Strange Bedfellows: Innovation and the Powerful Role of Deep Pockets

cross post with the IBM electronics blog 

There’s a well accepted premise that big companies by and large have an anti-innovation bias. Simply put, they have a vested interest in maintaining the sales pipelines of the products that have put them in the market to begin with — covering the sales top line, and spreading costs protecting the bottom line. There are very few companies where most innovations are going to substantially influence portfolio value rapidly. For most companies, protecting the status quo is the order of the day – and for their shareholders, it’s the right thing upon which to focus.

Startups are unsaddled with the machinery of big companies (plants, executives, salaries, benefits), they conceive of new solutions – or so the story goes. As with most fairy tales, the magic is not necessarily in what you see, but instead the sleight of the storyteller’s hand. In our case, it’s often the investment of successful big companies in start-ups.  Just as fairy tales draw from ancient stories, this investment approach is by no means new.  A similarly viewed patron model has existed since the dawn of civilization, primarily in artist-patron relationships, the most famous of which is likely DaVinci with the Medicis.

This is especially true in one segment of the industrial/electronics sector, a blended category called “green tech.”   A recent report from the Cleantech Group (registry wall), they detail the market and what it means for tech and business.  I spent some time reducing the report to some valuable components for the reader, adding in additional qualifying points and exemplars.  I am broadening this from a clean tech discussion to some bigger implications for the electronics companies.

Cash, Collaborators, Convenience and Commercialization  

Cash is certainly a big benefit of the Innovation partnership. In 2012, roughly 20% of the green tech deals saw corporate participation – roughly 144 deals.

Yet, a case can be made that cash is the easy part, because there is a seemingly endless well of venture money in the category.  Annual venture investments are 5x bigger, with investments amounting to $5B (estimate).   There are also plenty of alternatives for getting cash for small start-ups such as crowd-sourcing.  However, corporate investments bring two other key aspects:  collaboration and convenience.  Startups have great ideas but making ideas real is often the benefit of big companies – especially in areas such as clean energy and large scale automation. Collaboration allows start-ups the access they need while shielding the corporate balance sheet from a lot of the risk. This presents a Convenience element – not needing to deal with a lot of the internal political strife needed to enable a team of employees to pursue uncertain outcomes.  Getting the board to agree can sometimes be easier than a set of executives with specific metrics. Commercialization runs the gamut from concept validation, access to resources, production expertise and distribution networks.

While everyone looks to Nest (disclaimer:  I own and love mine) and the $80mm, they raised, it’s not the norm. The media plays up these rapid ascents – and the rapid declines such as Solyndra – a magnitudes bigger failure (as in $80B).  The reality is somewhere in the middle. Companies like Intel Ventures, Mitsui and ABB play a real role in driving innovation throughout their ecosystems partners.

Building Your Next Business

For companies like Mitsui, these investments are about portfolio differentiation.  They feature a large number of investments in health-related assets. If we do finally embrace a greener future, oil companies will need new market offerings.  Contrast that with ABB Ventures, who is moving toward adjacencies with their investments. Intel – who has a highly successful track record in this area also stays close to its heritage – where it can offer the greatest amount of support, namely introductions to tech execs.  They backed 150 companies, conducted 7 IPOs and acquired or merged in 28 more.

cleantech deal counts

Fear of Failing

Yet, for all this goodness, there are a significant amount of unsuccessful market exits.  These are expected casualties, yet still painful. North of 40% of the businesses in these partnerships see distressed exits, according to Cleantech’s research.  I think that number would hold up across the larger electronics industry as a practical estimation.  In a world where so many businesses fail – especially corporate backed new products which fail 80% of the time or more, that’s still a great success ratio for both sides.

Diversifying your portfolio of investments and expanding your ecosystem are critical parts of the mix.  And in electronics, it’s a better bet than trying to do it all within your own walls.

Finding the Innovation Horizon

At Google Ventures, they talk about the difficulties of not knowing where a product, offering, industry or even the world will be 5-10 years out. That’s the horizon line to value for many of these investments. It’s the difference between the thermostat and generating the energy usage it displays. Still, every electronics company must look beyond its own walls for these types of investments sooner rather than later.

Robust ecosystem partnerships, attachments to University Labs (such as MIT’s indomitable Media Lab), and of course, exposure to the largest private lab with $5B in annual investment – IBM Research – offer you solid places to start.  In addition to IBM Research, there are three other entrants to increase your view and reach toward the horizon line:

  1. IBM AD Lab (Accelerated Discovery) : The IBM AD Lab will improve the technology used for discovery, while at the same time, allowing users to make new discoveries in their fields more easily, at a more rapid pace. The AD Lab supports a set of domain specific “Centers” such as, a Center for Healthcare Analytics. Research will be performed on problems relevant to the Centers (for example, finding the best policies for reducing the incidence of diabetes in a particular population, or the most effective use of limited funding to improve overall longevity, etc), and on the technology foundations for enabling these decisions (for example, tools for automating the discovery of entities and relationships in data, or new machine learning algorithms for detecting interesting correlations or trends, or tools for better visualizing data which has both structured and unstructured elements).
  2. IBM Accelerated Visioning enables Enterprises to embrace their Digital Futures: The e-Commerce Visioning & Roadmap for example defines an appropriate e-Commerce solution for your organisation, supporting growth through online channels for both B2B and B2C relationships. This engagement may include a visualisation prototype, an examination of the commerce architecture required to support your objectives and a roadmap and work-plan to assist you to implement the vision.
  3. The IBM Customer Experience Lab combines advances in IBM Research in social listening, multimedia analytics and machine learning to understand and predict the differences in individual customers across many different touch points.
  4. IBM Global Entrepreneur program within our PartnerWorld ecosystem, offering large benefits for big thinkers and small budgets.

Whether your enterprise is pursuing a venture strategy, a partner strategy or just starting out, we’re here to help.  You can reach out to me through email: cristeneg@us.ibm.com or through social channels: twitter or linkedin.

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