IBM’s Venture Capital Group is a really interesting cog in the startup machine. It’s not a fund and yet, through it, IBM has managed to invest in a bevy of startups that align with its Smarter Planet initiative.
Smarter Planet is an umbrella concept under which IBM aims to uncover and foster technology that moves society forward in big ways. Think about smarter systems across just about every industry that can lead to things like improved electrical grids, traffic management systems and protection online — to name a few examples.
IBM’s SmartCamps attempt to uncover startups working on these kind of problems. The camps connect VCs, mentors and startups, and then, intriguingly, sits back. IBM’s Venture Capital Group doesn’t invest in startups directly, nor does it actively nurture them. Instead, VCs do the work, and happily too, as selling a company on their roster to IBM, an IBM partner or client is a compelling exit. IBM also invests in VC funds, about 70 around the world.
It’s an interesting approach, and if you look beyond the monetary and societal payoffs, a valuable one for the entrepreneurial ecosystem.
IBM recently held its first SmartCamp in Africa and we had a chance to sit down with Martin Kelly, an IBM Venture Capital Group partner for the EMEA region and the mastermind behind SmartCamp.
In his opening address, Kelly hit the nail on the head. “What we realised was that actually they [startups] didn’t need money, most of them needed networks, advice, access, a strategy. If they got all that, the money would follow.”
SmartCamp was an internal IBM startup. “Everybody told me, we shouldn’t do it,” said Kelly. Kelly was persistent and was eventually given the green light to pilot the programme in Ireland. “They said look, go and do it in Ireland and if it blows up, it won’t be on the front-page of the FT,” he quipped.
The first year SmartCamp was rolled out to seven cities in Europe and North America, the following year to nine cities, and in 2012 SmartCamps were run in 20 cities.
Kelly spoke exclusively to Ventureburn about IBM Venture Capital Group’s unique investment strategy, some of the success stories to come out of SmartCamp, the competitiveness of African startups, VC investment trends and how Africa can take on Silicon Valley.
Ventureburn: This is IBM’s inaugural SmartCamp in Africa. Why now?
Martin Kelly: There are two reasons. One is that IBM has had a very significant focus on Africa last year and this year, it’s something that’s top priority for our CEO and the senior management team.
The second reason is that we were invited. The partners who are here today like AngelHub and Hasso Platner Ventures Africa all said: “you’ve got to come to Africa.” We don’t run SmartCamps on our own, we do them with the community and we look for the right set of partners. Those two things came together.
VB: Could you tell us a bit about your involvement with the IBM Venture Capital Group and SmartCamps?
MK: I work for the IBM Venture Capital Group. I joined six years ago to set up what we were going to do in Europe. We discovered that there was a very interesting opportunity happening because the market was changing. You have VCs, but you also have accelerators, Super Angels, and corporates getting more involved — the growth of corporate venturing is very interesting. We figured out that if we could find great entrepreneurs and put them together with great mentors, everybody will benefit from it. We’d find interesting companies, the companies will get support and coaching, and then, if things were working out, they’ll find investment as well — many of them have found investments through the process. It’s not something that we promote, it’s something that happened as they’ve come together.
We started for two reasons. One was that we were talking about Smarter Planet and startups were looking at us going: “what is this thing?” Secondly, the investors that we worked with were saying: “this is great, but you need to help us find the companies,” and it was kind of like, perfect, if we can bring those two things together…
I’m a partner with IBM Venture Capital, but I spend the majority of my time on this programme.
VB: What is the IBM Venture Capital Group’s investment strategy?
MK: We invest in funds, we don’t invest directly in businesses. We work with many funds who we’re not investors in because it’s an eco-system — we buy a lot companies, many of them are venture-backed. A lot of revenue also comes from partners who are venture backed. It’s important for us to work with this community — whether it’s for channel, acquisition or strategic reasons — to understand where the markets are going. If you look at the companies here today, they’re trying to get into new areas. Those areas could be interesting for us, they could be interesting for our clients, so it’s important for us to understand that and work with the innovators.
VB: Not investing directly in startups that align with your strategy is an interesting approach as there’s no immediate “hook”. You kind of wait to see it come around…
MK: It’s a tough approach, but I think it’s more lasting. One of the things we do, is to try and get our executives and clients involved. For example, we have an event in Berlin, where we’ll have a lot of our senior guys and clients there, because we want them to engage personally with the startups. You meet a great entrepreneur, it’s infections and rather than us living over here and them living over there, we can get that interaction going in a thoughtful way. We think that’s useful.
VB: Which are some of the significant startups to come out of SmartCamps?
MK: People like Streetline who were our first SmartCamp winner, raised a US$15 million round and we’ve gone to market with them. We haven’t come to Africa before, but we have had companies who are active here, so companies like Sproxil who originally worked in Nigeria doing anti-counterfeiting of pharmaceuticals. We work with them, they use our technology, some of our people joined their board and they got some more funding — it’s a really nice story of how things have developed.
VB: What are your thoughts on the global competitiveness of startups in the sub-Saharan African region?
MK: I think there is entrepreneurship everywhere. I have the beauty of having the opportunity to look at pretty much all the SmartCamps we run. So I see the companies in China and Australia, and the US… What’s different, is the landscape. If you’re in Silicon Valley there’s a very well understood ecosystem of investors, lawyers; people understand how the model works and that doesn’t exist in developing places.
But I think you find entrepreneurs everywhere and what we’ve seen today, are four great examples — companies who are thinking about taking on the world, who understand from day one that it’s a global market. In the back of my mind I was thinking: “how is this going to work?” People always said to me, it [Africa] is a very immature market, but the companies I’ve seen today are very ambitious. We call the programme “Global Entrepreneur” because we’re interested in people who really want to change the world, who want to go after big markets and want to go international from day one.
VB: What are your thoughts on the companies you saw today?
MK: Fantastic, really fantastic. Really strong businesses. Very credible entrepreneurs. Two of the companies have very significant revenues and two are at an earlier stage. We’ve done that on purpose, we have what we call the best overall and the best newcomer. Within the newcomer category there’s a lot of experience and examples of really “scrappy” entrepreneurs, and I mean that in a good way — people that get out and bootstrap things and just make stuff happen out of thin air. The mentors are great as well.
VB: The finalists at IBM’s first SmartCamp in Africa are all software companies. When one thinks of technology hardware manufacturing, China springs to mind. Should we hope to see more African hardware startups?
MK: VCs, certainly for the last number of years, have moved away from hardware and chip investments. I think the capital efficiency is difficult, and I think there’s a whole lot of other reasons. There are still specialist firms who do that, but there’s been a massive move over the last 10+ years into web, into consumer, and that’s a wave that I think is starting to drop off. I think the idea of software and cloud services in the enterprise is starting to come up.
China already has the infrastructure, it’s very competitive. I don’t think it’s what Africa should be focused on at the moment. It’s a big investment, particularly for startups.
VB: Companies, in particular Google and IBM, have started to look to Africa for startup talent. What does Africa speak to you, as an outside observer?
MK: I see untapped potential. A whole continent that in a lot cases won’t have a legacy of infrastructure, so there can be greenfield opportunities. Then, the innovation that happens. If you look at Mo-De, the company from Kenya, their solution is specifically designed for the African market, but is applicable to other emerging markets.
The other security company [Entersekt], is seeing an opportunity in the US and the UK and that’s an example of innovation coming out of here [Africa] that’s going into developed markets.
Mo-De the micro credit services company who’s first product provides pre-paid cellphone airtime loans, went on to win IBM SmartCamp South Africa.
VB: When do you see Africa being recognised as an equal on the world’s startup stage?
MK: Everywhere I go in the world, people ask me: “how can we beat Silicon Valley?” or “how do we compare to Silicon Valley?” Every place I go has this type of inferiority complex. It’s not just an African thing. I hear this all the time. I think Silicon Valley is a unique place and it hasn’t even been replicated in the US so it’s very unlikely that it could be replicated somewhere else [See Memeburn's thoughts on Kenya's Technology City]. It’s a very organic thing that’s grown up over 50 years, it wasn’t a top-down planned thing. But, I think there are other areas that people can innovate in and develop their own unique thing.
I come from Ireland, and I think what’s interesting about Ireland, is we’ve done a great job getting the multi-nationals there, but we haven’t really thought about how we attract international entrepreneurs.
You’ve got to pick the areas that you want to be the best in, in the world. Rather than say: “we’re going to copy these guys,” say: “we’re going to pick a new sector, because we have these critical resources around this and we can be unique and different and be a world leader.” I don’t even think about it on a continent level or a country level, I think it’s really on a city level. Silicon Valley is a really small piece of geography. In Boston it’s Cambridge. These things are city level, they’re huge concentrations of money and talent, but they’re formed around pretty small geographical areas.
I think if you look across the content of Africa and say well, “what’s going to happen in Cape Town? What’s Cape Town got unique versus Jo’burg versus Kinshasa or wherever else?” Each one of those cities will have something that’s unique or different.
People have attempted to emulate Silicon Valley everywhere. Silicon Roundabout for example, places in the US, Chile, everywhere I go, and I think that’s fine, but I think you’ve got to be different. You’ve got to say, “we’re going to do this, we’re going to focus on this area, which means we’re not going to focus on everything.”
The examples of the companies we’ve seen today, are interesting because, they’re picking areas where there’s a local problem and they’ve created innovation around that, and they’re looking at how can that innovation move to somewhere else in the world.
*Image credit: UVuuMe