Smart Innovation

 

Main data source: "Venture Catalyst", Donald L. Laurie. Executive summary by Vadim Kotelnikov.

"Less and less GE value is coming from 100 percent-controlled companies and more and more is coming from businesses that we are a significant influence on, but do not control."

~ Steven Smith, Managing Director, GE Capital 

 

External Venture Investments by GE Equity

  • Established in 1995, General Electric (GE) Equity, a business unit within GE Capital, invested nearly $4 billion in 300 businesses by 2000; of those 60% represent opportunities that emerged outside GE; two-thirds of ventures sell products and services to GE. Currently GE Equity invests between $1.2 billion and $1.5 billion annually in ventures.

  • Following its strategy of a lot of small bets, GE Equity invests an average of $3 million to $5 million in each of companies, and it gets somewhere between 5 and 11% of each venture.

  • The segments in which GE Equity invests include financial services, business services, health care, telecommunications, media and Internet.

  • GE Equity employs more than 200 people and makes more than $120 million in net income for GE.

  • 75% of GE Equity's investments are qualified as strategic.

  • The key component of GE Equity's plan is co-investment program that requires GE Capital or individual GE businesses to match its investment; in 2000, 85% of GE Equity's investments were done either jointly with another GE Capital business or jointly with one of the GE company businesses.

 

The Two Missions of GE Equity

  1. Value Investing using corporate venture investments to help GE businesses grow. Ideally, each and every of GE Equity's investments adds value to both GE and the start-up. Before investing in a venture, GE Equity determines if a synergetic relationship between the venture and one of more of GE's businesses is possible.

  2. Making Money investing with the expectation of a 30 to 40% return within three to five years.

Qualities of Top Managers Critical to Success

  • they are visionary leaders aiming at building a world-class, global, private equity organization

  • each of them is a remarkable hybrid of corporate executive and venture capitalist

  • they practice and lead a highly disciplined approach to project selection and portfolio management

Financial Management System

Financial management system, which is a part of the business management system (BMS), allows management:

  • to monitor financial performance

  • to allocate investments across industries and stages of investment (early-stage, later-stage, mezzanine)

  • to anticipate liquidity events

  • to ensure GE Equity's ability to deliver specific quarterly results to the parent company

 

GE Equity's Goals

GE Capital, Equity is a leading source of innovative private equity solutions. GE Capital, Equity provides equity capital to mid market sponsor and lending relationships and to companies with differentiated technology in GE's core industries. GE Equity maximizes the return on GEs investment capital by combining deep equity investing experience with GEs industry expertise, operating experience and global reach.

From 1995 to today, they've had over $5 billion of assets under management. GE Equity invests in private companies exhibiting strong growth and established business models.

GE Equity's initial plan was only to invest in areas unrelated to GE, with an eye toward making some money. Having understood how equity investing and growth are converged, the top management of GE Equity changed the company's strategy. It was decided that GE Equity should make investments in companies, technologies, and distribution channels that could further the strategic interests of the various GE businesses.

Today, GE Equity's venture investment goal is to build a world-class, global, private-equity business. The second goal is to extend GE's management and operating systems to the portfolio companies.

2 Business Growth Strategies

3 Strategies of Market Leaders

Highly Disciplined Business Management System (BMS)

 

BMS is central to GE Equity's management and its venture activities. Each potential investment undergoes a rigorous examination procedure developed by GE Equity top management and carefully selected probability-and-decision theory experts. GE Equity developed a systematic investment approach based on decision and probability theories, and it is also known in the marketplace as having the most onerous due-diligence checklist in the world of corporate venture investing.

The due diligence report explores in depth and provides information on:

  • the investment rationale and investment considerations

  • an industry and company overview

  • value proposition

  • management team

  • company's marketing strategy

  • capital structure

  • financial assumptions

  • comparable companies

  • key risks and uncertainties.

Venture Financing Funnel

Venture Financing: Key Documents

Portfolio Management

The BMS also includes a portfolio management system that monitors the performance of companies and assigns them ratings of green, yellow and red. Companies in the underperforming red category are subject to in-depth monthly review by the GE Equity top management, whose decisions can call for action that range from offering assistance to the troubled venture team to exiting the investment.

BMS, which can be accessed online, includes and tracks not only every investment but also every prospective investment. Top managers can look at all GE Equity's deals, their status, who's involved, who's on the team, who are the managers and what's their track record.

Value-Added Investing

Ventures associates with GE Equity benefit immensely from GE's value-adding capabilities. They gain credibility as a GE partner and get access to GE's wealth of industry-specific knowledge and research, marketing, sales, and distribution capabilities. GE Equity also created Community.com as a portal for the companies in which GE Equity has invested so they could come together and interact. Using this web-tool, the companies are able to sell to one another and take advantage of GE's purchasing power.

GE often works out a licensing agreement for a portfolio company with General Electric. It can also help start-ups over some trouble, sometimes charging prevailing consulting rates for its guidance.

GE equity does not seek to dominate the companies in which it invests. This approach characterized by support and respect for smaller enterprises as well as willingness not to seek control is an important aspect of the company's success. On their part, entrepreneurs see in GE Equity a value-added opportunity to get where they want to be more quickly than they could with a venture capital firm, that provides only cash.