AAA Distilling the spirit of innovation

Distilling the spirit of innovation

Give us an introduction to Independence United.

We have been going for about nine years. We are really a specialist in innovation – helping companies when they are looking for the big shifts, the new business models, the discontinuous growth opportunities. I guess we are different from the big consulting firms in that we are very much around helping you get some change under way. So we specialise in not just identifying what the need for change is, and what the change opportunity might be, but actually piloting some programmes and getting them up and running.

Of course, increasingly, you find that a lot of the innovation is happening in startups and outside the big corporates, so obviously one of the ways in which companies get change under way and find some discontinuous growth opportunities is to do the right kind of partnerships with startups, which might have new business models, new products or big process changes for them that can help them unlock change within their industry and their sector.

We are not exclusively focused on corporate venturing, but it does actually come into a lot of the projects we do, for on every simple reason – you find that a lot of the best talent, these days, want to be their own boss and go into a startup, whereas 15 or 20 years ago, joining a big graduate scheme of one of the big advertising agencies or one of the consultancies, or one of the big, consumer, packaged-goods companies, was seen as the best career out of university. It very much is not now, so you find that if you are in a big corporate and you are looking to change and develop what you do and what your services are and what your products are, that actually involves looking outside the corporation.

How did Distill Ventures come about?

We looked at a bunch of sectors, and drinks is a sector where there has been tremendous innovation in the past 20 years, and most of that innovation has been born from outside the big drinks companies – incredible entrepreneurial activity and spirit.

It also addresses the difficulty for those entrepreneurs once you get beyond a certain scale, because you are no longer selling yourself on being new and interesting and small and craft. You start needing access to really big amounts of working capital. You start getting into really big logistical challenges around buying your glassware and producing your liquid and shipping it around the world. You start having to understand import regulations and label regulations in 30 markets, rather than one or two.

So for those entrepreneurs there comes a point where, actually, it becomes very, very difficult doing it on your own. It is a classic case of a sector where it is easy to start up on your own, but hard to scale globally on your own, and therefore corporate venturing makes a lot of sense.

We worked with a lot of entrepreneurs in the space to understand their needs, and then we took it to Diageo as an idea, and they said yes.

So Distill Ventures is 100% for Diageo?

Yes. One of the things about the alcohol sector that is different from, perhaps, other sectors where corporate venturing operates, is that there are a small number of global alcohol companies, and therefore it is a space where an investment model which has acquisition as its end goal not only makes sense but is also acceptable to entrepreneurs, because if you are launching a drinks brand with the ambition to go global, there are probably only five or six companies you are going to end up selling to anyway. So doing a deal with the biggest company, saying: “You put up the money for this, but the money will come with a call option, for you to acquire it when it reaches a certain scale,” that makes sense for Diageo, because it means that, effectively, it is taking an early option on some really good opportunities out in the marketplace. And it makes sense for the entrepreneurs because Diageo is the biggest spirits company in the world, and by investing at an early stage we can structure the deal in a way for the entrepreneur that is incredibly good in terms of having capital that is relatively cheap and non-diluted, and an attractive exit option. So we are able to get the balance to a good place.

Does that model of acquisition and the metrics for the valuation sound relatively straight forward?

There is a fairly standard model in drinks, which is the basis for pretty much every transaction that is done. That model is really good because it gives a very single-minded focus for entrepreneurs of what they are expected to do – achieve a certain sales volume, but not at the expense of cutting the price and discounting, and to be efficient with marketing spend.

That is the formula of what makes a brand attractive to be bought, and it is relatively easy to encapsulate that formula in a fairly simply valuation mechanism.

Is this run as a separate unit outside Diageo? Tell us more about how that structure operates.

Distill Ventures is independent, but it does exist solely to execute this opportunity from Diageo. We market the opportunities globally, we find the entrepreneurs. Diageo will make the investment directly, off its own balance sheet, but we will facilitate that process. So effectively we will take the deal terms tabled by Diageo, we will discuss those with the entrepreneurs, we will work with the entrepreneur and Diageo to highlight any tailoring that might be needed for specific deal cases. We are Financial Conduct Authority regulated in the UK to enable us to act as the intermediary. And then we take the lead on running the accelerator part of it, which is all the support entrepreneurs get thereafter.

That puts us in what we think of as a best-of-both-worlds position, in that we can structure Distill Ventures with great entrepreneurs first and foremost. That involves all sorts of things that might be harder to achieve in a corporation. For instance, one is security of tenure, in that the entrepreneurs know that the people they are building a relationship with are committed to this for the next 10 years – they are not going to disappear in 18 months or two years’ time.

So we are able to create an environment structured around the entrepreneurs, which runs on its own, very entrepreneurial, culture. And yet, as Distill Ventures, we serve as the access point, to draw expertise from Diageo when the entrepreneur needs it. And we have built really good networks, within Diageo, to access all sorts of expertise – technical, regulatory legal, intellectual property and trademark issues – exactly when the entrepreneur needs it, and ensure it is being given to the entrepreneur in an efficient, well-packaged way.

We think that this structure of being independent and really attuned to entrepreneurs, but drawing on the best of Diageo, really works in our case.

Are there different lifecycles for these brands, technologies or businesses you are building?

Technically, to grow a business of spirits with a strong brand to a point where it make sense for a company like Diageo to acquire it and integrate it, you are typically looking at a time horizon of – if you were really going fast – maybe four years, but typically more like five, six or seven.

Do you think there will be more separate units in the future?

There are some corporates who set up units internally and who are phenomenally good at what they do, and really specialised in it, and create a great environment for entrepreneurs, but we have spoken to entrepreneurs who have been in that classic situation of meeting a group of people and working with them, and 18 months later they have all moved into different roles internally within the corporate, and they are working with other people and the relationships perhaps are not as good. For corporates to create an environment that is really focused on the needs of entrepreneurs, you have to make some big changes to that corporate culture and corporate structures to make that work.

And that is going to be increasingly important, because as more entrants come into the space, and the number of accelerators increases, the best startups are going to have offers from multiple places, and if you are a corporate you do not want to be entering that battle just with financial firepower, because it can get very expensive and start tipping the deal metrics into a place which is not effective.

If you are not only offering good financial terms, but an environment perfectly set up for entrepreneurs, smart entrepreneurs are going to see that and they are going to make smart choices about the type of culture they want to work and operate in.

What do you see as the implications for the models you have created, and how things are moving on?

One of the things we have learnt, both in the process of setting up Distill Ventures, but also just being out in the industry, and at things such as the Global Corporate Venturing Symposium, is that there has been a recurring theme around values. How do you build value for the parent? How do you sell that value, and how do you measure it? How do you create the right internal support?

Something that struck us was that the value Diageo sees in Distill Ventures now was probably in some slightly different places from where we thought they would see it when we started. We did a bit of an exercise to map different areas of value, and what is quite interesting is you can arrive at a map of value, which does capture the big areas.

They split into some that are more short-term values, such as things like cultural change, accessing new technologies that you could apply already to your customer base, or to your route to market, then some that are much longer-term value creation, such as acquisition opportunities, financial return on an investment portfolio, or a big hedge against a total disruption to your market.

When you analyse those, they are perhaps quite different stakeholders in a business, for those different elements of value, and what we were seeing was that, in some cases where we were meeting people who were saying: “I am having a bit of trouble because I am losing support,” there had not been a clear mapping of the different elements of value they were going to deliver, and aligning the right stakeholders for each one. So you might have started off your programme saying: “This sector is exploding, and this is a good use of capital and we are going to make a financial return.” Then 18 months in, when you have not shown much of a return, and perhaps you might be under water in the portfolio, you then start talking about cultural change, but the finance director says: “That is not really my brief. You came to me saying you were going to make me lots of money.”

At the GCV Academy, we identify with organisations’ clarity on purpose, process, people and performance measures, and getting the organisation to understand that is going to change over time. this change occurs because new startups, new technologies and corporate chief executives are going to change. You have to keep that alignment going as you move forward.

You need a frank and honest conversation about risk, as well, because by definition you are getting into areas which have, perhaps, a different risk profile from a lot of the main activities that are corporate. And if you are making investments you are likely to have write-downs before you have successes, and those write-downs are going to hit profit and loss. So you may have thought you were operating in this great space where you are taking all your money off the balance sheet, but the minute someone has to write a loss down to the P&L, you are involved in a very different set of discussions.

Having a really honest, realistic conversation about what the bumps in the road are going to be before success is really important. There is a tendency for all of us involved in this area to sell in a lot on the possibility and the excitement, and we can all point to the startup companies transforming whole sectors. We have just got to make sure we balance that excitement about the potential with the realism around what is going to happen along the way.

You have thought a bit about how you are applying these lessons. Have you any specific key insights there?

What we found is taking the time to do that value-mapping at the beginning is not only useful in terms of that sustainability, it is a really great way to build that stakeholder support. It is getting everyone you encounter within a corporate to really think about their part of the business, how it might change, what the possibilities of change are, how it might be disrupted if they do not change.

It is a really great exercise of helping people think, I guess, a bit out of their day-to-day challenges, and about where new solutions might come from, and new challenges might come from. We think that value-mapping exercise is incredibly powerful as a stakeholder buying tool, as well as getting the success factors aligned for sustainability in venturing activity.

What is next?

We are really passionate about this area. As investors ourselves, particularly in a time of uncertain stock markets, portfolio company exits to corporates are going to play an increasingly important role in realising value in the startup economy over the next decade.

For all sorts of reasons we are passionate about it, but it is a pretty exciting in many ways. There are lots of great things emerging, such as the academy you run. There are things like the Global Corporate Venturing Symposium, where there is a great sharing of learning. But it is still relatively early compared with some other areas of corporate activity, which are much more understood and documented and taught.

And then off the back of what we have done with Distill Ventures, we are in conversations with two or three other corporates about a similar type of model where, in their sector, there is an opportunity to tap into the innovation that is happening among entrepreneurs, and perhaps create that pipeline of acquisition opportunity.

My hope is we will have at least one more launched within the next year, and potentially two or three.

What other interests or commitments do you have?

My big passion is food and drink. I blog about food, at frankaboutfood.co.uk. That is where I document the food I cook and sometimes the restaurants I go to. So food and drink is a big passion outside work, which I have been lucky enough to bring into my day job to quite a significant extent. 

You can listen to this and other interviews on a podcast available at gaulesqt.podomatic.com

Andrew Gaule leads the GCV Academy, developing the capabilities and expertise of organisations leading open innovation, venturing and corporate venturing programmes to drive strategic benefit. He also supports innovation programmes and collaborations in innovative new value chains in global organisations.

To contact Andrew Gaule and for future interview ideas, email andrew.gaule@aimava.com or Toby Lewis tlewis@globalcorporateventuring.com

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