The Coca-Cola Co. knows its fizz. So you might not expect the soft drink giant to jump into the venture capital game just as its going flat.
But thats just what Coca-Cola is doing. As overall venture capital investments in IT were tanking, the Atlanta company three months ago launched a division charged with finding, cultivating and investing in embryonic technology startups. Have Coca-Cola officials been drinking something stronger than soda pop?
Nope, said Chris Lowe, president of Coca-Colas venture unit, Fizzion LLC. In fact, Lowe said, this is the right time for the company to get an early peek at the technologies on which its e-business strategy will depend tomorrow. "Im very optimistic on technology, and I think that were in the second wave of the technology upswing," Lowe said. "More and more of the investment [for] technology will come from what you used to call the Old Economy [companies]. Were sort of cutting the path for how this is going to unfold."
Coca-Cola is a latecomer to a trend that peaked last year: major corporations making billions of dollars in venture capital or incubation investments in IT startups. And, not surprisingly, with the sudden demise of the dot-com and IPO (initial public offering) markets, many corporations that came early to the venture capital trend have joined professional venture capitalists in closing their wallets to new investments.
But not all corporations. Enterprises such as Coca-Cola, The Dow Chemical Co., The Boeing Co., J.P. Morgan Chase & Co. and Chevron Corp. are continuing or even increasing venture investments in technology startups. Unlike enterprises that launched venture capital units a year or two ago, however, these companies arent in it just for a quick killing. Instead, their venture capital investments are intended to help them quickly spot and understand technologies that will be key to keeping their e-business strategies a step ahead of those of their competitors.
Therefore, these e-business leaders are making sure their venture capital units remain tightly aligned with the needs of the business so that they are able to strike the right balance between financial returns and strategic goals.
No doubt when Coca-Cola executives started planning Fizzion last September, they expected a more robust market for technology startups than they find today. While the number of potential startup investments has slowed, Lowe said, Fizzion still has received about 100 business plans since launching at the end of March. The company, which wont say how much it plans to invest overall, is examining a wide range of technologies that fit its e-business strategy, including distribution, logistics and electronic marketing applications, Lowe said.
So far, three have a good chance to make the cut. That means they fit strategically into Coca-Colas business needs, and they have a good chance to grow into profitable companies, Lowe said. "Its a pretty tight market out there," he said. "What it means is that we have to be a little more patient than we thought and operate with a broad scope, which is good. It causes us to cast our net wider."
In designing its venture initiative, Coca-Cola, like many enterprises, decided to create a unit to handle that work. Such separation is critical to the success of corporate venture investing because it creates a focus on finding and evaluating potential startups and fosters a more entrepreneurial atmosphere, said Nicole Weber, an analyst at International Data Corp., in Framingham, Mass.
Fizzions plan is to provide startups with physical space along with as much as $250,000 each. Fizzion also requires that they find a matching amount of funding from other private investors.
While Coca-Cola is mainly seeking to invest in very new external startups, other enterprises tactics are as varied as their products. Like Coca-Cola, Boeing, with its half-year-old Boeing New Ventures unit, is focusing on incubating new companies. But Boeing is looking mainly at ideas that come from within the business.
On the other extreme, Chevrons Chevron Technology Ventures LLC solely searches for investments in venture funds or more mature tech startups. The most popular approach, though, appears to be a mixed one of pure cash venture investments and incubations. Dow, J.P. Morgan Chase and Eastman Chemical Co. are among those still putting money into both approaches.
Whatever the approach, the key for most enterprises continuing with venture investments is to make sure they fit the companys e-business strategy. Companies that got into venture investing during the Internet boom just for the money are probably wishing they hadnt, said Tracy Lefteroff, global managing partner in the private equity and venture capital practice of PricewaterhouseCoopers, in San Jose, Calif.
"Those doing it for financial gain are now seeing the other side of the coin and seeing financial losses," Lefteroff said. "The strategic investors are still plugging along."
Key to ensuring a strategic fit is making sure the venture investment organization has both high-level executive support and close links to key business units and their e-business plans. Boeing New Ventures Vice President Anil Shrikhande, for example, reports to the companys chief financial officer and chief technology officer. And hes even got the attention of Boeing CEO Phil Condit. Condit was behind the effort in September to launch a $200 million Chairmans Innovation Initiative fund to support business ideas that can be spun into separate companies.
So far, Boeing, of Seattle, has announced one new non-IT venture, and others are on the way. Shrikhande said he expects several of the nearly 400 business concepts submitted to turn into new incubations this year, including some with an e-business focus.
Like Boeing, J.P. Morgan Chase is viewing its venture arm, LabMorgan, mainly as a way to find and support technologies that will be important to the companys e-financial services strategy. One of LabMorgans marching orders is that J.P. Morgan Chase must be a customer of the startups in which it invests, said Ameet Patel, LabMorgans chief technology officer, in New York. Since being created in late 1999, LabMorgan has invested $500 million in about 60 companies.
To make such a strategy work, LabMorgan officials realized that constant communication with major lines of business would be critical. To that end, the 240 employees of LabMorgan work closely with five e-strategists, one representing each major line of business, such as the consumer and small- business and mergers-and-acquisitions units, Patel said. These e-strategists serve as middlemen who help to make sure LabMorgan investments fit the needs of its lines of business and that the business units understand the potential of new e-finance technologies and services. The e-strategists report to LabMorgan and senior board members of J.P. Morgan Chase.
Working closely with line-of-business strategists helped to steer LabMorgan to invest in December in startup Kinexus Corp. After line-of-business officials told LabMorgan officials that catering to high-net-worth clients would be critical to J.P. Morgan Chases strategy, LabMorgan did the deal with Kinexus, a New York company that gives wealthy customers an online view of their overall holdings across financial institutions.
Besides furthering J.P. Morgan Chases strategy, the venture investment, not surprisingly, has been largely positive for Kinexus. Not only did it help the company raise $49 million in second-round financing, it also provided it with a key customer that is motivated to help keep improving the product, said CEO Harry Totonis, in New York.
While other companies may not be going so far as having dedicated strategists interfacing between lines of business and venture investment groups, enterprises that are continuing venture capital investments have, in many cases, developed formal processes to ensure that their venture investments are tightly linked to their e-business strategies.
At Eastman Chemical and Dow, for instance, potential venture investments are screened based on whether they fit e-business strategies before they undergo traditional venture capital financial due diligence. At Eastman, that screening process has led to investments in e-marketplace ChemConnect Inc., software company WebMethods Inc. and others.
Similarly, Chevron Technology Ventures—which last month upped its original $60 million venture investment by starting a new $100 million fund—uses a scorecard to rate the strategic value of a potential investment.
But that doesnt mean that, like LabMorgan, every enterprise with an ongoing venture capital effort is insisting that the products of each startup receiving money must be used somewhere in the enterprise. Some, like Chevrons VC group, play more of a matchmaking role. The group, created in 1998, helps to get discussions going among companies its invested in and Chevron business units. So far, of the nine companies in which Chevron Technology Ventures has invested, six have worked with business units that either use their technology or have conducted beta tests, said Cliff Detz, venture executive for the group, in San Francisco.
However strategically driven todays corporate venture investment units may be, like all investors, they still care about the bottom line. They want high returns. Some even expect returns comparable to what professional venture capital companies historically realize.
Eastman Chemical, which in mid-1999 formed its corporate venturing arm, has set a goal of having the unit return a rate within the top quartile of the performance of a typical venture fund, said Mark Klopp, managing director of the venturing group, in Danville, Calif. This year, the Eastman venture unit is on track to do so. But Klopp said that was not the case in 2000. Back when startups were booming last year, Eastman had expected to gain $25 million from its venture investments. Instead, it earned $9 million.
Despite the slowing economy, Eastman isnt backing away from venture investing, however. Overall, the company has made 18 venture investments in startups, four of them this year. Eastman also plans to add two or three more incubations and venture startups to its roster this year to join the three its already helped to start—Asia BizNet Company Ltd., ShipChem Inc. and PaintandCoatings.com Inc.
That doesnt mean corporate venture investment units should stick with every investment. Corporate venture capitalists must prepare for some failures, just like anybody investing in early-stage companies still struggling to turn a profit, experts say.
Dow, for example, stopped investing in one of the companies it helped form in October through a partnership with private incubator Campsix Inc. and consulting company Accenture. The problem was that the e-commerce startup, iVenturi, wasnt able to raise additional capital, said Snehal Desai, director of e-business at Dow, in Midland, Mich. Dow wasnt interested in owning the company outright.
Dow isnt alone. Eastman has had two ventures that fell through. One, a startup specializing in business-to-business testing and verifying potential B2B partners, WorldWideTesting.com, ran out of funding. Another, chemicals trading site e-Chemicals Inc., was sold in January to Aspen Technology Inc.
Despite such setbacks, however, corporate venture units must take a long-term view of their investments, PriceWaterhouseCoopers Lefteroff said. A typical investment from professional venture capitalists has a 10-year horizon. On average, venture capitalists can realize a compounded annual return of about 30 percent, he said.
Corporate venture leaders who are still in the game say thats just what they plan to do. Eastmans Klopp, for one, said that his companys investments have only just begun. "We want a reputation of being there through thick and thin," Klopp said.