People power pays its way

By ELLEN READ

Two years ago Kyle True and school friend Jeff Stewart developed the idea of taking powder coating technology - used to coat items made of metal - and putting it to work on things made of wood.

The idea was to find a new way of finishing medium density fireboard (MDF), widely used for kitchen cabinets, furniture and interior joinery.

Today the process they dreamed up is being put to work in Mangere to produce powder-coated doors and office furniture.

Other applications are on the way.

Their idea was turned into a reality - as a company called Climate - through a venture capital scheme developed by forestry giant Carter Holt Harvey for its employees.

Since CHH's New Ventures project started just over two years ago, employees have submitted 2044 ideas, many of which are following the path blazed by Climate.

In the next five years Craig Knox, chief executive of the New Ventures scheme, hopes it will become one of Australasia's leading providers of early stage venture capital.

That may be a lofty goal, but New Ventures is gaining a reputation on both sides of the Tasman.

The $15 million venture capital fund started in May 2000 as part of the company's bid to foster an innovative culture.

"People see Carter Holt Harvey as a traditional manufacturing company, but there's a strong technology feel to a lot of the applications," Knox says.

"It is a significant attempt to change the culture of the company."

Carter Holt Harvey's move is an example of a growing trend for "corporate venturing", in which companies establish funds to invest in their own industry.

Internationally, corporate venturing is the fastest-growing part of the venture capital industry; in 1999, it provided more than 35 per cent of new venture capital invested in the United States.

A sign of the regard in which New Ventures is held is an invitation from the state Government of Victoria for Knox to speak at a conference in Melbourne in November.

The New Ventures fund is supported by an internal "idea accelerator" - known as i2B (ideas to business) - which fast tracks employee ideas into companies CHH can eventually spin off.

Investment areas include commercialising Carter Holt's existing technologies and intellectual capital, applying e-commerce to the core businesses and co-operative industry initiatives.

The scheme focuses on early stage venture capital, developing the business from the ideas stage until it is ready to go public.

Ideas go through an "acceleration" stage - a scoring and ranking process with local and international experts.

"The more eyeballs you get on a business plan, the better," says Knox.

This also enables clear and detailed criticism to be given on unsuccessful ideas, which may help people submit a reworked or totally new idea.

And there is no shortage of ideas among CHH's 11,000 employees. In its first year, the scheme attracted 512 ideas. Last year 1532 were put forward. Of these, 10 were identified for further development.

Once the strongest candidates from an intake of ideas have been selected, they enter the "business acceleration" phase, in which a New Ventures portfolio manager works with the idea submitters and holds a seat on the new company's board.

This stage develops a business plan, introduces financing and creates a business ready to go to market.

Criteria include the credibility of the people involved, the merit of the proposed product, the business plan, the existence of a customer base and the market opportunity for the product.

Carter Holt employees leave their regular jobs for this phase. New Ventures covers their salaries during their involvement and for a further six months if their idea isn't carried through.

True, who worked in human resources for CHH, is now Climate's marketing manager, and Stewart is production manager.

Between 30 per cent and 40 per cent of ideas that go into the business acceleration plan emerge as viable businesses, Knox says.

The scheme is not an easy touch; projects get money only after reaching milestones and are monitored carefully.

The new businesses spend 12 to 18 months in the business acceleration phase, and New Ventures invests up to $300,000 preparing them for spin-off.

After this incubation period, some of the companies are prepared for sale or outside investment.

At this stage, New Ventures decides how large a stake it wants to retain in the company.

It has put $2 million into Climate, which now operates as a company in its own right, ready to do work for non-CHH customers.

Another $1 million-plus has gone into another new company, Straightedge, which develops and markets software for use in the DIY and trade building industry.

Knox says another three or four companies are at the stage where decisions need to be made about significant investment.

Straightedge is the first company to go through the whole process.

New Ventures has retained a significant minority shareholding in the firm, which is in the final stages of a $5.5 million capital raising.

This stake will eventually bring money in to the New Ventures programme, helping it more towards being self-funding.

Knox says CHH expects the programme to pay for itself, and he hopes to see that happening by the next financial year.

The people involved in the scheme have learned many lessons that help them develop and refine their ideas.

"Building a new business is all about people, from the idea generator to the business acceleration team to the investment acceleration team," says Knox.

The ability to benefit from the size and international networks of CHH and its parent International Paper also helps the new businesses.

Finding intangible pockets of value within Carter Holt and International Paper was one of the key requirement when the New Ventures scheme was established.

The usual problems facing new companies - money, lack of history and credibility and organisation - can be largely overcome through involvement in New Ventures.

The money is available, the association with CHH provides helps reassurance and the portfolio managers can help with the organisation.

With one company launched and others lining up on the runway, will Knox meet his self-imposed goal?

"The jury is still out, because we have to deliver financial value. We're a work in progress and creating financial returns from new ventures is a five to seven-year programme."