Innovating new value chains, coaching global corporates, and the five P’s
Podcast transcription - 26th september 2018
Alan Cowley: Well welcome to another Invested Investor podcast. I'm sat opposite Andrew Gaule. We are in Henley Business School where Andrew was once studying. This week we're going to be talking about Andrew's background and innovation within corporates. So Andrew if you'd like to start with your background.
Andrew Gaule: Al thanks for being here. Really interested in speaking and sharing perspectives. I went to Henley Business School where I did my MBA, formed my first companies and that here. Now I'm actively involved with the Henley Business Angels but my day job is working with large corporates round corporate ventures, open innovation, working with startups. That's the core to what I do.
Alan Cowley: And so can you elaborate on the innovation within corporates?
Andrew Gaule: Yes so, he history of that goes back to when I was doing my MBA in the backend of the 90s and we had that era, the dotcom boom and I was working in Unilever at the time, being sponsored. Trying to get them to look at Mosaic and Netscape and putting those types of propositions together on how the business was going to transformed by that dotcom and online era. I then got my worst mark in one of my MBA papers when I talked about how I was going to take our division to have online information, online health and safety. Do online order taking and to do automatic replenishment of our business to business tanks for hygiene products, laundry and food services products. The division I was in in Unilever.
At that time I felt, there's something wrong here in this marketplace that the corporate isn't listening to this technology and the business schools aren't teaching it. So when I graduated in 2000, I put the usually MVP together, put the PowerPoint together about how I was going to create a business around, it was going to be E everything. E online and getting corporates to work. I put the proposition to the business school and said, "I'm going to start this business," would they like to participate with it? We spent the summer of 2000 setting up, getting the approval for it with the court of governors in the college and in September 2000, we started Henley Incubator.
Alan Cowley: Even though they'd given you a bad mark, they still ...
Andrew Gaule: Well there you go. That's what being an entrepreneur does when you go along and sort of sell the idea and that to them. It was my business. I gave them equity and I gave them two seats on the board we created. And that then in September 2000 and we set ourselves the objective of by the summer of 2001, sort of do an academic year sort of type thing. We'd see if we could prove the business.
By the summer of 2001, we had Henley Incubator as a brand. We had clients including the likes of IBM, Baker Tilley, Kinetic, Shell, Unilever and that as clients. And the proposition really around that time was around creating a network of corporates. See that needed to innovate and how they were going to within individuals who were trying to do that. Make that change of business models and technology and that inside. So by the summer of 2001, we proved it. We were cash positive, profitable. The partner that I sort of started this with at Henley, we went and went through the legal rigamarole. Setting up the legal entity. Doing trademark agreement because we were using the name Henley which was associated with the business school. And went through all of that through the summer of 2001.
Alan Cowley: So what type of innovation we're you telling these corporates to think about and then implement in their businesses?
Andrew Gaule: Well of course at that time it was the dotcom boom although soon after we put the proposition together NASDAQ went through the floor but we still managed to keep the business going and built it up with those sort of clients and proved it up to 2001. We went through that sort of area of setting up corporates at the time. We were looking at exploring outside. For some of the listeners new, you might not be familiar with the term open innovation which Henry Chesbrough, Hank Chesbrough wrote about in his book and Harvard Business Review articles in around 2002, 2003. So that terminology was starting to be used more after we had started up. And corporate venturing was in its early stage and I'll talk about corporate venturing a bit more in a moment but that was still in its early stages.
We started in 2001 but then of course 9/11 happened in 2001 and we went through our, almost sort of almost near death experience in that again we were corporates then didn't want to innovate after the September they were getting slow in making decision and I recall walking across the grounds here in December 2001, coming to a board meeting and we were saying, "Ah look, we might actually just wrap this up," because getting the corporates to make a decision and move forward was a bit slow. But I made a firm call to one of the corporates and one of the R and D labs where we'd been speaking to them about spinning some technologies out and making their people in the labs more entrepreneurial and looking to have this technology be used in different ways.
Finally got professor Paul Davis to round say, "Yes, we're going to do the project." So from walking from my office to the board meeting, was a bit of a change. It's like, yeah, if we're going to go for another course or we going to keep going. We built the business up to 2005 and I brought onboard Rick Wills who was chairman of the London Eye and managing director of British Airways Enterprises, as our chairperson. And in 2005 we sort of spun away from the business school, very amicably to then become part of a boutique consultancy called Corven who were formed just a few months before we formed Henley Incubator but they were FSA registered to be able to do fundraising for early stage businesses. Typically entity values of about 20 million and fundraising up to about 100 million type areas. Which was more aligned with corporate venturing which is early stage startups which could have the support of corporates or needs angel investment, or round day investment or also ventures which are spinning out of corporate.
Like Paul Davis that I talked about was a spin out from Unilever called Insense which spun out and got Lucius Carey from Oxford Technology to invest and they gave equity to another partner to build the device using technology out of Unilever's labs. So that's why we brought it into Corven. I was there then, built it up. It was then called HI Network. We dropped then the Henley name and then became Corven Network. So that's sort of where I was doing in the early stages as corporate venturing was developing.
Alan Cowley: So you're saying that in 2001 obviously you hit a hurdle with the corporates accepting new ideas and the new behavior. What other challenges have you faced to kind of get this mentality across to them?
Andrew Gaule: As it's evolved over the years, in 2006 I wrote my first book called, Open Innovation in Action and How to be Strategic in Finding New Sources of Value. Through the mid 2000s up until now really I've been working corporates round one of key pillars within that book where I turn the five P's of innovation and venturing.
The first one is around what's the purpose? Why you trying to innovate? You trying to sell more of your current products? Are you trying to do incremental stuff? Or are you trying to do things that are really disruptive? Because those have got different purposes. They're going to disrupt or change the business and that considerably.
So examples in corporates I'm working with at the moment, in the automotive or oil sector, are you trying to sell more oil or lubricants? Or you looking about how hybrid cars and electric cars are going to change your business? Or in the disruptive scenario, what happens when you got autonomous shared electric vehicles? Because then people aren't going to be buying cars. They're not going to be topping up with fuel which going to disrupt your industry in that completely.
Understanding what your purpose is what I do with a lot of corporates to start with and then the process that's going to be aligned to that purpose. If you're trying to do what we term sort of horizon three type things, those really disruptive areas, should you be looking around where those disruptive technologies are coming from in universities, in early stage start ups? And maybe investing in funds in those areas. Maybe doing direct investment yourselves which is the typical definition of corporate venture capital is a corporate having a fund in an organization where they do direct investments with startups. Or you might be doing incubations. Having a facility where you'd have those startups working in that with you.
There's the different processes and I work with corporates in setting those up. My central P is people. Have you got the people who can work with those startups? As you and Peter know that the working with startups is a very different dynamic than working with people within a corporate. So have you got the right people to do that? Are you engaging your senior executives in the right way in doing that? That's the people aspect.
The fourth P is partners. Are you working with incubators, funds, startups? How you work and relate with those because by definition you're doing things which are outside your current re-net and your current expertise therefore you need to work with partners to build those or to learn from them.
And the fifth P when you go sort of round the circle then is performance measures. How do you know you're making the right financial returns? Because when you make investments, you should be trying to get a financial return because otherwise why would other investors or startups want to work with you? And also you want to be doing things which are strategically important. And I think it's important to differentiate you back to the purpose aspect of what's your performance measure? Is it to sell more of the current product you're trying to do? Or is it to get insight and move you into a new area? And that's what I think is the bit that becomes really strategic. That there's often talk within corporates about that they say, "Oh, we're strategic and we get our business units to decide where we invest." My response to that is, "Well, you mean you're tactical then? You're not actually looking at where the boundaries and that are where you're at."
That five P framework is around, I guess going back to your question about how do you engage with corporates? How do you get them to think about what they're trying to do in their innovation and ventures? And what it means to be even in a corporate.
Alan Cowley: Have you seen a lot more corporates take on this behavior over the last few years?
Andrew Gaule: Yes. The recent sort of stats going back, statistics from CB Insights and from Global Corporate Venturing Analytics who sort of watch this marketplace in terms of investments, VCs and corporates. There's around 2,000 corporates now over about the last five years have claimed they're doing corporate venture capital. That's doing direct investments and that into startups. So it's working out around 270 active corporates each quarter who are doing investments. In terms of the sort of stats, last year there were just over 2,000 direct investments from corporates. Totaling of about $109 billion in deals that they've been involved with but I take those numbers with a bit of a pinch of salt to be honest. I think it shows you the magnitude but it's only one sliver of what I term corporate venturing and open innovation because corporate venture capital is only measuring the direct investments that corporate is making which they make public.
I've done a number of these interviews as you know with corporate. I've done about a 100 interviews now with corporates around what they're doing in this space and I particularly remember the head of General Motors, GM Ventures. In the interview I did with him, he's responsible for a 9 billion per year budget in doing car developments and he's got a venture fund for investing in autonomous vehicle, electric vehicles and type areas. And he's said, "Well look Andrew." He said, "I don't want it to be public that we've shown an interest in this particular startup so we don't make it public until well after the event." So I think these figures that I just quoted ...
Alan Cowley: Once the business is doing well.
Andrew Gaule: Yeah, that's right. The figures I've just quoted are just the stuff in the public domain so that's the tip of the iceberg. There's stuff going on below that. What I would term corporate venturing, the process I talked about, incubation, partnering with startups, they aren't necessarily a direct investment.
One of the examples of a recent program we've worked with is with PepsiCo when they've been working on their greenhouse ventures. They went out and so we said, "Look we're looking for new nutrition type businesses." They're running a campaign in Europe. We worked with the PepsiCo team to get them to understand why they want to do it. Why they would work with corporate. Why they would work with startups. How they engage with those startups. And they went out, they got about a 150 entries. They selected eight of them. They worked and coached those eight over six months. They gave each of those eight 25,000 euros. Support for them to develop some of their business practices while they were doing it and of course PepsiCo was able to help them to scale up their nutrition businesses and it was learning on both side.
And then they selected one of those, Erbology. Which actually was one that came out of Henley Business Angels. Recommended that they, they went in for the competition. Erbology gained another 100,000 euros in support. Now, those monies went into those startups and it wasn't direct investments, they aren't in the figures that I originally talked about. Corporate venturing, open innovation, covers a wide spectrum of different processed and engagements with these sort of startups.
Alan Cowley: A large part of the Invested Investor is focusing on honesty and transparency between investors, particular angel investors and entrepreneurs. Now obviously corporations have shareholders that they need to keep happy and everything and keep onboard. But do you think more transparency with what you were just talking about in terms of how much they are putting into startups is relevant or needed?
Andrew Gaule: Yeah, well the corporates who I've seen working effectively on a respected net within the industry, I've been in this space now about 18 years and I've seen corporates like BP, like Unilever Ventures, like Relex Ventures used to be called Reed Elsevier Ventures, GE Ventures, they've got very well setup venture funds. They're very public on their websites about what types of ventures they're looking to invest in. What sort of scale. What stage they're looking to invest in. They are investing on typical investor, VC sort of type terms. Using national venture capital association or British venture capital associations sort of terms. That type sheets. And they recognize that they have to be there as part of that venture capital ecosystem.
I've worked for a number of years with corporate where I'm trying get them improve their capabilities to understand look, you can't go in with special terms expecting that the only follow on investment's going to come from your corporate and there's conditions on exclusivity and all of those types of things. Because nine times out of 10, if the startup survives, then it's a trade sale to somebody else. It's not a trade sale into the corporate. I think the whole purpose of why they're doing it, support the ecosystem and learn from the ecosystem rather than necessarily doing an acquisition. I think over the 18 years I've been doing this, I think the whole marketplace has become more mature. There's better practices around the corporates and the individuals running their venture units have been around for quite some time.
It's interesting now we're seeing over the last, I guess three years, something like that, people who've been successful in one corporate venture unit, transitioning into another corporate venture unit. So staying within the ecosystem. staying with their reputation. Staying with the reputation and the understanding of what's happening within a particular sector, be that health or consumer or automotive or industrial. Things like that. I think it's becoming quite a good vibrant ecosystem of being a good part of the ecosystem as well.
Alan Cowley: So Andrew, how do you see the ecosystem evolving?
Andrew Gaule: As I've talked about, 2,000 corporates trying to do corporate venturing. There's now a good cohort of ones who have been running for some time and you're seeing how it becomes really strategic. I've recently published a book called Purpose to Performance, the first bit of the five P's I talked about. The subtitle and the other second parts of the title is called, Innovative New Value Chains. What I've seen and what I believe now over the last couple of years and how it's evolving is that corporates are in a position to connect different technologies and different startups to create a new business model. That's what I term innovative new value chain.
An example that I give within the book is Bill Taranto around at Merck Global Health Innovation that builds a veteran of corporate venturing. Previously of Johnson and Johnson and has built what I term an innovative new value chain. They were looking at Merck. If we caricature Merck as a pharmaceutical business who produces tablets or big machines for hospital and Bill's purpose is to look for digital health innovation. Investing in those digital health areas which the core business hasn't got expertise or doesn't necessarily know about and he picked a particular customer need around cardiac health. Their challenge or issue is, if you've got a heart problem and you go into a hospital, do they release you from hospital too soon? And therefore you have another relapse. Or do they release you too late? And then it's very expensive in hospital and they're getting you to come in for ECGs or tests on a sporadic basis.
You and I know and the ecosystem now knows that we've now got technology to do your monitoring full-time. Your heart monitoring, other health and physical ailments and knowing whether you'll slow down in your pace. Whether your breathing is good. Whether, all these other sort of sensors. They invested in a business called Preventice which does cardiac health monitoring but that's only a point solution for cardiac health. Where's the data going to go? How are you going to do artificial intelligence to know whether it's a false positive or whatever and that when the data comes back? So they invested in another business which does secure health data analysis in the cloud.
Then you got the issue of the current health system is very good at looking after sick people in hospitals but not very good when the patient is out at home, at work or outside. There was another business that was doing that service side of it. They've been investing in that ecosystem. Have their purpose aligned around what sort of things they were looking at but where the innovative new value chain comes in is, they got those startups working together. They then also did a private equity deal to bring those three businesses together. They also recognized that that business that they brought together in cardiac health would not sort of survive within the larger organization because the business model wasn't necessarily right yet for it.
What they did was sold half of the business to Boston Scientific for about $500 million. They had created a billion dollar entity which is in a new strategic, important area and while cardiac health is probably not the core for Merck. Oncology and diabetes are more important. They went, hey, we can do a heart monitoring. We can do diabetes monitoring is another thing. Now we can do some other type of monitoring. To me that's a new value chain because the current pharmaceutical business is, the current telecom's business is, the current care home businesses just don't fit that together but these corporate can do that.
Going to back to another example I talked about earlier, sort of like the automotive sector. An autonomous electric vehicle now has got data. It's got safety. You've got to produce 10 million of these new vehicles or whatever in a year. That's going to require different startups, different technologies to come together and either a large corporate needs to bring those together and one of the corporates that could be disrupted by that industry. Or it's going to be the likes of 10 Cent out of China or Baidu or Google or Alphabet or Tesla, are going to address those sort of areas.
Where I see the ecosystem going is, corporates will be more strategic in driving where they're doing the investments. I think they can orchestrate these things globally. They can bring these thing together. And from an startup and an angel perspective, angel investor perspective and other investors, if you are just investing within your local Cambridge area or where you're based or Thames Valley where we're based or Shanghai where I was two weeks ago or a month ago when I was in Silicon Valley.
If you're just a startup with a local VC, I think you're going to miss out on the opportunity of collaborating to become part of a full chain rather than being just one point sort of solution because in my book, I'm a bit provocative maybe and I say, well, Silicon Valley has done the easy stuff of 140 characters or doing some cloud based sharing. When you start putting health devices on people, sending a half a ton of metal down the road at 70 miles an hour autonomously. When you're capturing people's social media data and location data to help in their retail or finance payments, you need to be a grownup corporate to be able to do that. Even the current incomes are going to have change or a new corporate is going to be created which is going to take those opportunities.
Innovative new value chains I think is where corporates can evolve their corporate venturing and where the ecosystem can help them.
Alan Cowley: That's really interesting Andrew. There's one last thing I'd like to speak to you about is upstarts for startups. Can you elaborate on that?
Andrew Gaule: Yeah, there's was a bit of a side thing. As of my day job I've been talking about most of the time and that here but I've got two daughters who are now 15 and 11 and going back about four years ago I guess it was, when I was working with corporates, my daughters and that would've been making things for charity, baking stuff or making lavender bags or plants for charity and I'd bring those into the workshops. I'd say, "All right, does anybody want to buy these?" Or we'd do a draw for the feedback forms. And a number of them came up to me and said, "God I wish my children would do something like this." That was the bit of the sort of inspiration. We said, "Well we'll create a business, a venture to do innovation with startups and with corporates."
Alan Cowley: When you say we, you mean you and your daughters.
Andrew Gaule: Yeah, my daughters came and did the first ones. I've now got a colleague, Richard Ingram who sort of runs the operations for upstarts for startups. But basically what we do is we run programs at a corporate, typically on a Saturday morning. One of the recent ones we did was at GE Venture in Menlo Park in Silicon Valley. Teaching people in Silicon Valley entrepreneurship. Talk about taking sand to the Arabs or snow to the Eskimos. We were there with the children and their parents from GE and a number of other corporates and funds. We started at 10:00 o'clock in the morning. We gave a basic briefing to the children about business and about brands and about entrepreneurs they like. We gave them option of about 12 different ventures. So they were making lavender bags. They were running a formula one race. They were making healthy drinks. They were doing advertising. Creating advertising billboards on Minecraft and they were making YouTube promotional video. They were running these little ventures.
We also had the adults competing against them. So the older children, they don't need the support of the adult. The younger children need that sort of support, the adults to help with some of the stuff. But we had the adults competing with them. And then after lunch they set up their shops. The adults went round and bought the products or bought the services from the children and at the end of it, the children cashed in their credits that they got from the real money from the adults and they donated their checks to fires that had been in California, to the annual pet sanctuaries in San Francisco. So the donated that and they graduated.
But we find that the adults learn an awful lot about what brands the children are like, their creativity. What they're doing online and these children effectively creating a business in about four or five hours and getting some real money. And they go on to create new ideas. We've been getting their things that they've been raising money for their charities round making pet toys and sort of stuff like that. So we've done it in California. We did it with 30 Chinese children in Shanghai in Chinese with their parents. We did that and my 11 year old daughter was with us when we did that one. So yeah, we have a bit of fun with that so that the model is now is that we're going to run these for corporates and the corporates can effectively run it themselves using out online signup and using the our orange boxes which has got the different ventures in for the children to learn about business and entrepreneurship. But I think the adults learn more than the children to be fair to be the honest.
The adults who take nine months to produce a PowerPoint to go their board and their daughters in four hours can turn round and create a venture that's one of the inspiring corporates that I was working with, that's was the scenario that I've been working with that corporate for about nine months just to create the PowerPoint to go to the board about entrepreneurship. In about five hours their daughters created a brand. Packaged it, sold it and donated money to charity.
Alan Cowley: Brilliant.
Andrew Gaule: And they created some YouTube channels as well. If people go and look at upstarts for startups. Number four in the middle, they'll see the YouTube videos that the children have produced as one of their ventures was to produce a promotional video and that for us. It's been good fun.
Alan Cowley: It sounds hugely enjoyable and also great initiative and hopefully it will be in a city or location near our listeners soon somewhere around the world. Well Andrew, it's been absolutely fantastic to hear what you're passionate about. Thanks very much.
Andrew Gaule: Thank you. All the best.
Peter Cowley: Thanks for listening to another Invested Investor podcast. You can subscribe to all future podcasts by our website, investedinvestor.com or by a number of podcast platforms online. Remember you can order our book online and be sure to follow us on Twitter, LinkedIn and Facebook to get the most up to date, interesting and insightful content from the Invested Investor.