My previous post in the corporate venture capital (CVC) series provided a broad historical perspective on the sector. In this post I review important lessons learned by CVCs that have been operating for many years and several economic cycles and best practices being used by newer CVCs. The lessons in this post would be of value to CVCs looking for best practices and corporate leaders whose companies have already established venture organizations or are considering doing so as part of enabling innovation.
More CVCs — but will they last?
During the last few years, as corporate innovation initiatives have been multiplying, the rate of Corporate Venture Capital creation rivals — and maybe even exceeds — that of the dot-com era. As a result, while the venture investment pace continues to increase a larger percentage of the total invested capital is coming from CVCs. In addition, based on the data PwC and the NVCA have collected, the per-investment amount contributed by CVCs has increased.
It is only natural to consider whether the cohort of CVCs established during the last five years will have more staying power than the dot-com CVC group, many of which closed down during the economic downturn of 2001-2004. This raises three questions:
- Will the newer CVCs shut down when the next economic downturn arrives, or will a larger percentage of these CVCs be able to endure and flourish in the long term?
- How can a company set up and operate a CVC organization for long-term success?
- Are there lessons these newer VCs should be learning from CVCs with proven staying power?
Two groups to learn from
In an attempt to answer these questions, I looked at two CVC groups.
Group 1 – the incumbents, includes five firms that have been operating continuously for the past 15-20 years. (SAP Ventures — now called Sapphire Ventures –, Qualcomm Ventures, Dow Venture Capital, BASF Venture Capital and Siemens Venture Capital). By analyzing the data collected from the first group, I tried to understand the lessons they learned over the years and how they impact their current investment and operating approach as corporate innovation enablers.
Group 2 – the new entrants, includes two firms that have been established in the last 5 years (American Express Ventures and USAA Ventures). I selected these particular firms for Group 2 because I consider them among the best in their class and most likely to be operating for years to come. By analyzing the data from the second group, I tried to understand whether recently established CVCs are considering lessons from older CVCs when forming their a) investment strategy, particularly as it relates to the corporation’s innovation needs and the risk profile of the investments they make, b) organizational structure, and c) operating approach.
I focused on these particular CVCs because:
- Their corporate parents focus on different industries, such as high tech for SAP and financial services for American Express (AMEX).
- They invest in different sectors: such as software and services for USAA Ventures, and materials (and more) for BASF Venture Capital.
- They come from different geographies: U.S. and Europe.
- They invest globally.
My goal was not to establish statistically driven conclusions but to take a case-based approach to how certain CVCs have managed to succeed over a long period and how newer CVCs are setting themselves up for success. These cases will prove an important companion to the methodology I presented.
Lesson One: The three questions to prepare for success
Several factors led to the demise of the dot-com cohort. However, the root case was that first and foremost, each CVC must be set up for success. There are three questions corporations must ask to ensure a CVC organization is prepared for success:
- Is the CEO is ready to lead the corporation’s innovation goals over the long term?
- Has the corporation determined the mission of the venture group and how it will complement the overall mission of the other innovation enabling organizations the corporate is using?
- Has the corporation considered all its innovation-seeking investment options?
The CVCs in the sample:
- Gain and maintain support from senior leadership
In all seven cases the CEO and the corporation’s board of directors set up the CVC organization. In the process they reached three important conclusions. First, they recognized that innovation is not only important for achieving short-term corporate objectives but it is a long-term corporate goal. Second, startup-driven innovation is an important ingredient for achieving the long-term corporate innovation goal. Third, the CVC organization is one of the innovation enablers but its formation doesn’t automatically imply that the corporation is innovating. Nino Marakovic, CEO of Sapphire Ventures, pointed to the importance of maintaining CEO support throughout leadership changes. He explained that over their 20 years of operation, the venture group “had to earn the trust of each of our CEOs.” Kevin McElgunn, managing director of Dow Venture Capital, also stressed the value of a long-term outlook, saying it contributed to the longevity of their group’s efforts: “Our senior leadership recognized that to be successful, our investment activity had to be sustained over a long period of time.”
- Recognize their missions
The interviewees indicated that the missions of the Group 1 CVCs each adapted over time. This ability to adapt is a crucial characteristic when combined with the corporate leadership’s long-term commitment to innovation. It means that even though the mission may change in order to take advantage of a new set of circumstances, the corporate leadership’s support remains unwavering.
Mike Majors, managing partner of Siemens Venture Capital, explained how the organization’s mission has evolved over its 20 years of operation: “We have learned that investing close to our fields of corporate expertise provides us with the ability to conduct more thorough due diligence, provide better investment results and be a stronger value-add investor to our portfolio companies.”
Björn Heinz, investment manager at BASF Venture Capital, summarizes his group’s mission as “identifying and supporting startups that are developing disruptive innovations which can be of great long-term benefit to BASF’s business units or R&D units, and providing adequate financial return to the corporation.”
The Group 2 CVCs also have a well-defined mission of investing in innovative startups that provide value to their respective business units. The requirement to provide value to business units may necessitate passing on tempting investment opportunities. As Vic Pascucci, Head of Corporate Development and managing director at USAA Ventures, said, “Over our years of operation, we have passed on investment opportunities that could have easily returned multi millions of dollars to our corporation because our business units were not ready to integrate the technologies of the companies we could have invested.” Staying true to the CVC’s core mission — despite appealing options — is crucial to success.
- Understand the spectrum of corporate investment options
All seven of the CVCs operate with the understanding that in addition to their activities, the corporation may be investing in companies through other vehicles in order to access more mature, and therefore less risky, innovations that address shorter-term needs. For example, the Group 1 CVCs recognize that their corporate business units (BU) may also work independently to form joint ventures or invest directly in certain private companies. As Mike Majors confirmed, this because each such investment alternative allows the corporation to employ different risk profiles, return expectations and timelines to success. “Siemens knows that the time horizon for business unit-led investments to produce a positive return is 1-2 years, whereas the horizon of the venture investments is 3+ years and most frequently 5+ years.”
The CVCs in Group 2 did not start by establishing a fund and then consider how to best invest it. Instead, they are using their ability to invest in conjunction with the other innovation enabling organizations (R&D, corporate development, business development and strategy) in order to provide their business units with access to important innovations that can address short-term and long-term corporate needs. This allows them to maintain their global leadership, or like Sapphire Ventures from Group 1, provide impactful financial returns to the corporate parent.
As I had indicated, under certain conditions, in addition to investing directly in startups through the CVC organizations, corporations should also consider investing in institutional VCs as LPs. Sapphire Ventures is an organization that takes this approach and invests in institutional VCs in order to meet investment objectives not covered by its theses and risk profile. Siemens Venture Capital has taken this approach in the past. It is now focusing exclusively on directly sourcing investment opportunities. It also advises the Siemens Pension Trusts as they invest in institutional PE and VC firms.
Lesson two: Avoiding the mistakes of the dot com era CVCs
There are five factors responsible for the problems of the dot-com CVC cohort: culture, success timelines, talent, objectives and a lack of enduring strategic relevance to the corporate parent’s business units. Examining how the sample CVCs are handling these five factors reveals more valuable lessons.
- CVCs must reflect an overall culture of continuous innovation
The corporate parents of the CVCs in Group 1 realize that innovation must be part of the corporate culture. In addition to internal R&D, startup-driven technology and business model innovation is an important contributor to achieving the corporate innovation goals.
BASF, SAP, Siemens, Dow and Qualcomm all incorporate the CVC organization in the overall innovation strategy. The CTO — and by extension the R&D organization — is intimately involved with the BASF, Siemens and Qualcomm CVC groups. For example, Dow Venture Capital always collaborates with the company’s technology, corporate development and business development organizations in establishing investment theses, and evaluating investment opportunities. This is consistent with the innovation model I presented
- CVCs must align the right success timelines with the corporate innovation goals
In Group 1 Qualcomm Ventures provides the best specific case on how the CVCs in Group 1 are establishing timelines and aligning them with different corporate innovation goals. For its robotics initiative Qualcomm associated innovation goals with short-, medium- and long-term timelines, and proceeded to address the goals strategically. It first started a new internal R&D effort. Next the corporation acquired KMel Roboticsto address its short-term market opportunity. Qualcomm Ventures invested in 3D Robotics to address its medium-term goal (expected return in 4-6 years). To support its long-term robotics innovation goal (expected return in 7-10 years), Qualcomm founded the Qualcomm Robotics Accelerator in collaboration with Techstars, where Qualcomm is currently incubating ten robotics startup teams. Other organizations such as Dow Venture Capital and Siemens Venture Capital make sure that each portfolio company can provide meaningful results to their corporations at least every three years, even when they realize that an investment may require significantly more time in order to provide sufficient returns.
- CVCs must include talent with strong investment experience
The organizations I interviewed fall into three groups:
a. Strong investment expertise from other CVCs and IVCs. SAP Ventures and Siemens Venture Capital have moved from having investment professionals who came from internal technology, corporate development, or business development organizations to hiring professionals with strong investment expertise who have been hired from other CVCs or institutional VCs. The investment professionals in these organizations are also responsible for connecting with the business units in order to understand the problems that need to be addressed as well as to make them aware of the value portfolio companies are providing.
Though not included in the group of CVCs I interviewed, Citi Ventures and Intel Capital are two additional long-term CVCs that have moved to employing managing directors with strong investment experience.
b. Technology, business, or corporate development background. Dow Venture Capital and BASF Venture Capital employ staff that has either a technology background or business or corporate development background. However, the members of these CVC groups have been with their organizations for 5+ years — many 10+ years — and have become seasoned investors through on-the-job experience. In my opinion, this approach typically provides comfort to the corporate leadership since they are working with individuals they know and trust. Judging from how long it takes to train a junior investment professional in an institutional venture capital firm, I believe that it was necessary for these transplanted executives to be in their position for such a long time so that they can get properly trained in venture investing. During that time, these two CVCs were making few investments, which might have been acceptable in a different business climate. However, given these days of accelerating innovation in every industry, this approach of long on-the-job training can prove problematic, particularly for CVCs that want to lead investments in startups.
Hearst Ventures is another long-term CVC that has been using investment professionals that have come from within the Hearst Corporation.
c. Strong investment experience and a good appreciation of corporate operations. The Group 2 CVCs have been staffed since inception with individuals who have strong investment experience and a good appreciation of corporate operations.
- CVCs must set clear objectives
A common characteristic across the investors in Group 1 and Group 2 is that they know under what conditions they invest; the type of institutional VC firms with which they will syndicate and under what conditions; and the stage of startups they will fund. Most of them tend to work with IVCs that have demonstrated high-caliber deal flow and a portfolio of investments that are relevant to their corporate business goals and needs. Nino Marakovic of Sapphire Ventures sums it up well by stating: “Always know why you are investing.”
- CVCs must maintain strategic relevance to business units
Six of the seven interviewed CVCs stated the importance of working closely with business units.
Heinz (BASF), Pascucci (USAA), and Harshul Sanghi of American Express also said they are looking for investments in companies with demonstrated business models and solutions that enable them to start working with the business units immediately following the investment.
Note that this approach and Siemens Venture Capital’s approach differ. Siemens Venture Capital requires business unit commitment around each investment. However, they also have access to a $100M “opportunity fund” to invest in early stage companies that are developing important and disruptive technologies that don’t immediately match the current product roadmaps but open medium-term innovation opportunities. For these investments Siemens Venture Capital has less stringent requirements for the participations of its business units.
In recounting his organization’s evolution over the years, Mike Majors of Siemens Venture Capital said that during the dot-com period, Siemens Venture Capital “did not collaborate as strongly with the corporation’s divisions as it does today. These days the majority of the investments are made with the support of at least one division.” Dow’s McElgunn recounted a similar experience with Dow Venture Capital. Even Sapphire Ventures that is now a strong financially-oriented investor, said that during the early years, when it was called SAP Ventures, the then investment team was trying to balance between investments to support the work of business units and investments that would expose the corporation to new technology areas and business models, such as mobile technologies and SaaS business models.
Lesson three: Consider the shared characteristics
Group 1 CVCs share several characteristics:
- The corporate leadership has a strong and enduring commitment to innovation, recognizes the role of startup-driven innovation to achieving the longer-term corporate innovation goals and acknowledges the critical role of the CVC organizations in accessing this type of innovation. The leadership also realizes that just establishing the CVC organization doesn’t automatically imply that the corporation is innovating. CVCs are innovation enablers.
- The CVC organizations have a well-stated mission but are willing to evolve as the corporations adapt to the market realities they are facing.
- The corporate leadership team fosters a culture of continuous innovation throughout the corporation.
- The CVCs closely collaborate with the business units as well as with other innovation enabling organizations, but they are isolated from day-to-day business unit politics and objectives. Autonomy of the CVCs organizations is important.
- They employ experienced investment professionals who understand the organization’s mission.
- They syndicate investments with good partners and show commitment to their portfolio companies.
- The CVCs have stable leadership. Their approach to hierarchy reflects their corporate parent’s philosophy on hierarchy.
- By investing in startups the CVCs adopt long-term timelines to investment success but couple them with 3-year milestones.
- They realize that failure is a likely outcome of investing in startups; therefore, they look to learn from each failure.
- They are primarily thesis-driven investors but will consider investment opportunities that align with the strategic objectives of their business units.
- They facilitate continuous knowledge transfer through the partnership between business units and each portfolio company. Through such partnerships, the CVCs remain relevant partners that add value to business units during any type of financial environment.
Our research and analysis show that CVCs with long track record as well as those newer CVCs that are set up with a well-defined innovation mission operate quite differently from the dot-com era CVCs that closed down by 2004.
In an environment where startups can disrupt entire industries through technological and business model innovations, and where such disruptions may come from around the corner or around the world, CVCs must have more than money to invest and desire to invest it. They must see their role as innovation enablers, be ready to adapt continuously as the circumstances warrant it but stay true to their mission, and to incorporate best practices of other CVCs. As USAA’s Vic Pascucci stated: “Being a CVC requires constant hard work.”
© 2015 Evangelos Simoudis
(Cross-posted @ Re-Imagining Corporate Innovation with a Silicon Valley Perspective)