A corporate VC will always have to justify its existence whenever the company goes through a period of change. A startup investment programme may be seen as an expendable discretionary cost when push comes to shove, be it management change, change of strategy, or full-blown crisis.
Being able to demonstrate that the venture investment programme is bringing value to the company is crucial if the unit is to survive.
One of the biggest problems Bill Taranto, president of MSD Global Health Innovation Fund, the CVC of biopharma company MSD, sees in many corporate venturing units is an inability to spell out their how the investment and execution strategy solves the company’s problem.
“That’s the beginning of your downfall because if you can’t communicate why you’re here to serve the organisation and serve whatever strategic change they have, you’re not going to survive,” says Taranto.
“What corporates are really saying to you is: tell me how you’re going to help me. You taking this money and putting it in this company over here – why is that fundamentally going to help me do whatever it is I’m trying to do better? If you can articulate that, that’s half the battle.”
I’m on my 10th boss in 14 years, and it’s had no effect on us, generally speaking,
Bill Taranto, president, MSD GHI
The sentiment is shared by Brian Schettler, head of AEI HorizonX, formerly Boeing’s venture unit, which spun out in 2020. “I would always speak in the language of what I think is in Boeing’s best interest. Not what’s in ventures’ best interest, not what’s in the fund’s best interest, or even my team’s best interest. It always had to be Boeing,” he says.
Finding the right structure for a fund can help insulate it from turbulence at the corporate level. An evergreen fund that can recycle its returns, for example, will be less reliant on capital commitments from its parent company, which tends to be the sole LP. Conversely, having a contractual GP-LP agreement will also contribute to peace of mind, doing away with the risk of yearly appraisals that come with balance sheet investing.
A resilient strategy
“I’m on my 10th boss in 14 years, and it’s had no effect on us, generally speaking,” says Bill Taranto, president of MSD Global Health Innovation Fund (MSD GHI).
“The great thing is, the way this is structured, when I move on eventually, or if [MSD] has more CEO changes or strategic shifts in the future, it doesn’t matter. This fund knows how to interact with the organisation based on what they want to do.”
When Taranto joined MSD in 2010, the company was focused on primary care – diabetes, vaccines, cardiovascular drugs, etc. A few years later, it came out with Keytruda, an oncology drug that helps the immune system fight cancer cells.
The success of Keytruda changed everything – MSD decided to shed its primary care assets and pivot to being a biopharmaceutical, research-focused company.
That change was mirrored in the company’s CVC unit. Virtually all the investments in the first six years as been in the primary care space. The team had to adjust to managing many of these as a financial, rather than strategic investor. At the same time, the CVC unit shifted focus to investing in startups relevant to biopharma needs, such as patient data intelligence platform Culmination Bio and Baseimmune, which is using AI to design mutation-proof vaccines. The basic strategy, however, remains the same as it has been for 14 years.
Having a sound strategy that is malleable to strategic change, says Taranto, is crucial. The right set of theses can work as an agile suspension system, absorbing the bumps and shocks of the changing terrain underneath.
For MSD GHI, the first thesis is that data is the currency of the future healthcare market – it’s the underlying data collection and capabilities that hold the most value, even if the strategic interest in the technology changes.
Communicate, communicate, communicate, and when you’re done, communicate it again.
Bill Taranto
Secondly, the team believes that point solutions, those designed to fix specific problems, don’t work for digital health. It is better to consolidate these into an integrated offering – what MSD GHIF calls “ecosystem investing”, which is also a sub-sector-neutral approach.
“It doesn’t matter what the management change is, or your strategy change is. What we’re interested in is what problems are you trying to solve? And our strategy or our investment thesis can solve those types of problems,” says Taranto.
Raise your hand
The big problem a lot of CVCs have, especially when a new boss comes in, is internal visibility. How well do people within the corporation actually know what your unit does? Do they have any frame of reference to judge the value you bring? The real secret sauce is keeping people in the loop.
“You got to communicate, communicate, communicate, and when you’re done, communicate it again. Make sure they understand what it is you’re trying to do for them,” says Taranto.
Being in constant contact with internal stakeholders, letting them know that you want to hear what their problems are and you’re actively on the look for equity plays that can solve those problems, is what you want. Even if you’re just telling them the problem doesn’t yet have a solution, that’s still an answer that will keep you in people’s minds.
Bringing key decision-makers into the fold is also important, having the C-suite on the unit’s board simultaneously makes them part of the communication piece as well, as they become advocates of the CVC to others.
Is there a commercial agreement with a portfolio company? Communicate the results – the good, the bad, the areas to improve. Is an exciting technology on the horizon? Ask business units if that’s something they could use. Is there a major trend in the venture world? Let people know internally. Stay on the radar, continually, year-round.
In 2016, the MSD GHI created what it calls enterprise coverage, assigning each person on the team a part of the corporate to link with — whether it be human health, research labs, manufacturing, etc — to communicate the work the CVC does and listen closely for problems it might be able to help with. These lines across the corporate, as opposed to just one-way traffic letting the higher-ups know what’s going on, have been monumental not just for potential deal flow, but for keeping everyone in the loop.
Parting ways
Some corporate-level changes are harsher than others. Making your unit resilient to changes in strategy still doesn’t prepare you for sudden macro events that threaten the parent company. Sometimes the best way to survive is on the outside.
Between 2018 and 2019, the aerospace giant Boeing came under heavy scrutiny for two high-profile crashes of its new 737-MAX planes. The market’s confidence in the company had remained surprisingly buoyant — as reflected by its stock price — despite scathing criticism, only to have covid lockdowns threaten to rip the entire aviation industry apart the following year.
Those were the early warning signals that I needed to get creative.
Brian Schettler, head, AEI HorizonX
Schettler recognised that the environment internally was such that HorizonX could find itself on the chopping block as a discretionary cost. He did not want to wait around to find out and took proactive steps.
Around mid-2020, Boeing had assumed some $60bn in new debt, and Schettler’s reporting line was crumbling as people shuffled around or left the company. There was a new CEO, there was a new CFO, and HorizonX was brought under the newly-created role of chief strategy officer.
“Those were the early warning signals that I needed to get creative,” Schettler tells GCV.
He discussed with his new boss the options as he saw them, which, to be comprehensive, included everything from staying the course, closing down the unit fully, reducing it from $200m to $40-50m with a narrower focus, doing a small spin-out and get third-party capital, or doing a bigger spin-out. This last option was the one they ended up taking.
No one wanted to just close up shop, and trying to stay the present course at a time of company crisis would have been a pitfall-peppered road that Schettler was keen to avoid.
“If you continue to get pushback and you still stand your ground, it’s easy for all your supporters to turn against you, because I guarantee you everyone else in the company is feeling some sort of pain – either a budget cut, a headcount cut, or a priority change,” says Schettler.
Boeing’s then-CTO advised against the option of shrinking to focus on just a few technologies like sustainability, as the opportunity cost in areas like AI would be too great. The joint recommendation to spin out was eventually presented to the CEO and CFO, and the decision was made to move ahead.
Independent of the problems at Boeing, spinning out HorizonX was something that Schettler felt would have been the right thing to do anyway for several reasons, including the fact that it could change its compensation structure to attract higher-calibre talent. The compounding crises provided a good time to pursue the spinout, but this background did put them in a weaker position when negotiating with AE Industrial, the investment firm under whose auspices the unit now exists. Luckily, portfolio performance was good, with markups in valuation and good distributed to paid-in capital. It was also at the height of the venture market, which helped.
Apart from a shift from a strategic to a financial focus, spinning out also had implications for the team. On the one hand, Schettler could not take the entire team as it existed at Boeing – budget constraints meant that he had to be brutal with his staffing choices. You don’t get to keep the nice big office, either, but you do get a carry compensation structure largely unavailable in a corporate
While it still has very close ties with Boeing, including having a portfolio success team remaining under Boeing’s umbrella to help onboard technology and link the corporate with portfolio companies, AEI HorizonX is, naturally, less exposed to similar crises going forward. Boeing has a $50m LP commitment to the fund, a contractual agreement that is much harder to unpick.
