Why enterprise venture capital reduces the risks and multiplies the rewards in investing in industrial technology



Industry 4.0 continues to generate tremendous value as we see large industrial companies adopt and deploy technologies to position themselves as strong competitors in their respective industry sectors. The convergence of growth between key elements associated with automation includes the availability of faster networks (i.e. 5G), increased computing power with quantum capabilities, advanced computing options , advanced cybersecurity software and incentives to reduce environmental impact and carbon footprint. With the emergence of these industrial innovations, AI and machine learning are more supported, low latency productivity, quality applications, as well as protection of connected industries.

Industrial companies are more than ever ready to change and compete for their future.

Traditionally, the industrial sector has been conservative, and industrial giants have generated stable and pleasant returns for investors in the public and private markets. However, while innovation is occurring within these large global firms, the venture capital branches of the world’s most successful industrial firms are more actively seeking start-ups and small and medium-sized enterprises. The new generation of inventors increasingly serve as “living laboratories” as they approach old problems in new ways.

In some cases, intrepid and agile start-ups pose a serious threat to some large manufacturers. In other cases, they breathe new life into old product offerings. For example, the integration of sensors and actuators in specialized equipment can allow manufacturers to offer continuous new services at the time of purchase or transfer of the equipment, making field service possible at distance, reduce the cost of “rolls” if equipment fails and accelerate to medium time to repair.

The potential to gain competitive advantages while creating value for the company in the context of Industry 4.0 has landed venture capitalists in a dynamic and exciting time. Corporate Venture Capitalists (CVCs) have the unique ability not only to fund industrial innovation, but also to integrate technologies into their product and service offerings while reducing risk on both sides of the spectrum. With the right investments or acquisitions, CVCs can transform a small start-up into a new DNA of business and technology development. Depending on the scenario, it could generate almost immediate returns.

Alternatively, small businesses – especially in the area of ​​industrial innovation, are too often penalized by the challenges of funding.

Pairing large companies that have an aggressive investment position and are looking to realize capital gains, with agile start-ups that have the most disruptive technologies and are not bogged down by internal forces, brings benefits to each stage of new projects.

The largest and most successful manufacturers have long-standing customers, highly developed distribution systems, and large networks of business and technology ecosystems. They also have the operational and administrative depth to accelerate, launch and develop the ideas and platforms created by newbies.

Compared to financing by venture capital firms, “strategic” financing can make all the difference in the lifespan of small start-ups. Here are a few reasons.

For starters, technological advancements are strengthening 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.

Additionally, innovations in fundamental automotive manufacturing technologies have led to lower production costs, better data detection and processing, improved worker safety, and faster time to market. , because connectivity capabilities in an Industry 4.0 framework bring the entire company together, as well as the supply chain. and logistics ecosystems.

Finally, innovation on the production lines of automotive factories brings real-time visibility and control to manufacturers, providing a massive amount of data that can be converted into business intelligence and leading to an unprecedented level of continuous improvement. in industry. before.

Why should an automotive HVAC invest in supporting technologies like IoT and industrial IoT, and buy these technologies directly, even when they are not directly or traditionally related? The answer is simple. The convergence of software, compute and connectivity enables manufacturers and marketers to tap new sources of revenue from software, analytics and services designed to deliver value to end customers throughout the life cycle. their life, compared to the economy of “price X units”.

These trends and many more are making a huge difference in the way industrial giants execute strategic roadmaps and acquisitions. “Smart Money” HVACs bring opportunities to transform not only their business, but the future of the industry as a whole.

The very definition of industrial technology is changing

Industrial technology companies were once seen as more mechanical than strategic.

Today’s leading innovators in industrial technology are increasingly defined by the benefits their solutions deliver, including actionable insights, business insights, more precise automation, more connected hardware, and software platforms that drive data that can directly improve results.

Electronics, sensors, cloud-based services and advancements in advanced computing enable manufacturers to transform what has been a stand-alone hardware company for decades into fully automated products with recurring service revenues. “Integrated”.

Over the past two decades, at the dawn of Industry 4.0, HVACs have made investments that have enabled more cost-effective IT, real-time connectivity, and increasingly sophisticated sensing in their environments.

From now on, there will be no large manufacturing company that is not also a technology company, with its own competitive “technology stacks” bringing together the physical and digital worlds.

We are seeing a blurring of the lines between Information Technology (IT) teams and Operations Technology (OT) teams, overcoming internal organizational barriers. New levels of orchestration are forming across the enterprise, from physical factories to digitally connected on-site service centers. This convergence was not easy to implement. Historically, IT and OT teams either did not collaborate or competed for internal resources.

Fortunately, this is changing rapidly. HVAC Groups bring new ideas, people and technology solutions to the culture, from product development to manufacturing, marketing and customer experience.

Together, IT / OT leaders make additional services possible. Developments such as basic remote monitoring, predictive maintenance, and advanced AI capabilities are improving the way customers engage, interact, and generate data that informs future product innovations.

The sensitivity of strategic investment: the great opportunities for future CVCs

The proliferation of new technologies in the industrial sector is not slowing down, it is accelerating. Bringing new energy into creative and collaborative investing is the next ‘big thing’.

The financial profiles of industrial technology companies reflect the importance they place on improving the productivity and profitability of manufacturers.

According to a study by William Blair, as of 2015, “Industrial technology companies typically generated gross profit margins of around 40% and EBITDA margins of around 20%. Today, those benchmarks have grown to over 50% for gross profit margins and over 25% for EBITDA margins in leading industrial technology companies that have incorporated substantial software-based revenue streams and subscriptions in their solution offerings. “

The report goes on to say that these results vary “depending on how well the company’s business model is positioned to capitalize on the converging trends that are driving much of the industry’s growth and macro tailwinds. described above that elevate the financial profiles of companies across the industrial technology sector.

CVC has today become one of the most adopted forms of financing for industrial innovation start-ups. 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 efficient means of financing and developing small businesses under large companies.

Executives have proven that by investing in highly innovative companies within or alongside their core businesses, industry groups can not only keep up with industry innovations, but can become the innovators themselves. This involves less risk and expense compared to relying solely on in-house R&D which has proven to be risky and expensive, especially when large projects fail while more agile competitors and challengers succeed.

The best CVCs I have had the opportunity to work with throughout my career are skilled outside 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 continued investments that lead to multiples of financial gains.

They are “innovation activists” who advocate for brilliant new combinations, sometimes helping to accelerate existing strategies, while simultaneously influencing those strategies.

They are ‘creative geniuses’ who get the job done and engage with the smartest minds inside and outside their industries to put together new combinations that protect competitiveness and lead to relevance and long term value.

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