Choosing CVC in a time of energy market change

Idemitsu Kosan, which has continued to grow through its oil business since its founding, is facing a period of major change in the energy market. Amid the demand for transition to a low-carbon, recycling-oriented society, innovation is essential for the company to continue to be a major player in the supply of energy and materials in the future. Idemitsu CVC’s investment in startups is positioned as part of Idemitsu Kosan’s open innovation^*2policy, along with collaboration with universities and public research institutes.

• 2. Open innovation: Initiative in which a company goes beyond its own boundary and creates new value by incorporating knowledge and technologies from outside, such as startups and universities.

“Our partnership with SUs began in 2019 when we invested in a domestic fund. The following year, we also started investing in overseas funds, and I myself was seconded to an overseas fund to study technical and business due diligence (hereinafter DD)^*3in the cleantech materials^*4area in Europe and the United States so that I could deepen my knowledge of SU investment. That was when Idemitsu invested in Emerald Technology Ventures (hereinafter Emerald), a Switzerland-based venture capital fund^*5、(hereinafter VC) with which Idemitsu CVC currently has a partnership.”

• 3. Due diligence: Detailed investigation and evaluation of the financial and business content of an investment target company.
• 4. Cleantech materials: New materials that contribute to decarbonization and resource recycling.
• 5. Venture capital fund: Investment company that invests in growing companies and supports business growth.

In Japan, some companies have been working on CVCs for about 20 to 30 years, but Idemitsu Kosan was a latecomer, and this was its first attempt.

“Some data showed that around 70 to 80% of CVCs in Japan would cease operations within five years of establishment. If that’s the case, I thought, it would be a good idea to find, investigate, and monitor promising SUs with the help of VCs, who are professional investors, and put in place a system to focus on strategy development and final investment decisions.”

VC-managed funds tend to deliver near-term financial returns, but it is difficult to factor in the company’s own strategies. On the other hand, self-established CVCs can invest according to the company’s own strategies, but their financial returns are highly uncertain. The launch of the Idemitsu CVC, which is predicated on a partnership with Emerald, was planned with these challenges in mind.

Looking for collaboration with overseas SUs in anticipation of growth speed

In the first place, Idemitsu Kosan started exploring collaboration with overseas SUs out of a kind of realization that it was lacking external partnership.

“An analysis of Idemitsu’s R&D expenses around 2020 revealed that investment in external collaborations, such as joint research with universities, was small compared to the scale of business. Most of the investment in the few external partnerships was made domestically, and almost none was made overseas.”

Idemitsu CVC entered into a partnership with Emerald with the aim of investing in overseas SUs from the outset. For SUs to achieve rapid growth, ample funds and a large market are essential. SUs in the United States and Europe have a large pool of investors and are able to develop their businesses at a rapid pace with ample funds, making it easy to achieve results in a short period of time.

“At present, we are accumulating investment know-how while co-creating with Emerald. We are now discussing Idemitsu’s future investment in domestic SUs on its own once we have enough experience.”

Toward a new commercialization process that connects technologies and business: Designing a mechanism to support SU investment

There is another realization. The main focus of Idemitsu Kosan’s R&D was on new businesses with technological strengths. The laboratories consider business projects on the premise of developing proprietary technologies. And employees in the technical field were mainly responsible for the evaluation for commercialization. Unique technologies undoubtedly have high value. On the other hand, if the goal is to contribute to society, a business perspective and cooperation with external organizations are essential in addition to technological superiority. Miura held discussions with top management as well as the heads of laboratories and business divisions, which led to a radical redesign of the commercialization process.

“If having our original technology was the premise for commercialization, we would be confined to creating new businesses that can only leverage our existing strengths. Yes, this is important, but in order to achieve innovation while looking ahead to society in 10 or 20 years down the line and beyond, being stuck on this idea will narrow our possibilities.”

Thus, in addition to the technical aspects, the business aspects and the presence of external partnership were added to the evaluation items. Furthermore, personnel from the corporate and business divisions were also to be involved in the evaluation, and Miura took the initiative in preparing the foundation for active R&D focusing on commercialization.

Talents with a vision and the ability to interact with global players

Currently, Idemitsu CVC has four full-time staff members in Basel and two members in the Tokyo head office. In addition, Idemitsu Kosan has dispatched trainees to the Basel office for the purpose of cultivating new staff.

“Idemitsu CVC is also a place to cultivate talents with global knowledge and skills. To that end, we tell the trainees that the role of CVC is not to ask someone in the company when making a decision, but to think about the future of the company with their own heads. We also have them engage in dialogue with innovative SUs and make actual investment decisions together.”

Miura himself has been inspired by the outside world. Miura recalls an incident that occurred when he visited a SU with some top managers from Idemitsu Kosan’s head office during the due diligence. The CEO of the SU happened to be around Miura’s age. Miura was moved by his courage and spirit as a leader to start a company from scratch, raise a cumulative total of tens of billions of yen, and lead more than a hundred employees.

“Managers also felt the CEO’s honesty, depth of expertise, ease of understanding, and sincerity. When I see the determination of such a person who has made thousands of presentations and is betting his life on the SU’s business, I feel that I myself should be more sincere. It reminded me of the words that an Idemitsu senior had once said to me: “It’s the people who make proposals, make decisions, and get them right.” The experience also made me realize that I should change my way of dealing with those around me, including my speech and behavior.”

We will share a new worldview by embracing the desire of innovative players to contribute to society. Cultivating talents with a broad perspective is also essential for Idemitsu Kosan to continue its sustainable growth and deliver value to the future.