Ep. 22 - The perpetual Reinvention of the Open Innovation Models

And since I've been in the open innovation unit in Telefonica, it has been a matter of perpetual reinvention and fine tuning. And as you were saying at the beginning, hybridization of what we do because you have to serve on one hand to your mother group, but on the other hand you have to serve entrepreneurs and startups. And they're a super demanding customer. I think they're the most demanding customer that exists. So if you don't put on the table business development opportunities for them, if you don't put on the table financing agile processes and in a nutshell, smart money, you won't be able to attract this talent. So I think it's kind of being, I don't know how to say that in English, but it's like unaqui librista. It's like, yeah, you have to keep all the balls in the air. Yes. Yeah, that's it. That's it. It's fun. It's exhausting, but yeah, it's fun.

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The code word for open innovation today is hybridization. Open innovation models are being evolving over time and that's something that we know. But one thing that we are currently witnessing is that more and more of this model are going across, are becoming, let's say a bit more hybrid, sharing tools in a way that can hopefully produce results. A very interesting example is Telefonica, especially specifically Wire. Again as you might remember, Telephonic has been one of the first players worldwide to enter the open innovation arena. The most famous initiative has been wira. They probably was being one of the first to launch the model. The concept of corporate accelerators supported by ABS in Europe and in Latin America. And on the way, Wira and Telefonica's approach to open innovation has evolved into something else. And today Huayra is something that is very hybrid across venture client and corporate venture capital. In order to get a better understanding what has been the evolution, specifically what is ahead of that. I have the pleasure to have with me Agustin Morrow Augustin. Beyond being a long term friend again, since we know each other since a while, he is currently the director of Innovation Services at Telefonica Open English. Welcome Agustin.

Thank you, Alberto. Good morning and it's a pleasure to speak with you.

So, Agustin, let's try to get a bit of clarity first in terms what is the open innovation galaxy of Telefonica? Again? I think Wire probably is one of the the brand name that is definitely more known. But there is Telephonic Adventure and there is Telephonic Open Innovation that as we understand is the main entity that's currently covering all the innovation activities. Go back a bit. What has been the history and what are currently the current situation inside Telefonic?

Great. So you're right. Now the open innovation initiatives are all comprised within Telephonic Open Innovation unit. And we can find there all the venture capital tools and all the venture capital arms that Telefonica has in place as of today, together with the business development programs and other type of initiatives that we've got in order for Telefonica to engage with startups and with innovators. This has been a long walk since we started. We launched back in 2006 Telefonica Ventures. It was a small venture capital fund investing of balance sheet. And at that time Telefonica used that to understand the dynamics of entrepreneurial ecosystems and of the venture capital industry. We were investing in companies worldwide and those were companies with technologies that were very much related or very much linked to our core assets, meaning networks and infrastructure. After we learned how to engage with startups and how to invest, we decided in 2011 to launch Waira, which is a micro venture capital fund initiative through which we invest up to 350k per startup, mostly in Telefonica's footprint, meaning Europe and Latin America. But also we're able to invest in companies coming from other geographies. Since we started back in 2011, we have pivoted wider strategy very much. We have invested in more than 1,000 companies with a clear strategic goal, which is basically making or supporting Telefonica in increasing the revenues with existing businesses, reinforcing the commercial portfolio of Telefonicast digital solutions, also bringing internal efficiencies and savings in existing operations and in existing platforms. And even though wider, as you were rightly saying, it's the best known initiative that we've got. Telefonica Ventures has been also investing throughout all this time, not only with direct investments with higher tickets than wider. So Telephonic Adventure tickets go from 350k up to 5,6 million. Average ticket is I think 1 million, 1 1/2 million. And through Telephonic Adventures, we're more focused in geographies in which we think that relevant technology for telco industry might arise such as Israel or Silicon Valley. So it has also a worldwide investment scope of and with bigger tickets is series post series C onwards. On top of those two venture capital arms that we've got wide and Telephonica Ventures. So Telephonica Ventures we also do a fund of fund Strategy. We are LPs in more than 13 different venture capital funds which invest again in telephonic as geography and also in Silicon Valley and Israel and others. And we finally have also a set of initiatives and programs in order to support third parties to develop their open innovation strategies. Such as Open Future, which was launched back in 2015, which is a program that aims to support regional and local open innovation strategies, mostly focused on public institutions and local and regional governments, but also embracing private local and regional partners that want also to support entrepreneurship and startups in a specific region. I think those are the main programs that we've got as of today within Telefonic Open Innovation.

And you also have a venture builder.

We also have a venture builder which is not directly sitting in our unit, but in one of our sisters unit which is the ideation unit within the Digital Innovation unit of Telefonica, which is leaded by Cem Alonso, our chief and digital consumer officer, which is basically looking for idle technologies developed within the company so that we can draft a business model under those technologies. And we look for third parties that want to also support that venture. We look for a management team and we and we finally fund a startup born within this unit that should aim to raise fund from third parties and become a sustainable business.

So very, very comprehensive approach. I think one of the things looking at your evolution that you know pretty well one of the. I think the most written criteria that in a certain way inform your your actions being trying to get more and more close to what is the fit, the strategic fit. Again, trying to be able to to funnel innovation that might be as you said at use of Telefonica on the one hand, generating revenue new business, on the other hand reducing operational expenses, increasing efficacy. So this is substantially the two main drivers. And Telephonic is one of the few that also have some metrics in order to again, you are quick advanced and also try to measure the impact of the activity that you do. Again, how do you do that? Some ballpark results that you can mention just to understand.

Sure. Just to provide some context to our audience, I would like to highlight that when we started with Telefonica Ventures and with Waira, there were tough times for Telco industry OTT players were coming into the digital scene using our networks which had high capex necessities and telcos weren't able to monetize those at that time. So from the beginning, and even though we were born far away from Telefonica, because we knew that at the beginning in order to position ourselves and to have a clear value proposition to entrepreneurs, we had to be independent and a bit far away from the big corporation. We soon learned that if we really wanted to have impact and be here today, 10 years after or 12 years after, it was needed to have clear metrics and business metrics. And this is something that we have always pushed for. We wanted to be since the very beginning a business unit measured as any other regular business unit. And we have been since the beginning very much obsessed in being able to present our results to Telefonica Group and also to the to the market. So we have invested in more than 1,000 companies out of which I think we have right now around 550 in our portfolio. And from all those 400 have been able to close commercial agreements with Telefonica. We have achieved almost 700 million revenues for Telefonica by our business units reselling the startup solutions in which we have invested. And in terms of savings, I think that should be around 200 million though that's a metric that's hard to follow. We just use proxy the size of the contract of the startup. With Telefonica though we are pretty sure that savings and efficiencies efficiencies brought to Telefonica Group are much higher than that amount. However, as said we wanted anyone can challenge if you, if you try to to measure savings. Those are soft metrics or, or things that cannot cannot be proven. We have preferred to, to to have like just the size of the contract which is something that we can also always show.

Yes, now this is a very let's say muddy matter. Not as is super relevant but it's difficult to be measured sometimes. Also measuring the value produced by open innovation. One typical advantage you can get is maybe reducing the time to market. And how do you measure that? It's not something that probably creates an immediate revenue impact, that is something that creates a strategic advantage as well as again open innovation. And this is probably one of the, the biggest problem that most of the corporates in the world we have and particularly most of the open innovation units in the world who have is to. To showcase the value produced that is beyond the numbers that you say that are by the Way are are impressive, but it's beyond because again, if you think about that open innovation on the one hand is helping the company to improve a strategic foresight substantially. By working in open innovation, you technically help the company to improve their future strategy, to innovate the future strategy and to survive. That's by the way is not a minor thing actually it's quite relevant. On the other hand, you are producing a big impact in the cultural transformation of your own company. And fourth also you're improving a certain way also the image of the company, the branding of the company. Again, because you you're perceived as a company is looking at the future might have also an impact of how the market measure and assess the company as a whole. And so the problem that the last three things that you have there is strategic contribution to the strategy, contribution to the culture, contribution to the image are intangibles that are very difficult to we measure. And so some point we need also to try to add some concrete, more pragmatic or more economic API to try to support. Also we know that this KPI are partial because we are just measuring what has been extracted from the open innovation today. It doesn't mean that what will be extracted in the future. Maybe we can go beyond again we have some successful implementation, maybe start small and then become larger. The impact of cost savings is larger. Imagine also the impact on strategy. So this kind of stuff is relevant, difficult to be measured and I don't know if you have some KPIs also to try to measure this kind of intangible activities.

It's super relevant, as you certainly say, Alberto. And this is something that we have also measured in the past. We have always spoken about the ripple effect of open innovation which impacts in all the dimensions that you were mentioning, culture, positioning, branding and many other things. However, in the end, and I think this is a common challenge that we have with other innovation units, open innovation units from other corporates. When you're doing open innovation at a big and complex group, you have the risk of spreading too thin. If you focus on measuring the impact in comms or in the cultural shift on how many employees you are reaching throughout these initiatives, you might get mad and become mad by having to follow so many different indicators. So we have preferred to just focus on the business ones that I mentioned together with the return on investment, because those are the ones in the end that the financial guys and people in the executive committee understand. So I think it's super nice to see this picture and see how many articles were written about our collaboration with startups. But that's not how a business is measured in stock markets or in front of the analysts. And yeah we want to be treated just as another one as another business unit. So in the end and even if it's something that we have always considered and try to follow, we have preferred to focus on the main ones. I could give you all figures on the comms, but those are updated. We stopped doing and following those metrics I think three, four, five years ago, not anymore. For sure this is something that it's in our main value proposition for Telefonica. But yeah we really aspire that everyone perceives that not having to give any metric around that and just speak about business.

No, no. I think business is supposed to be the common language also because currently open innovation is no longer younger in what we call the age of infancy where again substantially those was this honeymoon effect. And whatever you do with data was good enough. Just as we say you communicated you were golden. Now I think we are entering what we define the age of results and people are rightly measuring results. My concern is that showcasing the the impact that can be measured today is. Is in a certain way. We are under mining the value that we have been putting on the table. And at the end if you go to your executive committee or your executive board showing this number say okay, that's interesting but it's not that much. While the value is this is just a subset of the value you put on the table. So the things because again you are working both horizon one and this number probably reflect what you are being able to achieve. This has an impact on the core business, has an impact on the numbers of today. But again the largest part of the value that you guys have been doing is mostly working on Horizon 2 and Horizon 3. That by definition is something you will grab. The value will be grasped just on the way in five to eight years. But again we need to balance both approaches and we in order to to allow the children to do your work while you are able to nurture also those kind of results. And again this balance between short term, long term is a delicate topic because most. Most company have certain point losing approaches being used in the. In the early days and they start just to look at the results and they look at these results probably don't find anything particularly valuable to be continued and it might reduce the budget discontinue actions. And so it's a delicate balance.

And again I fully agree to talk.

With players like you that have probably the one that are the start of this journey in the early days. And so I've been all the across the innovation curve and now you're currently facing this area and we have this experience that probably company just starting today, just started a couple of years ago. Then don't have the perception what has been the journey, what you come from, what is the value that you put on the table. Because you said we invested in over 1000 startups, that's just impressive numbers. There's potentially a lot of value, a lot of learning that you can extract from that and you have actually extracted and put service of the company that is very fuel to nature.

Yeah, I fully agree. I think when doing open innovation you have to be consistent. The thing about the balance between doing short term innovation or more tactical innovation and supporting your obs in achieving their short term results, it's really important because you want to be relevant to those guys and you want them to see you as an ally in closing the year. So you have to devote some efforts to supporting them in that. If you are measured by the amount of revenues that you are doing right now, it's something that really pushes you to look into the short term. But as you were saying, we are open innovation units and we have to look into Horizon 3 too and we have to invest in the future of Telco Playground and making sure that we do not miss any opportunity around new technologies or things that might have not a proper fit right now with what Telefonica is doing, but can be the game changer of tomorrow or the killer technology of tomorrow. So this is something that we try to have clear in the unit and to keep this balance we do investments in things that are in fact against the strategy of our business, such as the investment that we've got in Borderless and Ilium, which is this decentralized network IoT connectivity platform that was born in US in the west coast and that's spreading out all the all geographies and for sure that's a competitor. But we think that maybe our network guys are not happy with that. But we're also here to bring optionality to telephonic arup and we can only do that by doing things that might not bring any revenue today, but might bring that in 10 or 20 years time or even allow Telefonica to be here in 20 years time. So yeah, I think it's a matter also Alberto, of setting clear goals and being consistent. You have. I always, I always think of. So when we go to Telefonica's board of directors or Executive directors committee. You only have half an hour. We could speak about comms, we could speak about many things, but in the end, yeah, we just, we prefer them to spec two or three things and, and be able to go six months after or one year after and say, hey, the things that we promised in the last time we were here, we have achieved those and here are maybe one or two success cases. This is one how what we will be doing in the next period. And since I've been in the open innovation unit in Telefonica, it has been a matter of perpetual reinvention and fine tuning and as you were saying at the beginning, hybridization of what we do because you have to serve on one hand to your mother group, but on the other hand you have to serve entrepreneurs and startups. And they're a super demanding customer. I think they're the most demanding customer that exists. So if you don't put on the table business development opportunities for them, if you don't put on the table financing agile processes and in a nutshell, smart money, you won't be able to track this talent. So I think it's kind of being, I don't know how to say that in English, but it's like una. It's like yeah, you have to keep all the balls in the airport walker. Yes. Yeah, that's it, that's it. It's fun. It's exhausting but yeah, it's fun.

And again, let me take the advantage of, of sitting with someone that again, you have been in Telefonica since a while and Telefonica has been on the open innovation arena since a while. So and so most of the typical discussion, we are seeding the future. So we are building something that will change the strategy of the company in the future. Since you have been around for more than 10 years, if you go look back and find can you find a couple of example of startups that you invest the work with years ago that actually has been embedded helper to transform the strategy of Telefonica.

So yeah, some good success cases come to my mind. So I might think of Devo, which is an artificial intelligence company which is one of the unicorns now in Spain that when we started to use as a customer, telephonic, as a customer, their technology, they were able to predict real time like failures in the network systems for video and content delivery and many other use cases. They were a series A series B company. And yeah, we have worked all the work together with them and I'm sure that having Agreements and contracts with Telefonica of more than seven figures really supported them in their way to become a unicorn. And that was super valuable or is a super valuable technology that Telefonica has and that was identified by us. Another example that I like is the one that I was previously mentioning around borderless capital which is a fun coming from Helium. This decentralized network for IoT connectivity and which also allowing us to learn how decentralized networks and collaborative networks are deployed and how they work and they even have tokenization component in which they reward end users that deploy their devices at home and they get, they get these tokens and this is something a model that's new to a big corporation and from which we, we have learned a lot in terms of return on investment. I have to name on one hand Altiostar, which was a joint investment of Telefonica together with Deutsche Telekom, Deutsche Telekom and Orange. It was an open run company that we invested in I think 2018 and we sold one year and a half after with huge returns and also with big learnings for our network guys maybe operating in satellite businesses to telco industry. I can think of quick Genius for example, which is a health and wellness company coming from the UK that we invest in London and that has also brought great return on investment to, to Telefonica. So many, yeah, many different examples come to my mind. Basically what we try is on one hand enhancing existing businesses but we also like to put some money in, in the E verticals in which we think telco industry might have the right to play in the coming months or in the coming years such as health, such as energy, such as mobility. And yeah, I'm still expecting like a good investment that really supports or helps Telefonica to build like more than 100 million revenues business in a short term.

To close our conversation, Augustine again also to take advantage of your experience as open innovation professional. So what are a couple of tips? Recommendation to your peers, to your colleagues. So what you have learned that you think has been beneficial.

So I think I mentioned a couple of them throughout our conversation. One is setting clear goals for, for me that's key. To set clear goals and to socialize them and communicate them to your organization so that everyone knows where you want.

To be.

In the next year. Another one is for sure being consistent. Even though you might fail in achieving those goals any quarter or any semester, you have to keep on pushing for that. And there are tough times when you're doing open innovation. But if you really think that you're right, keep on the track. So no one has the secret sauce when it comes to open innovation. We see, as you were saying, hybridization of the models. So follow a strategy and be consistent. There are no shortcuts for this. So yeah, just keep on doing what you think you're right. And finally I think you have with the open innovation units we also have to at times try to hack the system and instead of asking for permission, asking for forgiveness. So in big companies if you ask for permission, you might be dead. So at times if you really have set clear goals, if you think you're right, be consistent. And if you have to find carve outs and shortcuts to what you're doing, do them. If you are current, if you have neat figures, if you're not giving away money or throwing away money, I'm sure you will be. So we are the innovation unit. They have to understand that this is not only just about investing in companies and it's also about changing our, our companies and changing processes. So yeah, hack the system.

Yeah. And then finally one thing that you mentioned before, work with startups in a fair way because again I think you each corporate have a reputation on the market and when you are able to work properly with startups in a fair way, you typically his reputation pays off. Something takes years to build a build up and it takes just a very, very short period of time to destroy. So being consistent also in playing with startup, with startups and market standards, a fair way I think is the way that the DND pays off. And again you have a large community that the community have been building up over these more than 10 years and it's something that is your largest asset. Because also we have a very good reputation with all of them as far as year around.

I think yeah, from an investment perspective we have a good value proposition. But even more importantly from a business development perspective, you can feel with our portfolio companies that they know that we're focused on bringing them what they do not have, which is access to these 380 million clients base that Telefonica has reaching 14 countries. And you can feel that the open innovation unit is focused on that bringing them business. That's what we have different to venture capitals and that's what we want to give them.

Perfect. Thank you Augustine. It's been as usual an interesting discussion and let's keep the communication channel open because again as discussed models do evolve approaches to change and I think it's also important to, to stay in touch with the market. Leaders on this topic, that is open innovation to understand what's next. So thank you so much for your time.

Thanks to you. Alberto, always a pleasure.

Thank you for being with us today. And see you in the next episode of Open Innovation Talks. Mind the bridge. Chat with industry leaders.