investment (3)

This summer I wrote about the great research on intangibles in the Chilean Wine Industry done by Mark Dutz and colleagues at the World Bank. And I promised to let everyone know when the full study was released. Here it is and I highly recommend it to anyone interested in intangibles: Public and private investments in innovation capabilities : structural transformation in the Chilean wine industry

We used some of the early versions of the data in our meetings in Chile in June set up by our Smarter-Companies partner AKLOE. It was wonderful to have data that was directly applicable to the country. One country down. A couple hundred to go!

What was so great about this paper? It used a “novel” approach to measuring intangibles at the corporate level: investment. Novel? Really? Well yes. We’ve known for a long time from the CHS macroeconomic data from The Conference Board that investment in intangibles eclipsed tangible investment in the U.S. over 20 years ago, with a similar pattern in the largest economies. But there is still virtually no information on the spending at the individual firm level. That’s because intangibles aren’t capitalized so they wash through the income statement year after year.

The investment approach was taken in a couple of earlier studies including by Nesta Investing in Innovation in the UK but what was great about this study is that it looked at the correlations between investments and the growth of individual firms and the industry overall.

In the period from 1990 to 2012, Chilean wine production (in liters) rose by 9% per annum. Much of this growth went to exports which went from $116 million to $1.78 billion, 13% per annum. What drove this shift? Was it just about producing more wine? No. That capacity already existed. It was about making a connection with new markets, telling an effective story to the market and controlling quality in a time of significant growth. All this required investment in intangibles.


As this graph shows, the growth story of Chilean wine exports is a story of intangibles investment. The study found that spending on knowledge-based intangibles was a statistically significant and economically important correlate of the growth in the industry and in individual firms.

When we wrote Intangible Capital in 2010, we called for a new report to record “i-capex,” spending on knowledge intangibles that is an investment in the future but not an investment that qualifies for capitalizing on the balance sheet. This simple accounting issue has led to the 80% gap between tangible net worth on balance sheets and corporate value in the public markets.

It’s past time to start measuring intangibles investment. This study is a great step in the right direction. Where should we take the next step?

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Today, we had an amazing day with our partners in Holland, IPR Plaza, TPA and i2c.  We took video and photos and will share more soon.

Now it's on to Dubai!

This is actually the third in a series of posts leading up to our upcoming session at Sibos. In the first posts in this series I talked about how the basic model of value creation is shifting from extraction to attraction and what this means for management in general and investment management in particular.

Remember how I talked about the shift in Boston from an industrial to a digital economy? This whole shift is caused by technology: computers, the internet and social technologies. This latest step, social technologies is a tipping point. Social technologies are not just Twitter and Facebook, but all also all the tools that empower customers, consumers, partners and employees to share, learn and control conversations. These tools give them unprecedented powers that will only grow. And they will fuel alternatives like crowd funding that can replace you completely.

What does that mean for investment managers? It means you have to look at companies differently. But it also means that you need to manage your own business differently. You can’t just think about extracting value, asking what do we get out of owning your stock? You have to think about attraction: why someone would want your money rather than someone else’s money?

This means that you have to ask yourselves questions like: What value do we bring to the system? How do we support a company’s ability to create value for its stakeholders? Remember, your financial capital isn’t as important to the creation of value was when companies needed massive amounts of money to build railroads and factories. They can start those with less financial and more intangible capital.

Think about Facebook. They got some venture capital but not the kind of numbers that you saw in the industrial era. Facebook was built on intangible capital, attracting smart people, partners and knowledge. They only used the public markets to partially cash out the founders. I actually think that Facebook could have and maybe should have skipped the capital markets and raised money from their users. Once they went to Wall St, they ensured that they would be an extractive business, focused on how they can take as much value out of the network without losing members—rather than how can we create the most value for everyone in the network? Their goals are not as well aligned with their users. Some day, someone will replace Facebook with a network where the users get a return on their contribution to the network, where the financial and management systems are aligned around attraction, not extraction.

Technology is behind the changes facing the global investment management industry. The power of this technology is in how it empowers employees, consumers, companies and investors to connect directly. To remain relevant in this market, you have to think about creating value, not just extracting it.

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Investors interest for NPSP Composieten BV relates to IC Rating Report.

NPSP Composieten BV is a composites manufacturer in the Netherlands. In a €800 million domestic market with about 200 companies, NPSP Composieten BV is market leader in manufacturing composites using 85% bio based materials. This is what they call Nature Based Composites: the NABASCO brand they have developed over the last 5 years. Learn more at: 

Almost two years ago, i2c delivered an Intellectual Capital Rating™ report based on stakeholder interviews (the extended method developed by Leif Edvinsson and ICAB, Sweden). This report stated the intellectual capital value on NPSP BV focussing on the efficiencies, renewal and risks.

The overall Intellectual Capital score of NPSP Composieten BV was satisfactory, even very good at IP and relational capital. Their main challenge was about experience in the Management Team, protecting their IP and moving towards new branches such as construction through marketing outside their common client groups.

In the Netherlands, today, commercial & investments banks, and even investments funds are criticized of lacking any initiative to support innovative technical and manufacturing companies. But NPSP Composieten BV (Financial Daily, Hans de Jongh, March 16th 2012) found new investors. Time to find out what precisely happened.  

Wanting to share the success, CEO Willem Bottger, explained. The IC Rating report was part of the complete set of due diligence files. But the report got the attention, and convinced a traditional bank, a business angel and a private equity investor who decided on an investment of 50% of the NPSP Composieten BV turnover of 2011. During the research period of this investment group, questions about the IC report where unfolding realistic growth and development issues that the management team had intervened upon since i2c research team had presented it. Every single risk and learning had been given follow-up. The reliability of the IC report was even after such a long time not questioned, the advantage for the investors with this kind of reporting was clear. As NPSP Composieten BV will grow the coming years, they plan to do a new IC Rating Research when turnover has doubled.

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