Why Corporate Venture Capital Reduces Risk And Multiplies Rewards In Industrial Technology Investing
By Hank Torbert June 16, 2021
Industry 4.0 continues to drive tremendous value as we are seeing large industrial enterprises adopt and deploy technologies to position themselves as strong competitors within their respective industry sectors. The convergence of growth across the key elements associated with automation includes the availability of faster networks (i.e., 5G), more computing power with quantum capabilities, edge computing options, advanced cybersecurity software, and incentives for reducing environmental impact and carbon footprints. With the emergence of these industrial innovations, there is more support for AI and machine learning, low-latency productivity, quality applications, as well as protecting what industries connect.
Industrial enterprises are more ready than ever to change and compete to secure their future.
Traditionally, the industrial sector has been conservative, and industrial giants have generated pleasing steady returns for investors in public and private markets. However, while innovation is happening within these large global enterprises, the corporate venture arms of the world’s most successful industrial companies are more actively pursuing start-ups and small to medium-size businesses. The new generation of inventors is increasingly serving as “live laboratories” as they address old problems in new ways.
In some cases, fearless and agile start-ups constitute a serious threat for some massive industrials. In other cases, they bring new life into old product offerings. For example, embedding sensors and actuators into specialized equipment can enable manufacturers to offer new ongoing services at the time of equipment purchase or lease-back, make remote field service possible, reduce the cost for “truck rolls” if equipment breaks down, and speed up mean time to repair.
The potential to gain competitive advantages while driving corporate value in the context of Industry 4.0, has landed corporate venture professionals in a dynamic and exciting time. Corporate Venture Capitalists (CVCs) have the unique ability to not only fund industrial innovation but also embed technologies into their products and service offerings while reducing risks on both sides of the spectrum. With the right investments or acquisitions, CVCs can transform a small start-up into new corporate development and technology DNA. Depending on the scenario, it could generate almost immediate returns.
Alternatively, small companies – especially in the industrial innovation field, are too often impaired by the challenges associated with financing.
Pairing larger firms that have an aggressive investment position and are looking to achieve capital gains, with agile start-ups that have the most disruptive technologies, and are not bogged down by internal forces, brings advantages to every stage of new projects.
The largest and most successful industrials have long-standing customers, highly developed distribution systems, and important business and tech ecosystem networks. They also have the operational and administrative depth to accelerate, launch, and grow the ideas and platforms created by upstarts.
Compared to financing by venture capitalists, financing from “strategics” can make all the difference in the lifespan of smaller start-up companies. Here are a few reasons why.
For starters, advancements in technology are powering up smarter supply chains, more efficient manufacturing environments, and improved products and services for end-customers. They are not only transforming what industrial giants produce and how they produce it – but also future business models.
Automation in the automotive industry has changed everything – from the design and prototyping of new vehicles to testing, manufacturing, customization, electric power, battery storage, autonomous or assisted driving, and connected services.
Furthermore, innovations in fundamental automotive manufacturing technologies have led to lower production costs, higher performance sensing and data processing, improved worker safety, and accelerated time to market as the connectivity capabilities within an Industry 4.0 framework bring together the entire enterprise, along with supply chain and logistic ecosystems.
Lastly, innovation on the production lines in automotive plants brings real-time visibility and control to manufacturers, providing a massive amount of data that can be converted into business intelligence and lead to a level of continuous improvement that is unlike what the industry has ever seen before.
Why should an automotive CVC invest in supporting technologies like IoT and Industrial IoT, and buy these technologies outright, even when they are not directly or traditionally related? The answer is simple. Converging software, compute and connectivity allows manufacturers and marketers to embrace new revenue streams from software, analytics, and services that are designed to deliver value to end-customers over a lifetime, compared to “price X units” economics.
These trends and more are making a huge difference in how industrial giants execute strategic roadmaps and acquisitions. The “smart money” CVCs bring to the table comes with opportunities to transform not only their business but the entire industry’s future.
The Very Definition Of Industrial Technology Is Changing
Industrial technology companies used to be thought of as more mechanical than strategic.
Today, the leading industrial technology innovators are increasingly defined by the benefits their solutions enable including actionable intelligence, business insights, more precise automation, more connected hardware, and software platforms that generate data that can directly improve top and bottom lines.
Electronics, sensors, cloud-based services, and edge computing advancements enable manufacturers to transform what may have been a stand-alone hardware business for decades into fully automated products with recurring service revenues “embedded.”
Over the past two decades, at the dawn of Industry 4.0, CVCs have made investments that have enabled more cost-efficient computing, real-time connectivity, and increasingly sophisticated sensing into their environments.
Henceforward, there will be no great manufacturing company that is not also a technology company, with their own competitive “technology stacks” bringing together the physical and digital worlds.
We are seeing a blurring of the lines between the Information Technology (IT) teams, and the Operations Technology (OT) teams, overcoming internal organizational barriers. New levels of orchestration are forming across the entire enterprise, from the physical plants to the digitally connected field service centers. This convergence has not been easy to implement. Historically, the IT and OT teams were either not collaborating or were competing for internal resources.
Fortunately, this is rapidly changing. CVC groups are bringing new ideas, people, and tech solutions into the culture, from product development to manufacturing, marketing, and customer experience.
Together, IT/OT leaders are making additional services possible. Developments like basic remote monitoring, predictive maintenance, and advanced AI capabilities improve how customers engage, interact, and generate data that informs future product innovation.
The Sensibility Of Strategic Investing: CVCs Grand Opportunities Ahead
The proliferation of new technology in the industrial sector is not slowing down – it is speeding up. Driving new energy into creative and collaborative investment is the next “big thing.”
The financial profiles of industrial technology companies reflect their focus on increasing importance in driving productivity and profitability enhancements for manufacturers.
According to a William Blair study, as recently as 2015 “industrial technology companies typically generated gross profit margins of about 40% and EBITDA margins of about 20%. Today, those benchmarks have risen to 50%-plus for gross profit margins and 25%-plus for EBITDA margins at leading industrial technology businesses that have incorporated substantial software- and subscription-based revenue streams into their solution offerings.”
The report goes on to say these results vary “depending on how well-positioned the company’s business model is to capitalize on the convergence trends that are driving much of the industry’s growth and the macro tailwinds described above that are elevating the financial profiles of companies across the industrial technology sector.”
CVC today has become one of the most adopted forms of financing for start-ups in industrial innovation. As another form of venture capital that has changed dramatically since the practice began in the late 1930s, it has gradually become one of the most successful ways to fund and grow smaller companies as part of larger enterprises.
Leaders have proven that by investing in highly innovative firms within or adjacent to their core business, industrial groups can not only keep track of industry innovations but can become the innovators themselves. This involves less risk and expense compared to relying solely on internal R&D that has proven risky and expensive, especially when large projects fail while more nimble competitors and challengers succeed.
The best CVCs I have had the opportunity to work with throughout my career are skilled, external risk-takers. They impact the strategic vision of the company by constantly studying and interacting with innovators. They develop progressively successful strategies that lead to ongoing investments that lead to multiples in financial gains.
They are “innovation activists” who advocate for brilliant new combinations, at times helping to accelerate existing strategies, while simultaneously influencing those strategies.
They are “creative geniuses” who do the work and engage with the smartest minds inside and outside of their industries to put together new combinations which protect competitiveness and lead to long-term relevance and value.
I’ve spent my career analyzing and implementing new technologies (artificial intelligence, robotics, renewables, transmission technologies, and synthetic biology) to change the industrial landscape. I have served as both an executive and a private equity investor, working with early-stage to billion-dollar companies in the industrials, energy, media/technology, transportation, and financial services sectors. I am currently the President of Alta Max, LLC, a specialty packaging company serving Fortune 500 aerospace /defense, oil and gas, agribusiness, chemical, and transportation companies, as well as the Department of Defense. Prior to Alta Max, LLC, I was the Operating Partner for Potomac Energy Fund, LLC, focused on investing in energy/renewables and emerging technology companies. I founded The Frontier Conference (www.thefrontier.co), where key industrial sector leaders discuss and collaborate on innovation and disruptive technologies.