Economic downturns and corporate leadership changes are the biggest danger points for a corporate investment fund. These are the moments when a new CEO or a beleaguered board can axe a unit that seems like just a “nice-to-have” not a “must-have”.
With a recession looming, corporate venturers will be asking how they can make sure they prove their value to their parent company and avoid a cull. So Global Venturing asked two CVC veterans to share how they had navigated their units through tricky times.
You couldn’t get much more of a CVC survivor than Bill Taranto, president of Merck Global Health Innovation Fund, the investment arm of US multinational pharmaceutical company Merck & Co.
“I’m on my third CEO and my 10th boss,” he told the GCV webinar The CVC Survival Game – Delivering Value in Downturns this week. During the nearly decade of the fund he’s reported variously to the chief strategy officer, the chief financial officer and the CIO. Not only that, in 2016 Merck underwent a big strategic shift from being a primary care company to being an oncology-focused biopharmaceuticals company. The venturing unit survived all this intact.
Merck’s investment fund was launched in 2013. It is an $500m evergreen fund that has so far invested in more than 70 companies and had more than 40 exits — most of those financially successful. Only four portfolio companies have had to be closed. It invests at the later growth stage, so at series C or beyond, and will write cheques in the $10m-$15m range. The remit is to invest in digital health technologies — anything that brings “value beyond the pill”, as Taranto puts it.
Amy Burr, president at JetBlue Technology Ventures, the investment arm of JetBlue, the US low-cost carrier, hasn’t undergone a CEO change yet, but, like the rest of the airline industry, the unit went through an existential crisis when the Covid pandemic halted most travel.
“I feel like if you made it through the first four months of the pandemic intact as an organisation, you’re not going anywhere, anytime soon,” says Burr. “At JetBlue Technology Ventures we had a moment of thinking ‘is this it? Is JetBlue going to stick with the CVC? Or is this going to be the end?’” JetBlue did dial down investment activity during the pandemic but did not disband the unit, and it has roared back to life since then.
JetBlue Technology Ventures was created in 2016 and has a team of 12 people. It invests off the parent company balance sheet and tends to focus on early-stage travel technologies, anything from aviation to mobility and hospitality. It has so far invested in 40 startups.
These were the six survival tips Burr and Taranto shared for getting through a downturn:
1. Creative funding
Don’t stop supporting your portfolio companies financially — but be prepared to be more creative about how you do it. Taranto and Burr both say, for example, that they are using more convertible notes than equity for follow-on investments at the moment, in order for companies to avoid writing down their valuation.
It may also be a moment to think about doing some private equity-style acquisitions of portfolio companies and rolling them in together with other companies to create more scale, adds Taranto. The main thing is to have patience and not walk away from the portfolio companies.
2. Don’t just invest, work on innovation more broadly
During downturns, when the parent corporation puts a lot of emphasis on finding immediate value and savings, it can be useful if your corporate venturing team has a very hands-on “innovation” function. Half of Burr’s team at JetBlue Technology Ventures are operations people who work closely with the core business, running innovation sprints and pilot projects. “During the pandemic, that was super critical, because that team was very, very busy, trying to find interesting ways to deal with the crisis at hand,” says Burr.
3. Invest in a business development function. Early.
This is the team that will get your portfolio companies partnering with the parent company’s business units. And these partnerships are ultimately what will give you credibility with the rest of the business, says Burr.
Merck’s Global Health Innovation Fund didn’t start out with this capability. It was only four years ago, that Taranto hired people for what he calls the “alliance piece”. The team proactively goes out to parts of the business looking for problems that portfolio companies can help solve. They act as the brokers to bring the two sides together and carefully monitor what works and doesn’t work. It has been transformational.
“Once we started this group, we had a massive increase in the number of commercial agreements that were signed between our portfolio companies. In fact, in the last two years, we’ve had over 30 agreements signed,” Taranto says. Out of the Global Health Innovation fund’s portfolio of 34 companies, around 80% have a contract with a Merck business unit.
You really cannot start this function too early, Taranto says. “I should have started it on day one, I think it was a learning for us.”
4. Avoid investing in one-offs
Do not invest in companies that offer a solution to just one tiny part of the parent business. “We’re looking for use-cases that can have broad impact,” says Taranto. It is much easier to prove the value of investments when they are useful across the whole enterprise. “There are a lot of startups that we will never invest in because they are just too niche, they cover just a tiny bit of the organisation,” agrees Burr. “Those aren’t great investments. They may be great ones to bring forward for partnership, but they are not great investments.”
5. Measure strategic value with things you can count
Be careful when setting up how your strategic value is measured. Every fund has to meet certain financial goals, which can be relatively easy to quantify with measures such as internal rate of return. Strategic value is more nebulous. Don’t try to link these to efficiency gains, says Burr. “It’s hard to really attribute a specific revenue amount or cost savings amount to a specific little company that you’ve brought into the organisation. There’s so many factors involved with that.” Instead, measure the engagements the team has with the parent company. “We measure how many interesting ideas and startups we bring into the organisation. How many are being trialed? How many are in a proof of concept? How many are being implemented? How much are we learning across the organisation built?”
6. Set up the CVC unit as an evergreen fund
If possible, set your CVC unit up as an evergreen fund with an up-front capital allocation. “If you are creating a CVC, an evergreen fund is the way to go,” says Burr, who doesn’t have this arrangement. She has to negotiate a capital allocation every year. So far, that has worked fine, but it is a much more precarious position than the one Taranto has at Merck. Merck gave Global Health Innovation Fund the whole $500m up front, making them highly independent. “Not having to do capital calls gave us a sense of freedom to invest because we weren’t worried about whether we had to get money from other parts of the organisation,” Taranto says. “It makes a tremendous difference in what I call freedom to operate.”
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