Oil companies are increasingly investing in low-carbon technologies that have the potential to disrupt their core and end-markets.
While their hydrocarbons business remains their bread and butter, to build long-term value, they need to think about a future where, for example, vehicles are powered by renewable energy and are driver and owner free.
Many are investing in new alternative energy businesses – including renewables, which often need additional capital to grow.
The question is how do they create value from investing in early-stage companies?
Purchasing fully-fledged ‘disruptive’ assets is expensive and can limit the investment capacity of the firm. Buying earlier allows companies to acquire a wider range of smaller start-ups, but this presents fundamental questions and challenges.
Oil companies are used to risk-sharing investment models designed around capital intensive assets, often requiring political partnerships and market access. Start-ups and disruptive investments require a different approach.
Companies are therefore increasingly using their own corporate venture capital (CVC) and are creating corporate venture funds to hold investments and to find a balance between parent company control and start-up innovation. In return, the start-up gains access to the parent company’s capital, expertise, connections and branding. This model also allows the business to develop outside of the parent organisation, which can help preserve an innovative culture and perhaps retain staff that wouldn’t want to be integrated within a large corporation.
There isn’t a standard CVC model. Directly owned and internally dedicated funds have less exit pressure than independent venture capital companies, which need to meet investor expectations. They also allow companies greater say over investments to ensure that they’re aligned with their strategic objectives but they require greater commitment and carry greater risk. The corporate investor also needs to decide whether to bring in industry or venture capital expertise, set lines of responsibility, decide how much they will actively collaborate with portfolio companies, and how they will ultimately realise value.
As companies have become more experienced, we have seen the progression from first generation CVC models, largely strategic in nature and directly owned, to second generation, largely financial in nature, with multiple investors. Third generation models aim to create an environment that benefits from external collaboration, skills and financing to create value.
Whatever investment model companies use, success still takes considerable effort. It is very difficult to align strategies and so the parent business needs to have a culture that will allow them to absorb new ideas and technologies.
Within corporate venture funds, third generation models are aiming to break the mould, and to enable traditional oil companies to grow new businesses faster than ever before while creating value for shareholders as they increase their investments in lower carbon energy and enabling technologies.
For those that can make it work, it should enable the company to be more outward looking and move faster, but it requires a strong combination of investment expertise, entrepreneurial leadership, financial management, and integration expertise to move ahead of the market.
David Baker is Transaction Advisory Services energy sector leader for EY UK and Ireland