Learn the ropes and build the networks you will need to have a dedicated fund of your own.

For Entrepreneurs — There are many advantages to working with CVCs. They can offer you funding as well as access to new customers, more advantageous supply chain relationships and skilled expertise in areas your business requires.

— However, be aware of the risks involved with taking CVC funding, (highlighted in Figure 16), which include the risk of being swept out by the tide due to the sheer size of the parent company. Keep hold of your management team’s entrepreneurial spirit.

— Stick to your values — and find a group of investors who share them.

For CVCs

— If you do have a CVC fund, but it does not currently make deals that have impact (either explicitly or implicitly) — ask yourself what the industry you are working in will look like in 10 years, 20 years, 50 years.

And consider how macros trends relating to social and environmental change will affect your business over these time horizons.

— If you have a CVC fund that does look for impact — congratulations! You are potentially riding this industry’s breakthrough wave. Continue to support the team with capital and an openness to take risks through both deals and unusual partnerships that may not be standard in the industry (yet…)

— Impact investments will be increasingly — Consider how other parts of your business, important for a CVC which is charged with including R&D, corporate foundation and finding innovations that will help future-proof strategy teams, might connect into a the business. Impact investors can help find venture strategy. deals and also provide tools to help you quantify the social impact.

For Impact Investors — In working with impact investors, be aware they may be more likely to trade off financial return for social / environmental impact — and where a value-added balance could be struck.

— CVCs are increasingly involved in areas where impact investors also have an appetite to invest, but they generally approach deals with an innovation imperative, rather than impact imperative.

— CVCs may have access to entrepreneurs who may not describe themselves or their businesses as ‘social’, but have business models and impact plans that meet your fund guidelines.

— By working with CVCs, you can help your portfolio reach scale at speed by tapping into new geographies and markets, existing channel partnerships, hard to reach customers, favorable supply chain relationships and the expertise and skills of employees within the company.

52 Investing in Breakthrough Chapter 5

For Governments

Additional Questions

— Build and co-invest in innovation cluster development to enable an investible pipeline of social ventures (as discussed on page 47). This is an opportunity for both developed and developing markets.

In the last two months of 2013, Egypt, South Africa, Azerbaijan and Tanzania were planning or launching incubators to kickstart innovation in the relevant regions.91

This report has been designed as a first step in a wider set of activities focused on different ways of investing in Breakthrough. In the process of our research, additional questions have arisen that require further exploration.

— Encourage legal and accounting changes that level the investment playing field for corporate venture capitalists, angels, VCs and impact investors.92 These might include tax breaks or other forms of policy incentives.

— Set up incentives for CVC and impact investor syndication by providing funding either directly or through the establishment of social investment banks (like Big Society Capital in the UK) which can provide match funding for funds which prioritize social impact.

— Are there better ways to define the scope of impact ventures?

— How should we assess whether particular impact ventures are ready to take on cvc investment?

— What lessons are there to be learned on how corporations can effectively integrate impact ventures into their business?

— What are the exits going to look like in practice?

— How can we measure the intangible strategic value of investments, especially as they relate to future-proofing a given business?

“We need to develop the rules of the game — how to manage distribution of profits and social purpose expectations.”

Adrian Brown BCG

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What Comes Next In addition to asking these further questions, we believe there are a series of activities that need to take place to encourage more impact deals to be made by both CVCs and impact investors.

— Networks We need to catalyze more connections between CVCs and impact investors. This can be achieved if CVCs (and members of the parent company leadership team) attend impact investment sector events such as SOCAP (US),93 Good Deals (UK),94 Global Impact Investing Network (GIIN) regional events (global),95 Sankalp Forum (India)96 and EVPA’s Annual Conference (Europe).97 But this is not a one-way street.

We would also like to encourage impact investors / intermediaries to expand their networks by attending CVC events such as the annual Global Corporate Venturing Symposium (UK).98 — Deal Flow Once these connections are made, we need to make sure there is a healthy and thriving pipeline of deals ready to absorb the capital (and other resources) that both these investment groups can provide. This is where the activities of governments, such as the UK Cabinet Office’s GBP£10 million Social Incubation Fund, will play a critical role.99 An example of a syndicate which takes the form of an impact venture incubator is Wayra UnLtd. This is a partnership between UnLtd, the world’s largest supporter of social entrepreneurs, and Wayra, Telefonica’s global tech start-up accelerator program and the UK Cabinet Office. Wayra UnLtd is the first Wayra Academy focused on start-ups that make a positive social impact. Each team that participates in the program receives an investment of GBP£40,000 (structured as convertible loan), as well as access to space, networks and mentorship.100

54 Investing in Breakthrough Chapter 5

— Reflection And, of course, we need to find a way to learn more from experiments. As more deals are done and partnerships develop between CVCs and impact investors, there will inevitably be huge successes and deep failures. We need to ensure there are systems in place that document, disseminate and explore the good, the bad and the ugly of investing in impact ventures.

Tools In order to accelerate and amplify the connections between CVCs and impact investors, we see an opportunity for four distinct tools in the market.

— Impact Deal Database We need to track CVC funds that have scope to invest in impact sectors (such as those profiled on pages 36–43).

The investments could be centered on direct investments as well as fund-offund level investments. By collecting this data, it would become easier to identify collaboration opportunities, where there is a shared sector / impact interest by both CVCs and impact investors.

— Syndication Platform Once the market for collaboration is established, tools to enable syndication can make the process of working together as easy and efficient as possible. The Artha Platform is a closed, secure online community which connects impact investors, donors, social entrepreneurs and capacity-building organizations.

Investors join this network to gain better understanding and comfort with enterprises listed in the project pipeline as a way of making the diligence process more efficient.101 A similar model could be helpful in connecting CVCs and impact investors on deals where they can share their views on the venture’s potential to meet both financial returns and social impact targets.

In order to tackle existing and future global challenges, we need to work together — sharing deals, co-investing in solutions that have the best chance of success, being open about failures, learning from what does not work and keeping our collective focus on Breakthrough levels of innovation that are fair, ambitious, disruptive and future-ready.

We go further when we go together, they say.

If you would like to join us on the journey to further investigate these needs in the market, and ways in which we might work together to build stronger partnerships between CVCs and impact investors, please contact us. We would love to meet with you.

— Amanda Feldman Director of Impact & Innovation, Volans amanda@volans.com @volansamanda — Charmian Love Co-Founder, Volans charmian@volans.com @volanschar and — Jim Mawson Global Corporate Venturing jmawson@globalcorporateventuring.com — Toby Lewis Global Corporate Venturing tlewis@globalcorporateventuring.com

Who Said It? (Page 48)

— Specialist Publication In order to track successes and failures in partnerships between CVCs, impact investors and impact ventures, there could be a market for an online publication that focuses on the intersections between these three communities — and the networks and systems that surround them. The publication could include case studies, articles on relevant topics (such as measuring ‘intangible’ value to the business, how to plan for effective exits) and a ‘job board’ listing opportunities for investor and management secondments and positions.

In Conclusion

We heard it from both (A) Impact Investors and (B) Corporate Venture Capitalists!

— Events We need to purposefully design events that bring together CVCs, impact investors and investible deals. Events of this kind exist in particular sectors, such as technology (First Tuesday102 is a popular UK example), or across sectors led by forward-thinking intermediaries, like Intesa Sanpaolo with their Start-Up Initiative.103 These events would support information sharing — while building networks, spotlighting success and failure alike, and curating opportunities for collaboration.

55

Appendix A Survey Process

Appendix B References

We have researched, scanned and interviewed a wide range of experts to deliver the following part-quantitative, part-qualitative analysis.

1

Vital statistics Qualitative data for this report came from a total of 20 interviews: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Adrian Brown, BCG Adrien Henry, Suez Environment Brian Flucht, Nike Corporate Development Chris Hollowood, Syncona Partners (independent subsidiary of the Wellcome Trust) Colleen Calhoun, GE Ventures, Energy Cristina Umani, European Venture Philanthropy Association Dan Cherian, Nike Deborah Hopkins, Citi Ventures Hans Daems, Hitachi Harsha Angeri, Bosch Jonathan Tudor, BP Jorn Anderson, Clareo Katelyn Donnelly, Pearson Marc Yi, Intel Capital Mark Muth, PwC Martin Kelly, IBM Ventures Richard Nourse, Greencoat Robert Wells, GE healthymagination Sam Gray, Apposite Capital Steven Serneels, Impact Investor

In addition to invaluable guidance from our Steering Committee: — Edward Evans, Senior Policy Adviser, Social Investment and Finance Team, UK Cabinet Office — James Mawson, Founder, Global Corporate Venturing — John Elkington, Executive Chairman, Volans — Toby Lewis, Editor, Global Corporate Venturing — William Rosenzweig, Managing Partner, Physic Ventures Quantitative data was drawn from the Global Corporate Venturing database and the EY Report.

56 Investing in Breakthrough Appendices

Breakthrough Capitalism project by Volans. www.breakthroughcapitalism.com 2 Sustainable Measures. http://sustainablemeasures.com/training/ indicators/weakstrg.html 3 2013 Analysis, Global Corporate Venturing.

4 Breakthrough Capitalism project by Volans. www.breakthroughcapitalism.com 5 Sustainable Capitalism, Generation Investment Management. www.generationim.com/media/pdfgeneration-sustainable-capitalism-v1.pdf 6 Global Corporate Venturing, Issue 047, April 2014.

7 2013: Full Year Data Analysis, Global Corporate Venturing.

8 Global Venture Capital Insights and Trends 2014, EY report.

9 Tech City. www.techcityuk.com 10 Level39. www.level39.co 11 2013: Full Year Data Analysis, Global Corporate Venturing.

12 2013: Full Year Data Analysis, Global Corporate Venturing.

13 Corporate Venture Capital: Avoid the Risk, Miss the Rewards, 13 October 2012, BCG Perspectives. www.bcgperspectives.com/content/articles/ innovation_growth_mergers_acquisitions_ corporate_venture_capital 14 How Corporate Venture Capital can Transform UK Finance and Funding, 17 October 2013, British Private Equity and Venture Capital Association. www.bvca.co.uk/newspublicpolicy/ pressreleases/2013/howcvccantransform ukfinanceandfunding.aspx 15 Corporate Venturing, July 2012, RSA. www.thersa.org/action-research-centre/ enterprise-and-design/enterprise/enterprise/ corporate-venturing 16 Global Corporate Venturing. www.globalcorporateventuring.com 17 BVCA Guide to Corporate Venture Capital. www.bvca.co.uk/portals/0/library/documents/ bvca%20guide%20to%20corporate%20 venture%20capital.pdf 18 Unreasonable Institute. https://unreasonableinstitute.org 19 Bethnal Green Ventures. http://bethnalgreenventures.com 20 Isis Innovation. www.isis-innovation.com/about/index.html

37 Technology Strategy Board.

www.innovateuk.org 22 Big Society Capital. www.bigsocietycapital.com 23 Omidyar Network.

38 www.omidyar.com

24 Global Impact Investing Group. www.thegiin.org 25 Growing the Social Investment Market: 2013 Progress Update, HM Government. www.gov.uk/government/uploads/system/ uploads/attachment_data/file/205295/Social_ 39 Investment_Strategy_Update_2013.pdf 26 What is Venture Philanthropy?, European Venture Philanthropy Association.

40 http://evpa.eu.com/knowledge-centre/

what-is-vp/ 27 Corporate Venture Capital: Avoid the Risk, Miss the Rewards, 13 October 2012, 41 BCG Perspectives.

www.bcgperspectives.com/content/articles/ innovation_growth_mergers_acquisitions_ corporate_venture_capital 28 How Corporate Venture Capital can Transform UK Finance and Funding, 17 October 2013, British Private Equity and 42 Venture Capital Association. www.bvca.co.uk/newspublicpolicy/ pressreleases/2013/howcvccantransform 43 ukfinanceandfunding.aspx

29 Corporate Venture Capital: Avoid the Risk, Miss the Rewards, 13 October 2012, 44 BCG Perspectives.

www.bcgperspectives.com/content/articles/ innovation_growth_mergers_acquisitions_ corporate_venture_capital 30 45 Grameen Danone Foods Ltd.

www.danonecommunities.com/en/project/ grameen-danone-foods-ltd 31 Puma’s Environmental Profit and Loss sheet: 46 http://about.puma.com/puma-completesfirst-environmental-profit-and-loss-accountwhich-values-impacts-at-e-145-million 32 The Great Recovery project.

47 www.thersa.org/action-research-centre/

enterprise-and-design/design/the-greatrecovery2 33 48 TED talk: The Cast for Collaborative

Consumption, Rachel Botsman. www.ted.com/talks/rachel_botsman_the_ case_for_collaborative_consumption 34 Model Behaviour, 12 February 2014, SustainAbility. www.sustainability.com/library/modelbehavior#.U2t5c-ZdU1M 35 The Future Quotient, Volans, 2011 36 BASF news release, 3 January 2012 http://renmatix.com/basf-participates-inrenmatix 21

Rice Husks Co. Seeded By DFJ, Cisco In Business Plan Contest, 1 July 2009, WSJ. http://blogs.wsj.com/venturecapital/ 2009/07/01/rice-husks-company-snagsseed-from-dfj-cisco IKEA, NIKE in Innovative Technology that will Transform the Textile Industry, 22 April 2013, The Climate Group. www.theclimategroup.org/what-we-do/ news-and-blogs/ikea-greentech-invests-ininnovative-textile-technology Altobridge news release, 25 February 2013. www.altobridge.com/2013/02/25/intelcapital-and-ifc-invest-us-7-8-million-inaltobridge-growth Quad Learning news release, 8 April 2014. http://quadlearninginc.com/2014/04/quadlearning-raises-10m-to-expand-affordablepathways-to-college Google Capital Invests $40M in Learning Analytics Firm Renaissance Learning at $1bn Valuation, 19 February 2014, Techrunch. http://techcrunch.com/2014/02/19/googlecapital-invests-40m-in-learning-analytics-firmrenaissance-learning-at-1b-valuation Pearson news release, 21 April 2010. www.pearson.com/news/2010/april/pearsonintel-capital-and-ascend-venture-groupinvest-in-innovati.html?article=true InOpen news release, 25 November 2013. http://blog.inopen.in/inopen-gets-strategicinvestment-from-japanese/ Pearson news release, 2 July 2012. www.pearson.com/news/2012/july/newpearson-investment-fund-to-enhanceeducation-opportunity-amo.html?article=true EdSurge news release, 22 February 2012. www.edsurge.com/n/pearson-s-presence-inedtech-investing Fitbit Raises $43 Million From Qualcomm Ventures, SAP Ventures, And SoftBank Capital, 13 August 2013 Techcrunch. http://techcrunch.com/2013/08/13/ fitbit-43m/ Intel Capital news release, 3 May 2010. www.intel.com/pressroom/archive/ releases/2010/20100503corp.htm HealthiNation Announces $7.5M in Series B Funding Led By Intel Capital, 30 September 2008, Business Wire. www.businesswire.com/news/ home/20080930005551/en/healthinationannounces-7.5-series-funding-led-intel#. u2j3xk1dxlk

57

61 One Medical Group Raises $40M To Help

Reinvent The Doctor’s Office, 17 April 2014, 62 Techcrunch.

http://techcrunch.com/2014/04/17/onemedical-group-raises-40m-to-help-reinventthe-doctors-office 50 63 Practice Fusion Adds Another $15M From

Qualcomm To Help Fuel Growth, Acquisitions & Mobile Push, 2 December 2013, Techcrunch. http://techcrunch.com/2013/12/09/practice- 64 fusion-adds-another-15m-from-qualcommto-help-fuel-growth-acquisitions-mobile-push 51 65 Manchester University news release,

19 September 2013. http://www.manchester.ac.uk/discover/news/ article/?id=10691 52 Transforming Cities, healthymagination. www.healthymagination.com/our-work/ 66 transforming-cities

53 Eye-Q news release, 10 October 2011. www.eyeqindia.com/eyeq_funds.html 54 67 Global Health Investment Fund,

23 September 2013.

68 http://ghif.com/press-release/

55 Google Confirms Waze Map App Purchase, 69 11 June 2013, WSJ.

http://online.wsj.com/news/articles/ SB10001424127887323949904578539370 980686106 56 70 Nextdoor.com news release,

29 October 2013. https://nextdoor.com/press/20131029/ 57 EnVerv Announces Closing of $15.4M Series C Investment Round, 24 March 2014, 71 Business Wire.

www.businesswire.com/news/ home/20140324006112/en/envervannounces-closing-15.4m-series72 investment#.u2j5vq1dxlk

58 Autogrid new release, 27 January 2014. www.auto-grid.com/gallery/autogridsystems-raises-12-75-million-in-series-cfinancing-from-strategic-investors-to-fuel73 domestic-and-international-growth

59 Car-Sharing Startup RelayRides Makes Move 74 75 Into U.S. Airports, 3 June 2012, WSJ.

http://blogs.wsj.com/venturecapital/ 2013/06/03/car-sharing-startup-relayrides- 76 makes-move-into-u-s-airports 60 BMW Group news release, 25 July 2013. www.press.bmwgroup.com/united-kingdom/ 77 pressdetail.html?title=bmw-i-announces investment-in-uk-s-leading-provider-ofelectric-vehicle-charging-infrastructure-five& outputchannelid=8&id=t0144026en_gb&left_ menu_item=node__6728 49

58 Investing in Breakthrough Appendices

The Gym, Bridges Ventures. www.bridgesventures.com/investment/gym FINO raises Rs 70 cr from HSBC PE, others, 10 December 2009, Reuters. http://in.reuters.com/article/2009/12/10/ idINIndia-44624820091210 Treasure at the Bottom of the Pyramid, 11 December 2011, Business Today. http://businesstoday.intoday.in/story/ innovation-cemex/1/20184.html Eleni news release, 22 January 2013. http://eleniexchanges.com/morgan-stanleyand-ifc-invest-in-eleni-llc-4 Mobile Money Revolution Spreads to Europe as Vodafone Brings M-Pesa to Romania, 31 March 2014, Gigaom. https://gigaom.com/2014/03/31/mobilemoney-revolution-spreads-to-europe-asvodafone-brings-m-pesa-to-romania Danone Communities. www.danonecommunities.com/en/project/lalaiterie-du-berger?mode=history Micro Drip. www.microdrip.pk/aboutus.html Grameen Intel Social Business. www.grameen-intel.com Unilever Opens up Sterling Green Bonds, 24 March 2014, Climate Bonds Initiative. www.climatebonds.net/2014/03/ unilever-250m Goldman to Invest in New York City Jail, 2 August 2012, The New York Times. www.nytimes.com/2012/08/02/nyregion/ goldman-to-invest-in-new-york-city-jailprogram.html?_r=5& What is Venture Philanthropy?, European Venture Philanthropy Association. http://evpa.eu.com/knowledge-centre/ what-is-vp/ Disrupting, the Affordability of Healthcare, GE Ventures. http://geventures.tumblr.com/post/ 70433851531/disrupting-the-affordability-ofhealthcare GE Ventures Fact Sheet GE Ventures Fact Sheet Intel Capital. www.intelcapital.com/advantage Intel Capital. www.intelcapital.com/portfolio/company. html?id=16315#/sector=qwxs/location= qwxs/role=qwxs/page=0/term=solar Intel Capital. www.intelcapital.com/portfolio/company. html?id=15006#/sector=qwxs/location= qwxs/role=qwxs/page=0/term=health

90 British Private Equity and Venture Capital Quote attributed to Peter Drucker.

91 Association.

2013: Full Year Data Analysis, www.bvca.co.uk/newspublicpolicy/ Global Corporate Venturing.

92 pressreleases/2013/howcvccantransform 2013: Full Year Data Analysis, ukfinanceandfunding.aspx Global Corporate Venturing.

79 93 Intel Capital.

SOCAP. www.intelcapital.com/advantage/ http://socialcapitalmarkets.net 94 global-summit.html Good Deals.

80 Intel Capital. http://good-dealsuk.com 95 www.intelcapital.com/advantage/ Global Impact Investing Network Events technology-days.html http://www.thegiin.org/cgi-bin/iowa/ 81 Pearson Affordable Learning Fund. resources/event/index.html 96 www.affordable-learning.com/what-is Sankalp Forum. affordable-learning/whyafund.html#sthash. www.sankalpforum.com 97 vi0mtko7.dpbs European Venture Philanthropy Association 82 Omega Schools.

Annual Conference. www.affordable-learning.com/the-fund/ http://evpa.eu.com/annual-conferenceinvestments/omega-schools.html#sthash.

2013/#&panel1-1 98 aXmO8pjo.cw19966h.dpbs Global Corporate Venturing Symposium 83 Patagonia Invests in Efficient Textile 2014.

Processing Company CO2Nexus Through www.globalcorporateventuring.com/pages/ $20 Million & Change Fund, 21 April 2014, global-corporate-venturing-symposium-2014.

CO2Nexus. html www.co2nexus.com/live/patagonia-invests- 99 ÂŁ10 Million Social Incubator Fund Launches, in-efficient-textile-processing-company24 July 2012, Gov.uk. co2nexus-through-20-million-change-fund www.gov.uk/government/news/10-million84 Patagonia Invests in Efficient Textile social-incubator-fund-launches 100 Processing Company CO2Nexus Through http://wayra.org/unltd 101 $20 Million & Change Fund, 21 April 2014, Artha Platform.

CO2Nexus. www.arthaplatform.com www.co2nexus.com/live/patagonia-invests- 102 First Tuesday. in-efficient-textile-processing-companyhttp://firsttuesday.org.uk 103 co2nexus-through-20-million-change-fund Start-Up Initiative.

85 B-Corporation certification means a company www.startupinitiative.com has achieved a verified minimum score in an assessment of its social and environmental performance and had integrated their commitments to stakeholders into company governing documents. www.bcorporation.net 86 Patagonia Invests in Efficient Textile Processing Company CO2Nexus Through $20 Million & Change Fund, 21 April 2014, CO2Nexus. www.co2nexus.com/live/patagonia-investsin-efficient-textile-processing-companyco2nexus-through-20-million-change-fund 87 1% for the Planet. http://onepercentfortheplanet.org/ 88 Patagonia Works. www.patagoniaworks.com/docs/faq.pdf 89 GCV Powerlist 2013: Adrien Henry, Blue Orange, GCV, 13 December 2013. www.globalcorporateventuring.com/article. php/7339/gcv-powerlist-2013-adrien-henryblue-orange 78

59

Appendix C Reading List

Appendix D Acknowledgements

To learn more about Corporate Venture Capital and Corporate Venturing, we would suggest the following resources.

The authors of Investing in Breakthrough were Amanda Feldman, Charmian Love and Sasha Afanasieva. This project would not have been possible without the support of our project partners: Jim Mawson, Tim Lafferty and Toby Lewis of Global Corporate Venturing; Debra Schwartz of the John D. and Catherine T. MacArthur Foundation; and Jonathan Jenkins and Vinay Nair of the Social Investment Business.

1 Corporate Venture Capital: Avoid the Risk, Miss the Rewards BCG 2012 www.bcgperspectives.com/content/ articles/innovation_growth_mergers_ acquisitions_corporate_venture_capital 2 Corporate Venturing in the UK The RSA 2012 www.thersa.org/_data/assets/pdf_ file/0008/636830/corporate-venturingreport.pdf 3 Driving Innovation Through Corporate Impact Venturing: A Primer on Business Transformation Impact Economy 2014 www.impacteconomy.com/en/ primer3.php 4 Global Corporate Venturing Magazine Global Corporate Venturing www.globalcorporateventuring.com/ pages/magazine.html 5 Guide to Corporate Venture Capital BVCA 2012 www.bvca.co.uk/Portals/0/library/ documents/BVCA%20Guide%20to%20 Corporate%20Venture%20Capital.pdf

60 Investing in Breakthrough Appendices

Our Steering Committee of John Elkington of Volans, Will Rosenzweig of Physic Ventures, Ed Evans of the UK Cabinet Office, Toby Lewis and Jim Mawson of Global Corporate Venturing helped keep us on the rails.

We wholeheartedly thank the rest of the Volans team: Amy Birchall, Sam Lakha, Jacqueline Lim, Josephine Living and Richard Johnson, who also helped us with different phases of the report. On the design front, as always, we tip our hats to Rupert Bassett.

Appendix E Publication Details

Appendix F Volans Publications

Investing in Breakthrough Corporate Venture Capital First Edition 2014 ISBN 978-0-9562166-3-2

1 The Power of Unreasonable People: How Social Entrepreneurs Create Markets That Change the World John Elkington and Pamela Hartigan Harvard Business School Press, Cambridge, Massachusetts 2008

Copyright © 2014 Volans Ventures Ltd. All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, electrostatic, magnetic tape, photocopying, recording, or otherwise, without permission in writing from the copyright holders.

Publisher Volans Ventures Ltd 2 Bloomsbury Place London WC1A 2QA United Kingdom T +44 (0)20 7268 0390 www.volans.com Designer Rupert Bassett Printer Pensord Press

2 The Phoenix Economy: 50 Pioneers in the Business of Social Innovation Volans for the Skoll Foundation 2009 3 The Biosphere Economy: Natural Limits Can Spur Creativity, Innovation and Growth Volans (lead author Alejandro Litovsky), Tellus Mater and B4E 2010 4 The Transparent Economy: Six Tigers Stalk the Global Recovery— and How to Tame Them Volans for the Global Reporting Initiative 2010 5 The Future Quotient: 50 Stars in Seriously Long-Term Innovation Volans and JWT Ethos 2011 6 The Zeronauts: Breaking the Sustainability Barrier John Elkington Earthscan/Taylor & Francis, Oxford 2012 7 Breakthrough: Business Leaders, Market Revolutions Volans 2013 8 The Breakthrough Challenge: 10 Ways to Connect Today’s Profits With Tomorrow’s Bottom Line John Elkington and Jochen Zeitz Jossey-Bass/Wiley, San Francisco September, 2014

Volans www.volans.com

Global Corporate Venturing www.globalcorporateventuring.com

Volans is a certified B Corporation dedicated to driving market-based solutions to the future’s greatest challenges. Their Breakthrough Capitalism program explores how business leaders can be an effective force for change towards a healthy, fair and affordable world.

Global Corporate Venturing is a monthly magazine and a website written for the inhouse venture capital units of businesses.

They run its Symposium, the biggest global event in corporate venturing in London every year. The monthly magazine covers each economic sector in turn throughout the year.

VOL ANS

John D. and Catherine T. MacArthur Foundation www.macfound.org

Social Investment Business www.sibgroup.org.uk

The MacArthur Foundation supports creative people and effective institutions committed to building a more just, verdant, and peaceful world. In addition to selecting the MacArthur Fellows, the Foundation works to defend human rights, advance global conservation and security, make cities better places, and understand how technology is affecting children and society.

The Social Investment Business is one of the UK’s leading social investors and has invested more than £340 million in 1,300 charities and social enterprises since 2002. They provide simple finance to help them grow and transform the communities in which they work. We pioneer new finance solutions to increase the funds available for social investment.