Collaborate to Innovate: a new venture capital model

COLLABORAZIONE, INNOVAZIONE, RICERCA E IMPRENDITORIALITA': DUE REALTA' A CONFRONTO Alberto Sangiovanni-Vincentelli The Edgar L. and Harold H. Buttner Chair of EECS University of California at Berkeley Co-Founder, CTA and Member of the Board Cadence Design Systems Comitato Esecutivo, Istituto Italiano di Tecnologia Comitato Scientifico, CNR Advisory Board (Walden International, Sofinnova, Innogest, Xseed (MDV)) Investment Committee (Fondo Atlante, Fondo Next) Copyright: Alberto Sangiovanni Vincentelli 2010

OUTLINE • Research, Innovation and Venture Capital in Silicon Valley • Technological Opportunities driven by Collaboration and Research • Research, Innovation and Venture Capital in Italy (and Europe) • A New Venture Capital Model for Italy? Copyright: Alberto Sangiovanni Vincentelli 2010

Collaborate to Innovate • Firms will focus more sharply on what they do best, and they will enlist a growing diversity of suppliers for the rest. Organizations will increasingly look outside their walls not just to reduce costs but for innovation – in processes, product and service differentiation – to free up resources, transform their businesses, and facilitate sustainable competitive advantage. As supply networks become more global and complex, winning will depend on transparency, trustworthiness, and reciprocity. In a word: collaboration. (Alan McCormack et al. (HBS)) • The ideal collaboration model is the Virtual Corporation where the different firms involved in collaboration act as if they were division of the same corporation (or even better!!). Copyright: Alberto Sangiovanni Vincentelli 2010

Silicon Valley: The land of Innovation Copyright: Alberto Sangiovanni Vincentelli 2010

Factors in Success Infrastructure – Legal and financial services – Excellent Universities – The simultaneous presence of large, medium and small companies – The “network”: both inside and outside company boundaries 6 Copyright: Alberto Sangiovanni Vincentelli 2010

US Capital Market Segmentation • Private vs. Public capital markets • Private Equity: – Founders, family, friends and fools – Angels, organized angels and seed stage funds – Early stage venture funds – “A round” investors – “B-Nth” Round venture funds – Late stage Private Equity – Mezzanine and Cross-over funds – Buy-Out Funds Copyright: Alberto Sangiovanni Vincentelli 2010

Attributes of Start-Up Enterprise • Discrete and defendable market niche • A differentiated technology that has a sustainable competitive advantage • Core competencies – Market specification & Solution Architecture – Product Specification & Technical Architecture – Product Development • Adaptable executive team • An investment group that brings marketing and operational expertise 8 Copyright: Alberto Sangiovanni Vincentelli 2010

The role of VCs in the Industrial Innovation Landscape • As a complementary lens on technological and market change – VCs see the world differently • As a window on global technology development – Technology is global and driven by local/regional needs • As a supplement to or portfolio hedge against internal R&D programs – Not even the best and biggest corporate R&D can cover all possibilities • To drive new/expanded market development or other strategic (non-R&D) objectives (Intel; Microsoft) • Explicitly to develop risky new ideas that will initially flourish better outside the corporation (Cisco) – A form of outsourcing of innovation • The best VCs adhere to "simple" fundamentals: – world-class leadership and team; – large, growing market; – defensible big idea; – rigorous application of best innovation practices Copyright: Alberto Sangiovanni Vincentelli 2010

Speaking VC: Structure of a Venture Capital Fund • General Partner: Manages each fund – Typically 2–4 funds simultaneously at different stages of their life-cycles • Limited Partners: Supply the capital – A 10 year commitment per fund • The purpose: Investment, liquidity (exit), returns • Incentive structure – Management fee: 2–3% of committed capital – The Carry: 20:80 split of investment gains • The inherent contradiction: Fund size vs. LP returns – 10 year performance cycles vs. 2–3 year capital-raising cycles Copyright: Alberto Sangiovanni Vincentelli 2010 Source: M. Borrus, Xseed

Risk Factors in Evaluating Startup Opportunities • Execution Risk • Market Risk • Technology Risk • Variable Factors (dependent on sector or specific opportunity): – Future Financing Risk – Regulatory Risk Copyright: Alberto Sangiovanni Vincentelli 2010

Liquidity and Returns • Exit options – IPO vs. M&A (see chart, next slide) – Bankruptcy vs Shut-down • Typical venture portfolio performance: – Historical data: – Out of every 10 investments • Half do not return capital • 1 returns >10X • Rest return 1-10X Copyright: Alberto Sangiovanni Vincentelli 2010 Source: M. Borrus, Xseed

U.S. Venture Capital Investment 1995–2008 $120,000 105,140 $100,000 $ Million Invested $80,000 $60,000 54,102 40,609 $40,000 29,406 28,298 26,449 21,100 21,941 19,730 22,422 22,968 14,894 $20,000 11,271 8,031 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report; Data: Thomson Financial Copyright: Alberto Sangiovanni Vincentelli 2010

Venture Exits—IPOs and M&A by Year, 1991–2008 600 M&A 500 IPO Number of Issues 400 300 200 100 0 91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06 '07 '08 M &A 17 76 74 100 97 116 164 209 240 317 353 318 290 339 350 368 355 260 IPO 156 181 220 166 202 270 136 77 260 264 41 22 29 93 57 57 86 6 Year Source: NVCA, Thomson Reuters Copyright: Alberto Sangiovanni Vincentelli 2010

Venture Investments by Round, 1994-2004 Investment Allocation by Round Class (Annual) Copyright: Alberto Sangiovanni Vincentelli 2010 *Seed and First Rounds Combined Source: VentureOne/Ernst &Young; DowJones/VentureSource

What Drives Venture Returns? • Market growth not absolute size • Efficiency of capital deployment • Irrational exuberance in exit markets • A handful of big winners And most of all • Fundamental Innovation—The (Tech) world isn’t “flat” (next slide) Copyright: Alberto Sangiovanni Vincentelli 2010 Source: M. Borrus, Xseed

The (Tech) World Isn’t Flat: Boston Distribution of most referenced patents (Medical, HiTech Harvard, MIT) Michigan Illinois (GM, Ford, Chrysler, (Motorola, U. Michigan) U. Illinois) Oregon, Washington (Microsoft, Intel U. Wash, Toronto) Silicon Valley Texas (Houston, TI, Freescale LA, S. Diego U. Texas) (Qualcomm, Defense UCLA, UCSD) Copyright: Alberto Sangiovanni Vincentelli 2010 Source: ATP and George Mason University

Consequence: VC Investment by US Region (2008 vs. 2007) California (Especially Silicon Valley) Rules! # of $ in Millions—All Results Rounded Deeds 0 3,000 6,000 9,000 12,000 15,000 1,552 $14,264 California 1,624 $14,735 405 $2,974 Massachusetts 446 $3,714 295 $1,203 New York 199 $1,130 146 $1,299 Texas 172 $1,469 164 $955 Washington 175 $1,382 100 $813 Colorado 97 $610 90 $708 New Jersey 92 $632 171 $603 Pennsylvania 159 $819 2008 47 $491 2007 Minnesota 57 $489 81 $499 Virginia 94 $557 0 5,000 10,000 15,000 20,000 30,000 2,091 $23,069 Top 10 Total 3,110 $25,595 Copyright: Alberto Sangiovanni Vincentelli 2010 Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report; 2008

Factors in Success 1 People and Technology: • Scientific and Technology education • Centers of excellence in research • Talent pools (people form Universities and companies interested in high- risk high-reward activities) • Ability to attract the “best” to the region (infrastructure for families and continuous learning) but attention to moving social and financial costs 19 Copyright: Alberto Sangiovanni Vincentelli 2010

Pasteur’s Quadrant Considerations of Use? NO YES Pure Basic Use-Inspired YES Research Basic Research (Bohr) (Pasteur) Quest for Fundamental Understanding? Pure Applied NO Research (Edison) D. Stokes Copyright: Alberto Sangiovanni Vincentelli 2010

University-Industry Relationships • Professors are promoted on the basis of their contributions in all areas, including professional activities • Reciprocal respect and attention to respective roles • Unrestricted grants: “speed not patents” • Transfer of technology through visiting professionals and summer students • Formation of new companies favored 21 Copyright: Alberto Sangiovanni Vincentelli 2010

Factors in Success 2 Financial – Stock market structure for public offering of new companies – Venture Capital – Investment banking (Underwriters) – Stock market regulations – Institutional investors with high-growth interest 22 Copyright: Alberto Sangiovanni Vincentelli 2010

Factors in Success 4: The Valley “Culture” • Move fast • Leverage all you can • Do not be afraid of making mistakes • Learn from your errors • If you fail, try again • Re-invent yourself and your company constantly • Grow grow grow …… 23 Copyright: Alberto Sangiovanni Vincentelli 2010

Innovation as a Long-term System Innovation Cycle Reinvestment Advocates Customer Product Production E-service & Basic Applied Marketing & Process application Research Research Distribution & Development providers Infrastructure Government, Universities Large Companies Private & Venture Small & Large & Private Institutions Capital Public Markets Market-focused Developers Investment Copyright: Alberto Sangiovanni Vincentelli 2010 Source: Regis McKenna; McKenna, Borrus and Cohen

X/Seed Capital • Founded late 2006 • Seed-focused, ‘very’ early stage venture capital – High risk—high reward – Emphasis on systematic risk-reduction and company-building – Reflects significant changes in US capital market for innovation • Diversified portfolio: – To date: 45% Energy/CleanTech, 35% Life Sciences, 20% IT/Internet • Geographically concentrated in Western US • Focused on breakthrough innovation Copyright: Alberto Sangiovanni Vincentelli 2010

Case Studies • The Cadence and Synopsys story Copyright: Alberto Sangiovanni Vincentelli 2010

Cadence • Founded in 1983 by UC Berkeley professors (ASV and Newton), and one National Semiconductors High-Level manager • Innovation in technology and funding model (large enterprises (4M$) and VC (1M$)) • Almost out of business in 1986, refinanced with largest help by a large enterprise • To go IPO in 1987 (Black Monday)… Public by reverse merger • One Of The Ten Largest Software Companies in the World and one of the largest companies in the world (Forbes 500, Fortune 1000) – $916 million revenues in 1997, 1.6Billion in 2008 – 5,200 people worldwide – More than $ 5Billion Market Capitalization 2007 (now 1.9B$) • One of The two Leaders in Electronic Design Automation (EDA) – Software used to design electronics 27 Copyright: Alberto Sangiovanni Vincentelli 2010

Cadence’s Missed Opportunity: Synopsys • Synopsys founded in 1987 by team from GE and UC Berkeley (2 professors (ASV and Newton), 2 ASV students) • Replicated funding model of Cadence • IPO in March 1991 (only one quarter non profitable form inception) • Today largest company in industry with 5,500 employees and market capitalization of more than $3Billion! In both cases we leveraged strong customers’ interest in the technology! 28 Copyright: Alberto Sangiovanni Vincentelli 2010

The Promise: Towards Integrated Wireless Implanted Interfaces Moving the state-of-the-art in wireless sensing clock regulator memory Tx DSP LNA ADC electrodes Power budget: mWs [Illustration art: Subbu Venkatraman] to 1 mW Copyright: Alberto Sangiovanni Vincentelli 2010

The Promise: Brain-Machine Interfaces The Application of Neuroscience Examples • Cochlear implants, Deep-brain stimulation for Parkinson’s disease • Spinal cord injuries/amputees (upper-limb prosthesis) – Estimated population 200,000 people in the US – 11,000 new cases in the US every year [ Nicolelis, Nature, 2001] [Lebedev, SA, 2006] [Sources: National Institutes of Health, Neurology journal] Copyright: Alberto Sangiovanni Vincentelli 2010

Engineering Tomorrow’s Designs: Neurons drive Electro-Mechanical Systems Italian Institute of Technology Genova Central Research Center The Neuroscience Brain Technology Department – Fabio Benfenati’s Group Generate spatially-ordered 2d and 3d neuronal (NON NEURAL) networks Copyright: Alberto Sangiovanni Vincentelli 2010

THE HIGH-RESOLUTION NEURON-TO-CHIP INTERFACE Luca Berdondini random addressing logic column amplifiers active area 20 μm 64x64 pixels 625 el./mm2 5.5 mm 200 μm 16 output amplifiers 5.3 mm ▪ technology: 0.35 μm CMOS (4 metal-layer process by AMS) • 625 electrodes per mm2 • inter-electrode separation of 20 µm Copyright: Alberto Sangiovanni Vincentelli 2010

THE 4096 ELECTRODE SPATIAL RESOLUTION Copyright: Alberto Sangiovanni Vincentelli 2010

NEURO-ROBOTIC INTERFACES: from neuronal networks to an external body (Sergio Martinoia) SENSORY STIMULATION (experience) NEURAL MOTOR COMPUTATION COMMANDS (adaptation, plasticity, (purposeful emerging properties) behavior) Copyright: Alberto Sangiovanni Vincentelli 2010

Obstacle avoidance task 10 min per phase Phase 1 Free running Phase 2 Learning Phase 3,4 Avoidance Phase 5 Free running Copyright: Alberto Sangiovanni Vincentelli 2010

Engineering Tomorrow’s Designs Synthetic Biology The creation of novel biological functions and tools by modifying or integrating well-characterized biological components into higher-order systems using mathematical modeling to direct the construction towards the desired end product. “Building life from the ground up” (Jay Keasling, UCB) Keynote presentation, World Congress on Industrial Biotechnology and Bioprocessing, March 2007. Development of foundational technologies: Tools for hiding information and managing complexity Core components that can be used in combination reliably Copyright: Alberto Sangiovanni Vincentelli 2010 37

Pioneering Synthetic Biology Moving from ad-hoc to structured design [Reference: Scientific American, June 2006] Copyright: Alberto Sangiovanni Vincentelli 2010

Italy Innovation 40-60% below comparable nations EU 27 “European Innovation Scoreboard” 0,50 0,55 0,35 Source: European Community:“European Innovation Scoreboard 2008” Copyright: Alberto Sangiovanni Vincentelli 2010 40

R&D Gap is in the Private Sector R&D as% of GNL Private Companies State and P.A. Svezia Giappone Stati Uniti ) Germania Francia Canada UK Italia 0 1 2 3 4 Fonte: Intesa Sanpaolo, Servizio Innovazione della Divisione Corporate su dati OECD 2005 - The Economist - August 2007 Copyright: Alberto Sangiovanni Vincentelli 2010 41

47% of research and innovation is in University and Research Centers University 77 Universities 59.344 employees in 2005 (18.781 full profs, 18.525 associate (22038 assistan) Res. Expenses= 5,098 Millions euro (2006) – 30,3 % of total expense for R&D R&D Expenditures Public Research Centers Large:: CNR, ENEA, ASI, INFN, ISS, ISPESL Small: 10 managed by MUR 30,30% 32 Research Centers of Health Ministry 23 agriculture experimentalcenters of the Agriculture Ministry 30,000 researchers Research expense = 2,897 millions euro (2006) 17,2% of total expenses. Nonprofit Research expenses = 630 Millions euro (2006) 3,7% of total. 17,20% 3,70% Industrial University Public. • 70,200 researchers • Research expenses = 8,210 millions euro (2006) 48,8% of total. Priv. No Profit Enterprisee Total R&D = 16,835 milions euro (2006) 7,995 Public (Univ.* Publ.) 47,5% del tot. Source: ISTAT – Nov 2008 Fonte: Intesa Sanpaolo, Servizio Innovazione Divisione Corporate su dati ISTAT 2008 Copyright: Alberto Sangiovanni Vincentelli 2010 42

Some positive signs First Quartile EU-27 for Numero 1 in Europe non R&D innovation +50% new patents for etrepreneurship Human Resources (2003 vs. 1998) 621 new enterrprises 400 born in million€ Universities University of new Capital venture 50% of all capital University Infrastructure 2007- driven 2008 enterprises of 14 public actors to sustain technology innovation in 2008 the last three years Latent Innovation that should be explored and exploited Fonte: Eurostat 2007, Netval, Servizio Innovazione Divisione Corporate Intesa Sanpaolo, Elaborazioni Atlante Ventures Copyright: Alberto Sangiovanni Vincentelli 2010 43

Some Excellence by Sector Example of High-Tech Sector Nanotecnology Biotecnology Medical Devices  169 active entities  228 firms  70 companies dealing with  Total revenues > 4.8 bln biomedicales for a total  70% located in Center and estimated revenue of 500 mln North  11% year to year growth euro  4,300 researchers  1,3 billion euro invested in R&D  Export >60% of revenues  14,000 researchers  314 patents in 2004-2007 (1)  77 drugs in experimental trial  599 biotech generated drugs under trial in 2001-2007(2) Even if large number of small players can be a systemic weakness (1) Fonte: AIRI Nanotech, II Censimento Italiano delle nanotecnologie, (2007) (2) Fonte: Blossom & Associati, Assobiotec, Farminustria, Rapporto Biotech 2008 IPI, il settore della biotecnologia in Italia, 2007. Lo studio indica in 300 le aziende presenti in Italia, includendo anche le filiali italiane di multionazionali (3) Fonte: Consobiomed Copyright: Alberto Sangiovanni Vincentelli 2010 44

Italy is below the average in available capital Italia ranking in EU 27 -2008 Innovation corporate Venture Capital Credit R&D corporate R&D NON- R&D Capital investments • Typically at the beginning • High Tech • Very large opportunities Fonte: Elaborazione Intesa Sanpaolo su dati EIS 2008– Pro Inno Europe Copyright: Alberto Sangiovanni Vincentelli 2010 45

Effects on industrial sector High Tech companies in the first 15 public companies: USA and Italia •Microsoft 13% •Telecom Italia •AT& T 2 •FInmeccanica 9 60% •IBM •Google •G.E. •Cisco •Pfizer •Verizon •Intel USA Italy Fonte. Elaborazioni Atlante Ventures su dati Financial Times e dati di borsa al 13 marzo 2009 Copyright: Alberto Sangiovanni Vincentelli 2010 46

Competitive Landscape Angel Early Stage Late Mature Seed – 1° round Enterprises– Investing Stage - e follow on pre-IPO, LBO Expansion round Interesting Recent New Intitiatives Italian Not always possible to position Funds them Club degli Investitori Quantica Innogest •Many players Main Attivi in Italia •Specialized European Funds Copyright: Alberto Sangiovanni Vincentelli 2010 47

VC in Europe gives low return of interest European Venture 3-,5-,10-Year Rolling IRRs (*) 30 10-year IRR 5-year IRR 25 3-year IRR 20 Rolling IRRs (%) 15 10 5 +4.4 +1.8 0 +0.9 -5 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 99 99 99 99 99 99 99 99 99 00 00 00 00 00 00 00 00 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 -10 -15 Source: Thomson Financial on behalf of EVCA (*) Performance computed on the basis of the value of Net Assett Value at the begiinning, cash flow during the period and of the estimated Net Assett Value at the end of the period excluding management fees and carried interest. Copyright: Alberto Sangiovanni Vincentelli 2010 48

Past Experience – Insufficient selection process not based on industrial sector analysis – Too much emphasis on product/technology and too little on innovation development process – High valuations wrt risks – No or little dialog among start-ups, established companies and institutions – Little synergy public-private sector – Not enough leverage of scientific know-how of the University system Need new rigorous and flexible approach Copyright: Alberto Sangiovanni Vincentelli 2010 49

Atlante Ventures Mature Angel Early Stage – Late Stage - Enterprise Seed 1° round e Expansion Investing pre-IPO, LBO follow on round Atlante Ventures •Synergy with internal partners such as Intesa Sanpaolo Eurodesk, and external ones such as Filarete to give max value to oportunites that are too early for Atlante •Collaboration with other VC funds (e.g., Innogest, Fondo Next) Copyright: Alberto Sangiovanni Vincentelli 2010 51

Italy as a Lab: a way of connecting all players Gruppo Large corporate Università Ist.Ricerca ATLANTE VENTURES PMI capitals competences network •Fund focus on innovative products/approaches “Early stage” • Large TAM •Excellence in management team Copyright: Alberto Sangiovanni Vincentelli 2010 52

Forte legame con il Gruppo Intesa Sanpaolo... INTESA SANPAOLO Div. Corporate&Investment Banking Gaetano Micciché Direzione Merchant Banking Marco Cerrina Feroni 100% IMI Investimenti S.p.A. (Bologna) 100% Sanpaolo Imi Sanpaolo Imi Fondi Chiusi SGR (Bologna) Investimenti per lo Sviluppo SGR (Napoli) Fondi Gestiti Fondi Gestiti CENTRO MEZZOGIORNO Team Centro Impresa Team Mezzogiorno Antonio Finocchi Ghersi Fabio Borsoi NORD Team Nord Impresa Walter Comelli ATLANTE VENTURES Davide Turco Team Atlante ATLANTE VENT.MEZZOG. Davide Turco Copyright: Alberto Sangiovanni Vincentelli 2010 53

...Team organized as independent unit with ample discretionality Management Team 4 people Team in Milan The team presents investment proposal Advisors Investment A. Perrazzelli Advisory Board with world reknown experts L. Hassan Committee to support Investment Committee incented C. Bastioli (Indipendente) with stock options in companies they A. Sangiovanni Vincentelli (Indip.) recommend D. Turco (Responsabile) A. Mezzotero (Investment Director) Implementation Executive Committee Sanpaolo IMI Fondi Chiusi SGR Bologna Copyright: Alberto Sangiovanni Vincentelli 2010 54

Conclusions • Collaboration is key to Innovation • Research in new domains fuels novel enterprises • VCs essential to fuel innovation • VCs need exits, IPO in particular • VCs assess value of enterprise based on risks and potentials • To found a VC-based enterprise you need: – Defensible technology and market (value of IP and patents) – Favorable ecosystem – Favorable climate (business and financial) – Proven track record • VCs are not funding good ideas not they act as R&D support! • Various sources of funding exist but they have to be carefully evaluated Copyright: Alberto Sangiovanni Vincentelli 2010

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Collaborate to Innovate: a new venture capital model

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