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Segway Seeks a Market


Introductory Class for Rotman Venture Capital Strategies MBA course

Jim de Wilde

September 10, 2003

Jim de Wilde is a Canadian venture capitalist. Since 1993, he has divided his time between Montreal and Toronto, focusing on the commercialization of early-stage technologies through JdW Strategic Ventures. He has advised financial institutions on their strategies for developing early-stage technologies and has been involved in a number of universities in developing commercialization strategies. He is currently on the Advisory Board of the RBC Capital Markets Technology Fund (Toronto) and the MSBI (McGill Bishop's Sherbrooke Fund).

Dr. de Wilde has also taught at a number of Canadian business schools, including the Rotman School at the University of Toronto where he currently lectures on venture capital strategies and technology commercialization. He has lectured in Finland, Mexico and Argentina on venture capital strategies. He was on faculty at McGill from 1991-1993 and the University of Western Ontario School of Business Administration from 1984 to 1991.

Dr. de Wilde has a PhD in political science from McGill with a dissertation on the capacity of Canadian political institutions to promote technological competitiveness. He has spoken and written extensively on federalism and Canadian capital markets and the preconditions for Canadian global competitiveness.

There are significant transformations going on in the global capital markets right now that affect the evolution of venture capital strategies both in terms of portfolio design (space and concept selection), financial engineering (restructuring models involving both consolidation and M&A), and the development of a variety of new private equity instruments under the broad category of "hedge funds". These developments reflect a disillusion with public capital markets, whose credibility was reduced by the day-trading epidemic of the late 1990s early 2000s, and the hype-and-boom excesses of valuation models in the 1990s. They also reflect the strategic realignment of technology-driven companies toward the search for new markets given a different pattern of global consumption.

In financial markets, the return to private equity makes possible a return to patient capital, seeking long term durability as a criterion for company creation. This is all, in my view, extremely healthy, and promises the return to a sounder economy which can manage globalization with greater benefits to all stakeholders. However, it does create some short term challenges for venture capitalists and private equity fund managers, who need to:

(i) reassure institutional investors that they are on top of the next wave of commercialized innovationwhich leads to a major source of growth in knowledge-based economies;

(ii) ensure that they have portfolio strategies to manage the number of new companies already created in areas like biotechnology and information technologies; and

(iii) develop exits strategies other than reliance on the IPO which requires working .with technology-oriented corporations and government actors to ensure that there is a network for implementing innovation.
Similarly, the search for strategies that are aligned with emerging patterns of global consumption for knowledge-based products requires a different approach than strategies for commercializing emerging technologies. Again, this is not bad news, as it reflects the movement away from strategies that targeted saturated and unstable product markets and makes possible significant opportunities for returns. It also means that the art of venture capital and the art of value-creation through investment banking increasingly converge as skill-sets.
One of the best places to start looking at trends and strategies in global venture capital/private equities is to look at the recent IPO market.
In the second quarter of 2003 (reported from Financial Times data), only two venture-backed firms received NASDAQ IPOs (iPayment and Form Factor ). These were not high concept deals, but well-managed incremental improvements in semiconductor chip manufacturing and credit card processing.

It is worth noting that five of the top six performing IPOs are from Asia, four (NHN, KHVatec, Webzen and LG petrochemical) from South Korea.

See, , . This raises a number of questions concerning globalization and capital market trends, but for our purposes, this means that the international capital markets are looking for new agents of consumer demand and new instruments for accelerating rapid growth.

A useful case study on private equities strategy for Asian markets is Longreach Global Capital. Longreach Global Capital. Longreach is the beginning of a new global trend, the use of private equities as an instrument for cross-border restructurings and its deal profile and success is well worth monitoring as an innovative growth strategy with implications for. Future case studies of designing financial instruments to access rapid-growth markets ( e.g. like the portfolio strategies for Chinese private equities: and


Three recent financial market stories (from the Wall Street Journal and Financial Times) reflect some trends beneath the surface of public capital market activity.

Each of these reflects an emerging trend:
  1. Norsk Hydro demonstrates the attempt to unlock new sources if value in emerging technology sectors

  2. Akamai shows that it is may be possible to revitalize innovative companies from the 1990s with restructuring strategies based on realistic valuation models and the opportunities for investors that comes from investment banking strategies being applied to restructuring opportunities in spaces like streaming media ( ) ;

  3. Kodak is an example of the attempt to find reincarnation of value in strong corporate technology brands whose key markets are saturated, shifting focus from consumer applications to the digitalization of health .

It is useful to start with some case studies to see what is going on "out there". Here are four developed at length and some suggestions as to other interesting developments in venture capital and private equity strategies that should be known about and discussed further :


The private equity/venture capital market reflects the search for new sources of value in the economy. Four case studies give some insight into where some actors in the market are casting their glance.

Case study # 1 The Segway Seeks a Market
Segway is an interesting venture capital case study. Initially, I confess to a Rule Number One in venture capital reaction to it. Let's call Rule Number One the anti-Hype rule. If something is hyped, instantly short it But Segway raises interesting questions about what is bankable and is an attempt to focus investor decision-making in new spaces. An excellent recent piece by Matt Richtel in the NYT points out three things about the Segway case which venture capital strategists should reflect on:
  1. John Doerr is one of the world's most successful venture capitalists. His investment style is a best practices of strategic venture capital. (*) Doerr described the Segway as "as big as the Internet as far as making a difference";

  2. The LA Metro Transportation authority likens the first-generation Segway to the first PC "a nice toy and it can solve some problems";

  3. The Segway is in the words of Herman Leonard, of the Kennedy School of Government, like a Jeopardy question, to which Segway is the answer.

Clearly, transportation logistics is a great space in which to anticipate expanded market opportunities a great space. But where is the competition to Segway? (Incidentally, one of the most frequently interview-ending answers in venture capital presentations is "we have no competition", which shows either the product is useless or the management team is not on the ball. In either case, a great deal of time and money can be saved by asking that question first). So, who is Segway's competition? Vespa? Harley-Davidson? Bicycle manufacturers? Public transportation? Bombardier? Golf-cart manufacturers? How can the marketing strategy redefine the sector (personal transportation and transportation logistics) to the advantage of the product?

(*) He saw a market need for cable-delivered internet, spent two weeks interviewing fifty-plus people for the CEO and leadership roles . Then, he financially engineered the company which was to become @Home, bringing in major cable companies as partners. This Kleiner Perkins deal is often cited as a best practices of strategic venture capital.

Case study #2 Carbon sequestration or storage

Canadian competence in energy investing is globally recognized. The portfolios of Arc Financial (, Hydro Quebec Capitech (, Ventures West (, RBCCapital Markets (, OPG Ventures ( represent a concentration of expertise that has potentially global significance if these strategies in the post-Kyoto world can lead to a concentration of globally-investing energy strategies. The energy technologies sector remains one that is defining its pattern. There are a number of critical case studies which reflect different doors through which the energy technology market can be entered. In this context, carbon sequestration makes an interesting case study ( ). In a portfolio of alternative energy driven technologies, how highly does one place a value on technologies which try to ameliorate the environmental effects of fossil-fuels as opposed to those technologies which seek to replace fossil-fuels. The short term answer is that there is an immediate market for remediation technologies that offset the problems of carbon dioxide pollution.

Case study #3 Battery Ventures and the Tennis Channel

Specialized investments make the new media issues (e.g. another interesting case study. After a number of interesting new media business concepts (e.g. a more specialized market in cybercasting and networked communities is emerging from the debris of the digital community inspired dotcoms. The Tennis Channel makes an interesting case study, backed by branded names in a highly individual sport, with serious venture capital money and a business model which leads logically to some tie-ins. Battery Ventures ( ) is considered a top-of-the-line venture capital firm, whose strategies are worth watching both in terms of "best practices" and the effect of their portfolio strategy on market appetites and judgments. The experience of new media investments to date is that realistic valuations are as always a critical precondition of success and that the business models which organize digital communities can be highly successful if this core precondition is met.

Case study #4 The Coming Biotech IPO trend (maybe)

Early stage health sciences venture capital is now starting up again. While there are some interesting new investment categories around specific scientific trends (e.g. patient cooling and cooling technologies is an example of a small trend as it results in less invasive surgery ( and emergency treatment procedures (e.g. ), a significant amount of medical venture capital is tied up with creating successful business from biotechnology research. A number of biotechnology IPOs are planned in the next few months, including Canadian plays like . Other scheduled are Eyetech , Myogen, Acusphere, Genitope, Advancis, Cancervax, Nitromed , Pharmion, Acorda, Cordentech . The question of market appetite for these offerings will reveal a great deal about the dynamics of the IPO process and its implications for the next stage of venture capital activity. case study of the commercialization of research on nanotechnology

Investment criteria obviously respond to the anticipation of market trends. While "lists" risk misleading analysis by excluding well-managed opportunities that exist outside of the focus (like Priveq's investment in, in the rail maintenance space), here are six categories of investment that can start to focus a discussion of venture capital strategies, and the reasons they make this list:

i. Security and encryption: In this category, there are clearly some conventional categories of investment: the search for personal and network security and encryption. An interesting case study of a portfolio strategy built on specifically galvanizing energies in this space is .

ii. Biotechnology restructuring. There are other visible and documented trends about biotechnology financings based on restructuring companies and launching new IPOs. The belief that there is a value proposition here lies behind some current Euro-deals, including the new round of capitalization of Schroders Life Sciences ( and the second fund for Abingworth ( This opportunity is discrete from the IPOs discussed above and involves the creation of new corporate entities to commercialize research effectively.

iii. Relaunching second chance stocks and second-stage stocks. Business School strategists have not spent enough time looking at companies that are being reborn, either "second chance" stocks, rising like a phoenix, or simply second-stage stocks, looking to build a sustainable suite of businesses after the successful commercialization of a single product or concept. The familiar technology stock-charts with their dips and peaks demonstrate exactly how frequent a phenomenon this is. While this is often misleadingly and annoyingly referred to as "vulture capitalism", the phenomenon of rebuilding companies like Akamia discussed above, reflects a significant new trend in the creation of knowledge-based value, again where technology analysis, venture capital and investment banking skills are required.

iv. Refinancing of public private partnerships. Combined with the need for different financial instruments to deliver public services, the refinancing of public-private partnerships has produced a range of investment opportunities: smart traffic, educational financing, healthcare insurance and consumer choice, markets in statistics and data about sociological trends all contain within them powerful potential for business models around which significant companies can and are beings designed. Educational futures options, ESRI ( activities in using global positioning satellites to turn geographical spatial awareness into a traffic management product are the kinds of examples of where public policy will create the possibility of the creation of commercial value.
v. The commercialization of new sources of science and the "next big things". Fields like agricultural chemistry and energy storage technologies potentially have incredible significance. See again in this context. The important point for venture capital analysis is that these are "new" market opportunities and require that investors look off the current radar-screen to find the "next big thing" to use the Silicon Valley language of the 1990s.

vi. New disruptions based on market needs - the concept of strategic venture capital, i.e. creating companies around emerging value propositions. When I first taught an MBA course on venture capital strategies in 1991, we emphasized the difference between market-driven technologies (at-home diagnostics was the hot topic that year and would have been a disruptive technology in terms of the economics of health-care) and technology-push (several areas of mobile telephony with excessive applications). Now, in 2003, the market continues to seek disruptions. For example, a medical software company that tells consumers what they need to know about the statistical odds of certain treatments for comparable medical conditions has the potential to reorganize markets in medical information by consumers/citizens and creating incentives for more efficient delivery of health-care. If designed by a venture capital firm (in the manner that John Doerr at Kleiner Perkins designed @Home to service the need for cable-delivered internet services discussed above), these approaches to "strategic venture capital" could yield some of the most significant returns in the industry.

Here are five trends to watch in the next year which we can bring back in September 2004 for a reality check .
  1. Private equity firms will have a significant opportunity as restructuring leads to buy-outs. In the past six months, one of the most interesting deals in the Canadian capital market was the Bain Capital, CDP buy-out of Bombardier's recreational vehicles unit. It is cited here as a case study of some new trends in capital market . This makes new innovators in capital market design companies with specialized investing strategies and management depth like and . On a global scale, the deal strategy discussed above of Longreach Capital is another example of private equity-led investing with longterm strategic thinking.

  2. The area of corporate venturing will lead to the development of real economic opportunities. This is partially because corporate venturing contains within it the potential of an obvious exit strategy. In the case of Cloakware, the role of Intel Ventures is significant. The structure of the Intel Ventures portfolio ( and Nokia Ventures Partners ( provides excellent insight into using venture capital activity both as a window on technological trends and as a revenue-generating activity within the company. It is possible that corporate venturing activities will prove to be adept at the generation of "strategic venture capital" deals, creating value from component activities where market opportunities can be discerned.

  3. The privatization of government activities now leads to the development of innovative financial models, sometimes called public-private partnerships. The development of "smart roads" is an infrastructure megaproject which contains within it certain real capabilities for the creation of value, e.g. the design of wireless billing capabilities. The broader issues of public policy (e.g. financing educational costs for the next generation of citizens) also provides the opportunity of creating a market-based strategy for financing investment in knowledge. Similarly, new areas of commercial activity ranging from food toxicology (governments now almost exclusively do food testing) to transportation logistics (smart roads) are coming onstream.

  4. The next generation of technologies to be commercialized takes place in quite different areas. Specialized venture capital firms like Foragen ( and Primaxis ( are a new wave where expertise is concentrated in future market activities. The development of a specialized cybercasting venture firm or a specialized transportation logistics venture firm are examples of opportunities which exist for combines specialized expertise in technological categories with core company-building, value-creating venture capital capabilities. This approach will increasingly be seen by institutional investors as a technique for accessing the new sources of technology to be commercialized, often in partnership with corporations in the sector.

  5. The market is now global for company creation and value creation. In other contexts, I have argued about the importance of creation of demand in places like Africa leads to some possibly highly valuable growth-creation models. An interesting case study is . There is a more real opportunity in the development of venture capital firms to back entrepreneurs in new rapid-growth markets. For that reason, case studies like are prototypes of investment activities in other emerging capital markets with a concentration of intellectual capital as exists in China and, possibly in the next year, Iran, Morocco, Thailand, Malaysia.

There are many reasons for caution in the current global investment and capital market context. However, venture capital is about creating new sources of value from knowledge and organizational capacities. The line between creating value (commercializing research in digital geological surveying or temperature control management) and unlocking value (traditional investment banking activities focused on restructuring public sector activities or merging corporate structures that are inappropriately engineered) becomes increasingly blurred in a period of realignment.
The opportunities that exist in the Canadian marketplace are substantial and concrete, but do require new instruments, psychologies and portfolio strategies to apply the best practices venture capital thinking to current contexts. That is what we shall be talking about in the next few weeks. For these reasons, I have focused on portfolios which look at value creation from commercializing engineering knowledge about transportation technologies (among other Canadian competences) or understanding of the developments in energy markets as they affect value-creation. It is also essential that the best practices venture capital focuses on less obvious areas of science, like transportation logistics, portable refrigeration technologies as profitable niches for investment activity can be uncovered in a global market that is now restructuring its approach to globalization. The opportunities are there, they are just not in plain view. But if they were, it wouldn't be venture capital.

Companies and technologies are cited here as case studies for discussion purposes only
Last Updated ( Tuesday, 05 July 2005 )