In a previous post I wrote about the disruptive innovations that have been introduced by Tesla Motors (Tesla) and Uber and presented the steps the automotive industry should be taking in order to address the startup-driven disruption. In this post I want to make three points:
- It is hard for startups to break into and succeed in the automotive industry. The industry requires high investment and ability to scale while maintaining low risk. The Car Use value chain has lower barriers to entry but they result in many competitors that have difficulty differentiating their solutions.
- Startups must realize that they cannot disrupt the entire automotive industry. Instead they must focus in the right areas, and collaborate with innovation-minded incumbents in order to become part of the appropriate supply and value chains as quickly as possible.
- The incumbents must structure their organizations, operations and culture in a way that enable startup-driven innovation to meaningfully impact their business.
Companies in the automotive value chain are faced with a challenging future. While reporting record quarterly sales, they are also witnessing two alarming trends. Because of problems such as pollution, climate change and loss of productivity due to long commute times, consumer attitudes towards car ownership and use are changing. In the medium and long term, i.e., the next 5-30 years, these changes have a high probability to negatively impact automakers, their suppliers and their dealers, along with insurance companies, finance companies, and many other industries that are part of the automotive value chain. In addition, there is a growing consumer interest in electric cars (to address the pollution and climate change problems) and in self-driving, or autonomous, cars (to address the productivity problem, as well as a slew of other issues such reduced accidents and mobility for the elderly and handicapped). The success of Tesla Motors, Zipcar and Uber, the growing consumer anticipation of Google’s self-driving cars entering broader service, as well as Apple’s anticipated entry in the car business are exerting additional pressure on the automotive value chain to change the way it innovates. In this blog I explore what the automotive industry has been doing to address the potential disruption, analyze the effects of these initial steps, and provide recommendations on what corporations could be doing better.
In the last two years I have spoken to many business, technology, and corporate venture executives about their companies’ innovation goals and the initiatives they establish to address these goals. Several of these leaders are involved in the automotive industry and through our conversations I have concluded that a) in the next 10 years we will create more innovations that will impact the automotive industry than we have created in the previous 100, b) these innovations will be embraced because of certain important problems that must be addressed and will couple technology with other forms of innovation, c) because of the disruptive innovations that were introduced to the market in the last 3-4 years, and the ones that will be introduced in the near future, particularly those relating to the electric-autonomous-connected car, the automotive industry is approaching a tipping point of disruption.
In this post I review the two value chains that have been built around the automobile, discuss the societal problems that must be addressed and how the technology and business model innovations being developed to address these problems are disrupting the automotive industry. I also present companies that are pioneering these innovations while offering fresh visions on personal transportation.
I started writing these posts with the hypothesis that in their effort to innovate, corporations must re-invent the traditional R&D model with one that augments the R&D efforts with venture investments, acquisitions, strategic partnerships and startup incubation. Corporate VCs (CVCs) are expected to play a big role in this innovation quest. It is assumed that a CVC can move faster, more flexibly, and more cheaply than traditional R&D to help a corporation respond to changes in technologies and business models. With that in mind corporations are establishing such groups in record numbers, including corporations from industries that have not traditionally worked with venture capital. Corporations have been providing their venture organizations with significant size funds to manage, and expect them to invest in companies of various stages and geographies. Today’s CVC prominence can result in many advantages for entrepreneurs and co-investment partners but also carries risks, many of which are due to the way CVCs are set up and operate within the broader corporate structure. In the last blog I examined how the disruption of institutional VCs (IVCs) can impact corporate VCs. In this blog I start taking an in-depth look of corporate VCs. I will examine the different types of corporate VCs, compare the characteristics of today’s corporate venture groups to the characteristics such groups had in the late ‘90s, and describe the areas where CVCs must focus on in order to succeed. In the next blog I will provide some ideas on how to best set up a CVC organization based on my work with such organizations to date.
A large corporation recently requested my advice on how to set up and structure their venture fund, which they wanted to base in Silicon Valley. This corporation had initially set up a venture fund in the late ‘90s to invest in Internet startups. By 2002 they closed down the fund after determining that its portfolio companies had lost their financial value and had created little intellectual property of interest. But the startup activity of the last four years and the disruptions startups are causing in the company’s industry is leading it to re-establish its fund. This example, and many other similar ones, demonstrates a recurring theme of the past three years: corporations from a variety of industries are establishing, or re-establishing, venture funds in Silicon Valley, and other innovation clusters, and are aggressively participating in startup financing rounds. According to Global Corporate Venturing today 1100 corporations have active venture funds. The number of funds has doubled since 2009 and 475 of which have been established since 2010. VentureSource reported that corporate venture capital firms (CVCs) invested $5 billion during 1H14, a jump of about 45% from a year earlier and the highest level since the dot-com era. The emergence of corporate venture capital as a major source of startup funding has been the result of two factors, the first accidental and the second intentional. First, because institutional venture capital is being disrupted, corporate venture capital is able to fill some of the void that is created and emerge as an important startup-financing source. Second, as was previously discussed, corporations intend to access externally developed disruptive innovations by participating in the financing of startups. This blog examines what CVCs need to understand about the institutional venture capital disruption in order to best capitalize on the opportunities it will create. In the next blog I will explore how to best set up a CVC organization so that it can provide the corporation with impactful, over the horizon visibility to technologies, business models and startups that can help it achieve its innovation goals while becoming a trusted and value-added partner to entrepreneurs.