In their endless search for the next big money-spinner, the packaged-goods giants are looking beyond their own hidebound internal cultures and setting up venture capital funds to seek out and incubate new ideas. David Benady assesses the prospects of these arm’s-length ventures
Their revolutionary products include a cholesterol-busting margarine, a sweetener that is made from sugar molecules but isn’t sugar, and a probiotic drink that helps with personal weight management.
But Unilever, Tate & Lyle and NestlÃ©, the manufacturers of Flora Pro-Activ, Splenda and Sveltesse Optimise, are wondering where their next amazing inventions will come from.
The answer, they appear to believe, lies in teaming up with experienced venture capitalists to create investment funds that will seek out radical innovations to fund and grow. If successful, these initiatives will either be integrated into the businesses or sold off for a profit.
NestlÃ© has announced that it is ploughing â¬500m (&£340m) into the New Growth Fund, which launches next year and will fund businesses with innovations in the fields of science and nutrition that are ready to come to market (MW last week). As a sign of how seriously the company takes this new venture, it has put finance director Wolfgang Reichenberger in charge, hiring former Procter & Gamble executive Paul Polman to replace him as finance chief. The New Growth Fund supplements the $150m (&£86m) Life Ventures Fund NestlÃ© established in 2002, to invest in early-stage start-ups.
On a smaller scale, Tate & Lyle’s &£25m Ventures fund, announced last February, launches soon and will invest in “smart ingredients and renewable technologies”. Meanwhile, Unilever has been running Unilever Ventures for three years and it is thought that one of its resulting products – Persil Service, a dry cleaning, laundry and photo-processing business that has expanded into 70 Sainsbury’s supermarkets – could emerge as a success story in the future.
Unilever initially committed up to â¬170m (&£107m) to three initiatives. Some â¬100m (&£68m) was handed to Langholm Capital Partners, an independent fund that aims to invest in promising European companies with a consumer orientation. The other two funds – Unilever Ventures and Unilever Technology Ventures – have focused on smaller projects.
Cooking your own goose
It is open to debate whether venture capital funds really will discover the geese that lay golden eggs for global corporations operating in mature and static markets. Many of the successful corporate ventures of recent times have been launched internally – from financial services companies setting up internet off-shoots such as Egg and Intelligent Finance, as well as Dixons’ internet service provider Freeserve, which generated &£1bn in revenue for the chain after being launched in 1998 at a cost of &£200,000. Technology companies such as Intel, Cisco and Apple have all scored successes by seeding new investments in outside companies through acquisition or incubation.
Even so, many of the aforementioned developments have been in areas close to the companies’ core businesses. The point about the radical developments of the future is that they can come from unexpected sources. These unknowns are what corporate venture funds are seeking out.
An advantage of setting up a separate venture capital fund is that it allows corporations to sidestep the paradox of innovation. Corporations’ success depends on the military discipline of their systems, their iron grip on distribution and their ability to leverage scale, as well as their training policies, personnel management and hierarchical structures that they employ to destroy competitors and dominate markets.
These practices are anathema to the entrepreneurial spirit that leads to the creation of the innovations that corporations crave, and without which they face decline.
Success in other fields
So far, however, there is scant evidence to show that consumer goods executives make successful venture capitalists. David Molian, a visiting professor at Cranfield School of Management, says there are no obvious instances of packaged goods companies coming up with successes in this way. “The success stories in corporate venturing come from the financial services and technology sectors,” he says. Indeed, there have been major failures in packaged goods – such as the Unilever Ventures-backed ready meal kit brand Rocket, which was axed last year.
Molian adds that an important consideration is the need to find proprietary technology with protectable intellectual property. Packaged goods companies often develop new products only to find they are easily copied by rivals or retailers. If they can develop patented technologies, it gives them a point of control over the market.
But as Molian muses: “Why should packaged-goods companies be any better than professional investors at picking winners? As a professional, you have a one-in-ten success rate and expect the majority of initiatives to go nowhere. It is an expensive gamble.”
The corporate venturers’ answer is that by working with investment professionals, they can combine the skills of picking winners with deep knowledge of consumer trends and desires. They also point out that venture capital funds are a recent development for European packaged goods companies, so it is too early to write them off.
Such funds have been successfully used in the US, according to David Ball, a former head of Unilever Ventures and now a consultant at the Webb Partnership. He says General Electric and US telecoms companies have a decent record in this area. A slightly different approach has been adopted by Procter & Gamble, which uses an internal venture business operating at arm’s length from the rest of the company to incubate new developments.
Ball says corporations may be good at launching big, new ideas and large-scale corporate activities. But he cautions: “Incubating a small business is not their skill. Innovation in large companies is always structured around short-term delivery.” For this reason, having a method of nurturing start-ups for the long term is essential, he says.
The enduring nature of venture capital funds makes them unattractive to many corporations. According to John Coombs, managing director of Unilever Ventures and a former Van den Bergh Foods marketing director, it takes five to seven years for a good idea to be incubated to the stage where it can be integrated into the business, floated off, or sold to another company.
Every egg a chicken?
It will be some time before any of the Unilever Ventures ideas come to fruition. But Coombs is confident that Persil Services could prove to be a winner. “It is growing strongly and looking really good, despite people talking about the downturn in the high street,” he says. Other schemes include Alleggra, a soy-based egg substitute created through a joint venture with Tate & Lyle. It has
recently signed a contract to supply the Royal Navy. There are also Pond’s Institute beauty centres and a number of technology, biotechnology and research- based concepts.
The Unilever and NestlÃ© funds have been set up under the guidance of management consultants. Analyst David Laing of Investec says: “It’s a McKinsey thing. It gives you access to a few of the opportunities you wouldn’t normally be able to handle with in-house research and development, which is totally focused on existing business. Anything more adventurous can be developed more cost-effectively through investment support.”
It will be some years before it becomes clear whether these venture schemes are just another piece of expensive management consultancy advice that does not pay off. In reality, corporations have little choice but to pursue some radical paths to innovation, since they know their own attempts are hamstrung by their hidebound internal cultures. Without a steady stream of ground-breaking developments, these mature businesses face gradual decline. It will be interesting to see whether they are any better at nurturing winners than the professionals.