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Innovation & Investment Insights: Big Change Coming

by Langdon on February 18, 2013


Conferences often provide great opportunities to get a lot of new information in a short amount of time.  This was exactly my experience at the IBF Corporate Venturing Conference, held February 11-13.  The conference brought together venture investors with corporate venture managers in a series of great discussions about the venture investment process, it’s risks, and some recent insights into best practices.  A few of these insights seem to be worth sharing.

1.  A corporate investment manager from a large pharmaceutical company commented on the huge challenges facing his industry by noting that big pharma is now “riskier than venture capital.” Wow!  What a huge change!

With such a high risk premium, the returns that the pharma companies earn going forward will have to be commensurate, i.e., better than venture capital returns, or investors will gradually pull out.  This will then put even more pressure on the pharma business model, and there is thus significant danger of a pretty severe downward spiral, which may look something like this:

More risk without higher reward makes for a less attractive stock, which drives market cap down, which makes capital more expensive, which creates more risk, etc.  This is quite a negative turn of events over the last few decades, and suggests that there will be huge challenges for the pharma sector going forward, and also suggests that there will be a lot of experimentation in at least three major areas throughout the pharma sector.

First, companies will be experimenting with many different business models to try to find approach to creating new revenue streams to offset their dependence on new drug formulations.  And second, they’ll be experimenting with many different approaches to R&D management to try to increase the returns and reduce the risks that are inherent in the discovery process.  Third, their own internal venture investments will become more and more diverse as they look for new business opportunities.

Best case, this is a blip on the radar that will go away; worst case, it’s the end of big pharma as we have known it since the 1970s.  Granted, it will take 5 – 10 years for this to fully unfold; still the potential is there for major change.  And given that pharma is one part of the larger health care sector, and we all know that health care is also in the midst of massive change, we can expect high drama.

2.  On an entirely different note, one speaker commented that the time that is required to hire and train a sales force to support a new venture is generally underestimated by a significant margin.  This insight has significant importance for the business case that justifies investment, as it is often an unrecognized delay factor that causes financial projections to miss, often wildly.  While experienced executives may see this trap ahead of time, those who mistakenly place their faith in their own capacity to quickly ramp up the sales engine with a new sales force are likely to see their time-to-market model severely disrupted, costing their venture significant value dilution, and perhaps also causing them to have to raise more capital than planned.

4.  ATT’s revenue from long distance dropped from a peak of $22 billion per year, down to $5 billion.  Talk about collapsing your business model!  No wonder ATT was forced to become part of Southwestern Bell (which then renamed itself ATT).  Few companies (or industries) survive disruption of that magnitude.

5.  Do you wonder about the prevalence or impact of social media and its influence on your children?  Well, consider that 1/3 of all school age children today have a best friend whom … they’ve never met.  The first reaction of many people to this factoid is a sense of loss, as in “It wasn’t like that when I was a kid.”  Well, we did have pen pals.  And on further reflection it may have some interesting benefits, as it indicates the possibility of global links and friendships that might not otherwise exist, helping to tie the world together and supporting us in finding and appreciating the qualities we can share.  Except unlike a pen pal, today’s kids can Skype, text each other incessantly, watch the same TV show from multiple locations at the same time almost as if they are in the same room together.  As this generation moves from childhood to adulthood, they will surely take these habits with them, and the technologies they use to connect will only get better, perhaps becoming a meaningful force for global dialog and unity.

6.  Historically, a corporate manager has only to deliver superior results to get noticed and promoted.  A corporate venture manager, however, faces some specific challenges due to the longer lead times that their investments typically require to reach maturity, and thus a longer time needed to demonstrate how effective their efforts at management actually were.  As long as they have consistent support from their executives leadership and/or boards, they will have sufficient time to demonstrate their skill and judgment, and also show the effectiveness of the corporate venture model.  But what happens when the executive team changes over?  A new CEO may have entirely different strategic priorities than the last one, which may make a whole series of carefully crafted investments and partnership irrelevant over night.  One corporate manager commented that due to the prevalence of external change and the increasing rate at which CEOs are now getting fired, and thus the greater likelihood that their own CEO may be replaced, corporate venture managers must now take into consideration the likelihood of significant change in the management teams they report to.  The problem of how to demonstrate value to a new CEO who may care little or not at all about an entire collection of ventures and partnerships that you’ve devoted years to nurturing cannot be encouraging.  Overall, this is yet another sign of massive change in the business environment.

7.  Lastly, as a word of advice for entrepreneurs who are out raising money, one experienced leader commented that, “If you want money, ask for advice; if you want advice, ask for money.”

I hope you found these thoughts useful.

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