Techs eye Japan’s ‘keiretsu’ as VC model

Last updated: October 2, 2013 8:47 pm

Techs eye Japan’s ‘keiretsu’ as VC model

By Richard Waters

Groups seeking venture capital success must mimic Japan’s example

When big corporations jump on the venture capital bandwagon, it is often an indication that a start-up investment cycle has peaked. Incumbents usually wake up to the idea of backing a new band of disruptive companies – some of which are out to eat their lunch – only when it is already too late. If so, then the extra $650m that SAP has just ploughed into venture capital – boosting the firepower of its venture investment arm to about $1bn – looks like a clear “sell” signal. As Nino Marakovic, head of SAP Ventures, ruefully puts it: “Corporations normally get in at the top and out at the bottom, which is exactly the wrong way to do it.”This sort of commitment rivals the biggest independent venture funds and points to something new in the corporate venturing world. Thanks to the massive liquidity of tech companies – rating agency Moody’s says that they now account for 56 per cent of the $1.5tn of cash sloshing around the US corporate sector – they are no longer bit-players in start-up financing.

But while the risks are rising, corporate venturing has come a long way since the tech bubble of the 1990s. Back then, any and every company fearing disruption from the dotcoms seemed to think it could inject a creative element into its own DNA by opening an office in Silicon Valley and backing promising entrepreneurs.

Eastman Kodak’s move into venture capital in 2000, right at the peak of the bubble, stands as a testament to that period. It turned out that pumping cash into start-ups with names like TurboSquid and Dataplay was not enough to put Kodak at the forefront of digital photography.

One lesson from the generally woeful record of corporate investors in tech start-ups is that it pays to be serious and not just dabble. Intel Capital, the most persistent of the tech investors, has remained the undisputed leader in US corporate VC through good times and bad, building a reputation for patience and consistency that has assured it an early look at many of the best new start-ups – the key differentiator that determines success in venture investing.

Never one to do things by halves, Google has shot to the top of the corporate venturing league tables, with $1.5bn in commitments through Google Ventures. If brand counts, then Google’s reputation for ambitious, long-range thinking makes it a natural player in this business.

A second lesson is that it helps to maintain a clear divide between the separate goals that corporate venture arms pursue – of generating strong investment returns and tapping into new ideas that can be fed back into the parent company. The confusion of the two has been an excuse for underperformance in the past, justifying poor investment returns without doing much to supplement in-house R&D.

Maintaining clear incentives for the people making the investment decisions is key. SAP has taken a different tack to most companies, spinning off its venture arm into a unit that mimics a standalone firm – complete with the 20 per cent “carry”, or share of capital gains, that goes to its partners. The firm has produced returns that put it in the top quartile of venture investors, says Mr Marakovic – a record that it would be hard to maintain if it could not compete for the best talent in venture investing.

A third lesson from corporate venturing is that its importance is not always traceable through direct returns in the form of cash or new ideas. Backing a range of start-ups, some of which might go on to become industry leaders themselves, has become a way to build alliances and extend corporate influence.

With the advent of cloud computing and families of new mobile devices, the tech industry is now characterised by a series of “platform wars” – contests between industry giants seeking to draw a bigger share of digital activity into their ecosystems. For a company like SAP, an application software provider that does not have a history as a platform player, it is now essential to appeal to a wider audience. That means building links with the entrepreneurs, developers and venture capitalists who will shape the next wave of technological development.

It is becoming increasingly common to hear companies and investors in Silicon Valley talk about “keiretsu” – the loose alliances of companies that have long been a feature of the Japanese business world. Networks of informal personal and business links between tech start-ups, and between start-ups and big companies, are not new – but they are hardening as the biggest platform players seek to extend their influence. With cash in plentiful supply, it makes sense to earmark some for this bigger purpose.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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