British Gas (BG) was one of the pioneers of corporate venturing in the UK, setting up a fund in 1986.
Its original investments are now being harvested and the benefits being assessed. BG's venture capital programme has shown varying degrees of success financially but Richard Rudman, who has been involved from the beginning, believes that the advantages are far wider.Following the privatisation of British Gas in 1986, the company set about modernising and updating its business. A new business development group was set up and its remit included a venture capital programme. Based upon research done in the US of corporate venturing, BG set aside £30 million for investments, principally alongside experienced fund managers and in development deals that would, in turn, help BG grow.
Three strategic aims were set up for the venture capital programme, Rudman explained. Firstly, to invest in anything that fitted with the strategic aims of British Gas and find new uses for gas. Secondly, it was expected to make a financial return for the group. This could be through realising the investment but also through cost savings that could be made across the group. The third reason was to bring about a culture change in the recently-privatised group.
Some of the money was ploughed into a US venture capital fund and a separate fund was set up for BG's investment in Europe. A third strand was dedicated to an environmental services fund, TR Ecotech, with a view to investing in technology that would help BG's old gas production sites. Although BG had not set out to take a direct investment, it did take board seats, joined collective research and development and assisted with marketing in some of the companies.
The programme almost immediately hit a wall when recession struck in the early 1990's. Most small companies were simply looking for money to stay alive rather than grow, Rudman noted. “It was nailbiting at times, he said, adding that the plug was almost pulled on the programme on several occasions.
As the investments are wound up, Rudman notes that the £30 million has produced a profit despite being looking unhealthy at an earlier stage. Some of the American investments paid off spectacularly while results in the UK were patchy, which Rudman attributes to a number of factors including critical mass, the pool of managers, reward structures and other cultural differences.
“As with most venture capital, one deal paid for the rest of the programme.”
The strategic aims of BG went largely unrealised. “We didn't get the strategic benefits we expected but in 1988 we didn't expect our business to change as much as it did,” said Rudman. Following privatisation, the empire spanned from gas exploration to supplying gas cookers for the home. That has shrunk and changed as the group has split into different operating areas such Centrica and BG.
The third and largely, intangible, benefit is what has been the most successful, according to Rudman. As BG's business grows, it is increasingly diversifying and spinning off into different business units. “We have broken down the monolith into lots of operating units with a broad remit. Each of those units has a remit to find new, innovative ways of making money,” he said. The venture capital programme has helped raise awareness of how to form and manage alliances with outside parties.
Despite the fact that the programme is being wound up, corporate venturing is alive and well at BG. Direct investments are less likely than ten years ago, according to Rudman, who believes the US model will dictate the future. In particular, smaller companies are often looking for a big partner purely for the name and backing. “We may be willing to do a joint venture or help to find financing [for a smaller company] but no longer be an investor ourselves,” he said.
Rudman points to one of BG's biggest successes as Cogsys, which although not generating huge financial returns has now been brought back into the group to operate as a subsidiary. “We realised that the real value of the company is to commercialise software. Not just the original software – any software,” he said.
“Cogsys is an example of where we have spun it out and the company has developed its own skills. Those skills are so valuable to us that we brought it back in again,” he added.