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Article from NYTimes.

MENLO PARK, Calif. — New York, London and Hong Kong are common addresses for blue-chip multinationals. Now Silicon Valley is, too.

From downtown San Francisco to Palo Alto, companies like American Express and Ford are opening offices and investing millions of dollars in local start-ups. This year, American Express opened a venture capital office in Facebook’s old headquarters in downtown Palo Alto. Less than three miles away, General Motors’ research lab houses full-time investment professionals, recent transplants from Detroit.

“American Express is a 162-year-old company, and this is a moment of transformation,” said Harshul Sanghi, a managing partner at American Express Ventures, the venture capital arm of the financial company. “We’re here to be a part of the fabric of innovation.”

The companies are raising their profiles in Silicon Valley at a shaky time for the broader venture capital industry. While top players like Andreessen Horowitz and Accel Partners have grown bigger, most venture capital firms are struggling with anemic returns.

The market for start-ups has also dimmed, in the wake of the sharp stock declines of Facebook, Zynga and Groupon, the once high-flying threesome that was supposed to lead the next Internet boom.

But unlike traditional venture capitalists, multinationals are less interested in profits. They are here to buy innovation — or at least get a peek at the next wave of emerging technologies.

In August, Starbucks invested $25 million in Square, the mobile payments company based in San Francisco, which will be used in the coffee chain’s stores. This year, Citi Ventures, a unit of Citigroup, invested in Plastic Jungle, an online exchange for gift cards, and Jumio, an online credit card scanner.

Banco Bilbao Vizcaya Argentaria, the large Spanish banking group, opened an office in San Francisco last year. The team, which has about $100 million to fund local start-ups, is looking for consumer applications that will help the bank create new businesses and better understand its customers.

“We are in one of the most regulated and risk-averse industries in the world, so innovation doesn’t come naturally to us,” said Jay Reinemann, the head of the BBVA office. “We want to avoid the video-rental model. We want to evolve alongside our consumers.”

The companies are hoping to tap into the entrepreneurial mind-set. Multinationals, with their huge payrolls and sprawling operations, are not as nimble as the younger upstarts. While they are rich in resources, big companies tend to be more gun-shy and usually require more time to bring a product to market.

“Companies cannot innovate as fast as start-ups; increasingly they realize they have to look outside,” said Gerald Brady, a managing director at Silicon Valley Bank, who previously led the early-stage venture arm of Siemens. “We think it’s happening a lot more than people recognize or acknowledge.”

Of the 750 corporate venture units, roughly 200 were established in the last two years, according to Global Corporate Venturing, a publication that tracks the market. In the last year, corporations participated in more than $20 billion of start-up investments.

Big business has played the role of venture capitalist before, with limited success. During the waning days of the dot-com boom, financial, media and telecommunications companies sank billions of dollars into start-ups.

The collapse was devastating. Although some managed to make money, far more burned through their cash. In 2002, Accenture, the consulting firm, scrapped its venture capital unit after taking more than $200 million in write-downs. The previous year, Wells Fargo reported $1.6 billion in losses on its venture capital investments. Dell, the computer maker, closed its venture arm in 2004 and sold its portfolio to an investment firm. (It resurrected the unit last year).

Companies say they are taking a different approach this time. Rather than making big bets across the Internet sector, investments are smaller and more selective.

“We invest with the idea that we’re a potential customer for a company,” Jon Lauckner, G.M.’s chief technology officer said. “We’re not looking to make several $5 million investments and make $10 million on each. That would be nice, but it’s not important.”

As they try to find the right start-ups, some are forging tight bonds with local firms. BBVA, for example, is an investor in 500 Startups, a venture firm that specializes in early-stage start-ups and is run by Dave McClure, a former PayPal executive.

Unilever and PepsiCo are limited partners in Physic Ventures, a venture capital firm designed to help corporate investors build commercial partnerships with portfolio companies. Both Unilever and PepsiCo have installed full-time employees in Physic’s downtown San Francisco offices.

American Express has stacked its investment team with technology veterans. Mr. Sanghi, the head of the office, has spent roughly three decades in Silicon Valley and formerly led Motorola Mobility’s venture arm. Through its network of relationships, the office has met with roughly 300 start-ups in the last six months.

The connections have started to pay off. Vinod Khosla, the head of Khosla Ventures and a co-founder of Sun Microsystems, introduced the American Express team to the executives at Ness Computing, a mobile start-up. In August, American Express partnered with Singtel, the Singapore wireless company, to invest $15 million in Ness.

Mr. Sanghi says Ness is a logical investment and a potential partner. The start-up’s application connects users to local businesses through customized search results.

“It’s trying to bring consumers and merchants together in meaningful ways,” he said. “And we’re always trying to find new ways to build value for our merchant and consumer network.”

For start-ups, a big corporate benefactor can bring resources and an established platform to promote and distribute products. Envia Systems, an electric car battery maker, picked General Motors to lead its last financing round because it wanted to have a close relationship with a major automaker, its “absolute end customer,” said Atul Kapadia, Envia’s chief executive.

Although the company received higher offers from other potential corporate investors, Envia wanted G.M.’s advice on how to build the battery so that one day it could be a standard in the company’s electric cars. After the investment, G.M. offered the start-up access to its experts and facilities in Detroit, which Envia is using.

“You want to listen to your end customer because they will help you figure out what specifications you need to get into the final product,” said Mr. Kapadia.

A marriage with corporate investors can be complicated. Besides G.M., Asahi Kasei and Asahi Glass, the Japanese auto-part makers, are also investors in Envia. They both build rival battery products for Japanese car companies.

Mr. Kapadia, who prizes their insights into Japan’s market, says his company is careful about what intellectual property information it shares with its investors. At board meetings, confidential data about Envia’s customers is discussed only at the end, so that conflicted corporate investors can easily excuse themselves.

“In our marriage, there has not been a single ethics concern, because all the expectations were hashed out in the beginning,” Mr. Kapadia said. “But I can see how this could be a land mine.”

For the big corporations, start-up investing is fraught with the same risk as traditional venture investing. Their bets might be modest, but blowups can be embarrassing and can rankle shareholders, who may see venture investing as a distraction from the core business.

OnLive, an online gaming service, offers a recent reminder.

The company was once a darling of corporate investors, with financing from the likes of Time Warner, AutoDesk, HTC and AT&T. At one point, it was valued north of $1 billion.

Despite its early promise, the start-up crashed in August, taking many in Silicon Valley by surprise. The company laid off its employees, announced a reorganization and in the process slashed the value of the shares to zero.

“It can be painful when a deal goes sour,” James Mawson, the founder of Global Corporate Venturing, said.

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By Patric Carlsson – Gerbsman Partners BOIC advisor and CEO of Flexolvit.

Smart meters, datamining and cost awareness is driving the release of new, smart software that enables massive cost savings on energy for commercial property owners and private consumers alike. Companies like OPOWER, FuelFirst, Possitive America and Clean Urban Energy are leaning on the SaaS business model and behavioural and social science to enable 5 – 25% savings on private and commercial customers

New web based services, data minings and smart meters enables for a large, and concrete investment and M&A opportunity in the marketplace. Owning the direct dialog with the customer will enable scalable and profitable business models and incentive-based payouts on meassured results.

In the spring of 2011, the Boston-based OPOWER had approx. 600 000 active customers thorugh their service as launched in partnership with regional and national energy corporations. Using familiar strategies of get customers first and find ways to bill them later have generated interest of investors and media alike. With the modest ambition of increase cost effectiveness ranging from 1.3 to 5.4 cents per kilowatt-hour, the untapped potential of submetered promises in commercial building of around 20 % of total consumption and cost – the mere scratch on the surface OPOWER has made is very indicative.

FirstFuel, another Saas energyefficiancy company has chosen instead to focus on commerical properties. Using similarlly sociall and analytical webbased solutions, they act as samrt suggestions for “quick-fix” solutions lowering energy usage and cost around 7-10% for larger commercial property owners. The list of competitors and innovators is rapidly growing, companies like Clean Urban Energy and veteran company EnergyCap to mention a fed also uses the same set-up – use software to identify patterns that will save energy och money.

At the center of this emerging market segment is insight that draws on evidence from behavioural economics and psychology and social networks. Statistics has shown that Social, comparative energy consumption drives motivation and actual behavioural change. Collective purchasing and Social norms encourage broad-scale energy efficiancy though these new kinds of social networks. It also leans on the direct-feedback loop theory by crafting direct suggestions from statistics and incentives thorugh immediate rewards, rather then long-term payback. As user interface now is at the center of the web evolution, the simple touse, direct suggestions and incentives, actually meassure and validate a reduction of energy consumption and does save money.

What does it all mean?

Long established companies like Siemens, Schneider Electric, GE and Hitatchi has tradtitionally dominated the techical systems segment of the commercial property market by installing their stearing and monitoring systems. With these new competitive services that are being launched, The old-fashioned modell of installing isolated system in each building, focusing on the property management and stearing functions of each building or propery portfolio are struggeling to keep up on customer demand.

Large scale propery owners, as well as and private consumers for that sake, are seeing increased economic pressure from rising energy prises, increased demand of profits and marketshares from shareholders. Combined, the industry now are at a important threshold of old getting mixed and ourcompeted by these new kind of services. Energy corporations are much in the same situation – the lack of ability to communicate with each user generates a distance and disconnect.

Maturity of a cleantech segment.

Looking back a few years, green tech and cleantech segments have seen quite a shakeout in the infrastructure layer. The mautrity of winning concepts are settling in and new core technology have broadly started to replace old, in-efficient and polluting solutions. With the emergence of webbased services, connected stearing systems and smart meters a new highly scalable, and potentially profitable opportunity is quickly getting visable.

Likely scenarios and a large opportunity!

As a industry indsider, my views are colored. In some settings that might actually be a negative thing – here I view it as a blessing. The launching of a smart analysis SaaS company on the Scandinavian market during the last 24 months have given me the inside look of the severity of the situation for these large corporations that have dominated this segment for the last 25 years. Here are som points that I feel being the underlaying reason why there is an M&A opportunity in the near future.

  • They lack the vision of what the web is capable of. Having relied on onsite installation and maintainance of each individual building, the connecting of each system has proven to be a giant challenge, To now launch webbased, userfriendly, smart solutions is proving to be more difficult then predicted. Old patterns and comfort is hard to shred. Innovatros are launching in rapid pace and prove that new concepts and simplicity makes greatest impact. The end-user, corporate or individual is willing to get the information presented in a easy-to-use way.
  • Open standards and social networks generate large knowledgebases. Smart meters, open protocols for datatransmission and SaaS principles pushes the technology out to the individual that will make the difference in saving monety and energy. The new generation of companies are not held back by legacy systems and legacy contracts. The SaaS model is proving to be beneficial for energy corporations that struggles with public profile and direct dialogue with its users. The database driven services enables for broad statistical comparissons previously only available to power companies and such – service portals like those mentioned above harness large amounts of data to generate automatic analysis on patterns. This is a whole new ballgame for the older competitors
  • Evolving business models are likely to generate a shakeoutLets face it, we know that every business needs to make moeny. Facebook and others have proven that there is a twist to it, attract vast numers of users and slowly but clearly insert business models on users interactions or results – and the income will start grow beyond what was previously possible. Looking at OPOWER and FirstFuel, the game of scale is in full swing. If you look at the european markets, who has had smart meters for 10 years readlly available for same kind of services – there is a plehtora of service and software vendors offering their services. The last 2 years the EPC (Energy Performance Contract) model is more and more making its entry. In short, service vendor and customer engage with a SaaS program over a defined period of time and verified savings are spilt between user and company. The scalability have proven to be enormously successful. Its a hit and miss market where skilled analysis can generate vast income in short amount of time on a very undeveloped market. The M&A discussions are very present on the european markets allready where smaller technology and service packaging is getting rolled into older structures to renew customer engagements in new ways.

Conclusion

With a such a clearly defined need as this, both from the corporate and government sida, as well as the private consumerside – its a scramble to reach for customers by the new, and purchase innovation to keep the customers from the old – the cycle is very familiar. The emergence of large property analysis organisations and the emergence of smart software with verifyable results is to hot to miss – there are billions of dollars up for grabs from those who can visualize the consumption and generate savings for all users.

To reach Patric Karlsson please email at patric@flexolvit.se

About Gerbsman Partners

Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in under-performing, under-capitalized and under-valued companies and their Intellectual Property. Since 2001, Gerbsman Partners has been involved in maximizing value for 69 Technology, Life Science and Medical Device companies and their Intellectual Property,, through its proprietary “Date Certain M&A Process” and has restructured/terminated over $800 million of real estate executory contracts and equipment lease/sub-debt obligations. Since inception, Gerbsman Partners has been involved in over $2.3 billion of financings, restructurings and M&A transactions.

Gerbsman Partners has offices and strategic alliances in Boston, New York, Washington, DC, Alexandria, VA, San Francisco, Orange County, Europe and Israel. For additional information please visit www.gerbsmanpartners.com.

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