“Contrary to popular belief, oil and gas is not a Wild West industry. It is very conservative,” says Dave Henderson, managing partner of XPV Capital, a Toronto-based growth equity investor focused on water services in Canada’s hydrocarbons sector. “This is where the corporate venturing and open innovation models can add value. To penetrate the industry you need to win trust. So a large corporate or an established service provider can help.”
That’s the problem with clean deals – they can be dirty, slow-moving and plain difficult. The new water infrastructure solutions offered by XPV’s portfolio companies cannot be downloaded onto a smart phone. Getting them to market involves getting your hands dirty (and wet) out in the field; the inhospitable and highly regulated oil and gas field, to be precise.
This explains why corporate venturing and open innovation are increasingly important to clean deals. When done well, a virtuous circle is completed. Open innovation and corporate venturing provide the reassurance required by financial investors that their investments can get to market. The financial VCs then invest, thereby providing the companies with the financial firepower to get to market.
“Veolia recognises that start-up companies often lack the resources and the experience required to undertake pilot trials, particularly when such trials are in remote locations requiring onerous safety and quality procedures such as in the oil and gas industry,” says Richard Biquillon, Open Innovation Program Manager at Veolia Environnement, the Paris-based environmental services company.
“This is where Veolia is able to add value, in return for which we naturally look to achieve a return by way of a new offering that meets the needs of our markets while providing Veolia with an advantage over its potential competitors,” he adds.
Veolia’s open innovation strategy is called the Veolia Innovation Accelerator (VIA). The most recent VIA clean ‘deal’ is Genesis Water, a US water-tech company originally focused on the municipal water market, which, with Veolia’s help, is now pivoting to faster growing oil and gas markets.
Some financial VCs are sceptical of open innovation. “It sounds like acquisition by stealth and on the cheap,” says one European veteran VC who preferred not to be named. “And it opens a legal minefield around IP.”
Deals involving open innovation and corporate venturing are certainly more complicated than vanilla financial venture deals.
“VCs want to sell their stake for a financial profit. Nothing else counts,” says Neil Foster, partner with the law firm Baker Botts, a specialist in corporate venturing. “On the other hand, open innovation and corporate venture capital programmes have diverse desired outcomes for their investments. CVCs may wish to sell, buy or indeed hold. This adds complexity but the additional benefits that the corporates bring usually outweigh the extra time taken on the deal. Open innovation programmes can be just as successful.”
Veolia is aware that it needs to explain the benefits of its approach to a sceptical audience.
“This is perhaps the most difficult aspect to get across when talking about the VIA,” says Biquillon. “Deals have to be constructed in such a way as to ensure that the start-up has room to grow its business outside of the territories or markets covered by VIA partnerships, while taking advantage of Veolia’s involvement to the benefit of the business as a whole. Ultimately, the investor, as well as the innovator, must judge the value the potential exit value of a larger business with the VIA partnership in place compared to that of a smaller business free of such commitments.”
In other words, open innovation is difficult. So is corporate venturing. Who said it was supposed to be easy? But if clean deals are to be done, a combination of open innovation, corporate venturing and good old financial venturing are going to be increasingly required.
Disclosure: Veolia and Baker Botts are both sponsors of the LEIF Global Corporate Venturing report ‘Water Innovation in Oil and Gas’.