CNBC The Bottom Line
Published, Sun Jul 10 2022
by Rebecca Fannin

• Innventure, co-founded by a former Walgreens CEO, looks for innovations inside corporate R&D labs with the goal of building startups that ultimately have the former parent company as a key customer.
• The industrial investment firm has reviewed more than 100 technologies with multinational companies that it thinks can create $1 billion or more in new enterprise value within five years.
• Nokia and P&G are among companies that have licensed R&D to Innventure.

For over a decade, the research arm of Nokia Bell Labs in Finland had been working on a cooling and energy efficiency technology for data centers and mobile network equipment. In June, that R&D effort took a big step outside its corporate parent.

Innventure, which finances, operates and manages companies spun out from multinational corporations, formed Orlando-based Accelsius to house the Nokia innovation as a stand-alone startup.

This approach to giving corporate R&D a life of its own is becoming more common.

Co-founded by former Walgreens CEO Greg Wasson and his family office Wasson Enterprise, Innventure accesses the innovations inside corporate R&D labs with the goal of building businesses externally at less startup risk than the venture capital route and ultimately having that former parent company as a key customer.

Since its formation in 2015, the industrial innovation investment firm has reviewed more than 100 technologies with multinational companies, vetting disruptive technologies that can solve critical needs and have the potential to create $1 billion or more in new enterprise value within five years. It finances the new firms through its Innventus Fund with additional strategic investment and debt.  

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Private equity and ‘venture clienting’

For at least a decade, many big companies have created their own corporate venture capital arms to invest in promising startups that may be disruptive threats to their businesses as well as potential acquisition targets. The Innventure model of innovation is another approach that is working far outside Silicon Valley venture circles, with corporations leveraging their internal R&D by bringing it together with external startups to be commercialized, and then become a client of an innovative business from the collaborative effort.  

It’s not multinationals alone that are pursuing this approach.

“We’re starting to see some of these deals where a private equity firm comes in and helps a corporate carve out a startup. This could develop into a trend,” said John Garvey, global head of financial services at PwC in New York. He added that so far it is largely being done by smaller, specialized private equity firms looking for quality assets in a frothy environment where there is immense competition for deals. “If the firm is willing to put in the sweat equity to build the company, it is a way of working with a fixer-upper, and not at a premium price,” he said.

Several large companies, such as BMW, Siemens, and Bosch, have adopted another method to make key startup connections, known as “venture clienting.”

“Corporations can be a great resource for technology, and through outside partnerships and startups can make use of it without owning a stake in it,” said Gregor Gimmy, founder and CEO of Munich-based consultancy 27pilots and developer of the BMW Startup Garage, the venture client unit within the automaker. “The beauty of this is that the corporation makes more money from using the technology rather than owning a majority stake in the startup, and without the enormous cost and risk associated with corporate venture capital investing.”

Using this venture client model, BMW integrated machine learning camera technology into its vehicles as early as 2007 from Intel’s Mobileye (which had been a stand-alone Israeli company before being acquired by the chipmaker and is intended to become a stand-alone company again through an IPO planned for this year) and started installing smart sensor software that detects roads conditions from Haifa-based Tactile Mobility beginning 2021.

“This is a way to leverage startups without the enormous cost and risk associated with corporate venture capital investing,” said Gimmy, who estimated that only one out of 10 corporate venture capital investments done in a conventional way with equity actually results in a strategic benefit.

The Nokia-born Accelsius was Innventure’s third collaborative company, but the firm’s initial partner is giant packaged goods company Procter & Gamble. Well-known for brands like Tide and Ivory, the Cincinnati-rooted company – formed in 1837 as a soap manufacturer – has been venturing outside these core businesses in recent years.

P&G is taking patented inventions from its research and development labs, which have a $1.9 billion R&D budget, and teaming up with startup incubators and investors to create entirely new businesses and categories.

The goal is not just about a financial return on investment, but maintaining access to technology innovation, said Valarie Sheppard, former P&G treasurer and company transition leader who had responsibility for the global business development for several years before retiring in March 2021. Startups, meanwhile, can leverage large, resource-rich, well-capitalized corporations to gain market access, customers, facilities, and industry expertise.  

The departure from the conventional model of corporate innovation was championed by Tom Cripe, a retired P&G executive who was a gatekeeper of its leading edge research and today heads up business development at Innventure.

Cripe says he realized it made sense to reverse a long-held R&D process at P&G. Instead of startups and outside investors pitching P&G on scaling up new tech, the company would create the inventions, then turn them over to investment experts to nurture.

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Rust Belt R&D

Two startups to recently emerge with P&G innovations as a catalyst are located in its home state of Ohio and focused on environmental sustainability and plastics recycling – PureCycle Technologies and AeroFlexx.

Located in the former iron-producing town of Ironton in southern Ohio, an area that needs economic revival, PureCycle launched in 2015 using P&G’s proprietary process to transform the most commonly used and least recycled plastic wastes into a renewable, purified resource.

“P&G deserves a lot of credit for having an R&D budget to develop something completely new that even big players in plastics didn’t come up with,” said Mike Otworth, PureCycle’s chairman and CEO, who also is a co-founder and board chairman at Innventure. “For a company whose core business doesn’t involve plastics, this is truly remarkable. This new recycling innovation could help fix our broken trash system,” Otworth said.

PureCycle’s first product with P&G made from its recycled plastic is a shower dispenser that P&G’s EC30 cleaning products line introduced late last year. It was made from trash in bins collected from U.S. stadiums. PureCycle has begun working with U.S. sports stadiums to recycle and repurpose their trash. This July, PureCycle plans to recycle tossed-out souvenir cups from the home stadium of the Jacksonville Jaguars team, which follows a deal with the Cleveland Browns last November.

Long-lasting, rigid polypropylene such as waste carpet is the most common type of plastic worldwide, but less than 1% of it gets recycled. By contrast, about 30% of other more common plastics like those used for bottles and consumer goods is reused. PureCycle Technologies is aiming to eventually recycle 10% to 20% of the tougher plastics. 

At an industrial site along the Ohio River where a Dow Chemical plant once operated, PureCycle plans to begin churning out recycled plastics at full scale by the end of 2022. But that’s about two years behind the original timetable after delays in raising financing and further tests of the technology at a pilot manufacturing plant. PureCycle broke ground for a second plant in Augusta, Georgia, in March 2022.

“They have the innovation and now they need to scale up,” said Steve Alexander, president and CEO of the Association of Plastic Recyclers in Washington, D.C.

By 2030, PureCycle aims to have 80 recycling operations worldwide, Otworth said, including one in Japan where it has an agreement with Mitsui & Co. to develop a plant. PureCycle has been gearing up for $800 million in annual revenue by 2024 and $2.3 billion in 2027. 

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P&G’s multi-pronged approach to innovation

Just within P&G, there is more than one model for bringing innovations to market. The consumer giant has a new business division focused on creating brands and technologies outside its existing product categories, either through organic development or through acquisitions and joint ventures.

Guy Persaud, a 21-year veteran of P&G who has done the corporate tour of duty in Greater China, Europe and Latin America, was named president of the unit in early 2021, reporting to COO Shailesh Jejurikar. His role encompasses P&G’s ventures studio, helping startups incubate their ideas and obtain resources to scale startups. Over the past seven years, the studio has rolled out three new brands in health and beauty categories as well as Zevo, a line of household insecticides.  

Persaud, who now works from the twin towers of P&G’s downtown Cincinnati headquarters, also has taken up a post as board chair at Cintrifuse, a P&G and Kroger-supported accelerator and investor in a budding startup hub of the city known as Over-the-Rhine for its once-large German immigrant population. At a recent annual meeting of Cintrifuse, Persaud said he sees strong opportunities for fintech, sustainability and women and minority-led enterprise startups to thrive in the region, working with big companies such as P&G.   

“P&G’s collaboration with Cintrifuse opens up innovations with startups, and Guy is put in that role to make P&G more nimble,” said Peter Blackshaw, CEO of Cintrifuse. P&G is the biggest investor in Cintrifuse’s syndicate venture fund of $110 million.

One thing the new model hasn’t changed is the high degree of risk associated with moonshot ideas that come out of the lab but have a long way to go before achieving economies of scale and offering the market a cost-effective solution. In March 2021, PureCycle completed a $1.2 billion SPAC on Nasdaq, a move that prompted short selling firm Hindenburg Research to issue a report noting that PureCycle is the “latest zero-revenue, ESG-themed SPAC taken public with a bold story about how it will someday revolutionize the plastics recycling industry.”

The stock has suffered steep losses since the offering, down more than 70% since its first day of trading, and it has faced multiple class-action lawsuits, as well as an SEC investigation into statements made in securities filings. The SEC closed that review without any further action taken and the company says it remains focused on its business goals. 

P&G’s second spin-out business with Innventure is West Chester, Ohio-based AeroFlexx, which launched in 2018 with technology for a liquids package that is flexible and uses far less plastics and is fully recyclable.

P&G stands to be a major customer of both Innventure startups, given its goal of 100% recyclable or renewable plastics by 2030. Beauty products company L’Oreal and French energy company Total also have been lined up as initial purchasers of PureCycle’s plastics. AeroFlexx has completed select pilots and soft launches with P&G brands Dawn, Olay and Old Spice, as well as a handful of non-P&G brands such as Mighty Mutt dry shampoo for dogs and hair clipper maker Wahl.

“Once we license the technology from P&G, our job is to fund it from inception to exit off the balance sheet with investment partners and debt financing,” said AeroFlexx CEO Andy Meyer, also an Innventure co-founder.

When the PCT SPAC merger was announced with Roth CH (Nasdaq ROCH) on November 14, 2020, the price per share was $10.50 (https://www.barchart.com/stocks/quotes/ROCH/interactive-chart), with an implied post-merger market cap of 1.2B. As of July 15, 2022, PCT market cap is approximately $1.2B, essentially unchanged from the announcement of the definitive agreement of the SPAC merger with ROTH. This performance compares quite favorably with the S&P 5

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