Introduction
James Mawson, founder and editor-in-chief at GCV, welcomed delegates to the Fourth GCV Digital Forum, stressing that in the world of corporate innovation “It is the most flexible and adaptive that succeed” in leading innovation capital. Mawson also thanked the community for the continued support during the challenging times of the covid-19 pandemic. He announced that GCV is planning to host its first post-pandemic live-event, as vaccinations advance, at the end of September in Monterrey, California. He also said that GCV’s primary objective is to “follow and try to understand what the community is trying to achieve”.
GCV Digital Forum 2021: M&A, exits and rising trends across the market
Alex McCracken, managing director at Silicon Valley Bank’s UK branch, provided an overview of mergers and acquisitions (M&A) activity, exit routes and emerging trends across the market at the GCV Digital Forum 2021.
As McCracken underlined, activity has been buoyant in the last year, often driven by an increasing presence of corporate investors. A rising trend that has picked up steam not only across the US, but also in Europe.
“Deal activity has been strong in the European market, and we have seen a notable increase in corporate investing, with CVCs now participating in 50-60% of rounds above $30m,” said McCracken. “Corporate investors have been providing vital resources as well as know-how, expertise and strategic support to local entrepreneurs.”
The European market has also seen a positive year on the exit side, with a flurry of deals and an increase in valuations across many sectors. “We have seen several great exits across Europe, including some outstanding IPOs, which are essential to driving up outside returns,” said McCracken. “Furthermore, US Spacs are calling on European companies, and this has become a valuable path for many businesses based in Europe. In addition, there has been considerable Spac formation in Europe itself recently, and this also represents an interesting exit route that many European companies could successfully pursue.”
McCracken also noted how M&A activity has increased across the market, with a significant expansion and differentiation of the players involved, including emerging companies eager to pursue build-up and consolidation projects.
“In addition to strong corporate and private equity M&A, in the last year we have also seen more and more startups buying other startups,” McCracken said. “Many companies have been able to raise hundreds of millions in funding and use part of their proceeds to finance their acquisition strategy. Despite multiples often being not as high as in IPOs and Spacs, these players are achieving an important goal: they are recycling capital back into the ecosystem in a way we had not seen before.”
McCracken also underlined another major trend that has accelerated across the market in the last year, impacting the strategy of many VCs and CVCs: sector specialisation. McCracken said: “In niche industries, often very highly regulated, such as deep tech, fintech and health tech, corporates that truly understand the dynamics of the sector have the ability to find promising investment opportunities and add value to their portfolio companies.”
GCV Digital Forum 2021: Amazon’s innovation strategy
Paul Misener, senior vice-president for global innovation policy and communications at Amazon, speaking at the GCV Digital Forum 2021 described how being obsessed over customers instead of competitors is the key to Amazon’s innovation strategy.
“Our invention machine relies very heavily on customer sessions, where we figure out what the customer can get out of a product or service. This is what drives all the innovation and the invention that goes into it,” said Misener.
Another unique and essential part of the Amazon formula, according to Misener, is also the willingness to fail.
“We fail all the time and we are actually proud of our failures, because our willingness to fail in the name of doing something truly new and innovative has allowed us to achieve incredible goals. It has given us the freedom to try new things without worrying about the direct consequences for customers, making sure that things fail within Amazon before they reach our customers.”
Furthermore, Amazon’s strategy has an additional component that represents a strong factor for the firm’s innovation approach, Misener explained: “Diversity allows us to break down that confirmation bias that we all have, as human beings,” he said. “Our diverse teams are better positioned to identify flaws and optimise product development and innovation.”
GCV Digital Forum 2021: How innovation and syndication have strengthened the healthcare sector
Jennifer Friel-Goldstein, managing partner for life science and healthcare practice at SVB Capital, and Christopher Picariello, president of Johnson & Johnson Innovation – JJDC, discussed how innovation is fuelling the growth of the healthcare sector at the GCV Digital Forum 2021.
“At Johnson & Johnson Innovation our ultimate mission is to identify the best ideas wherever they might be in the world and provide a diverse set of investment tools to accelerate their development,” said Picariello.
“We want to achieve a successful translation of the best science into effective solutions for patients and consumers, to help them live healthier lives,” he added. “We focus primarily on three segments within the healthcare industry: pharmaceuticals, medical devices and consumer health, trying to bring our long-term support to entrepreneurs at all stages of their journey, from discovery to commercialisation, from the early creation of new companies to series A, B and beyond.”
The importance of fuelling innovation and technological advancements has become particularly significant during the pandemic, when the entire healthcare industry has been affected by the race for a covid-19 vaccine.
“The pandemic has been a very challenging time for the entire healthcare industry, but has also been a time of great innovation,” said Friel-Goldstein. “It has allowed SVB to flex what is its core, putting the entrepreneur at the centre of every investment decision and strategy. As an organisation, this was one of our proudest moments, working hard to respond to a crisis and get to see science winning and achieving unimaginable results.
Furthermore, an important factor that has emerged during the pandemic, especially across the healthcare industry, has been the ability to build syndicates and partnerships with the aim of achieving common goals.
“We consider syndication as a critical part of the ecosystem,” said Picariello. “It is important to find great partners to syndicate great innovation, because we do believe that it takes a village to finance a great opportunity.”
“Life sciences is a collaborative industry by nature,” added Friel-Goldstein. “Investors often syndicate deals, and at SVB we work closely with our partners and we are very supportive of syndication and collaborations with traditional, corporate and alternative investors to support further innovation. With this goal in mind, we have been able to deploy different tools, depending on the capital needs and requirements of each given company that we find interesting, to fuel its growth and boost its expansion.”
Constant Craving: Qualcomm Ventures and The Continuation To Conquer CVC
Quinn Li, Global Head of Venturing, Qualcomm Ventures
Victor Boyajian, Global Chair of Venture Technology and Emerging Growth Companies at law firm Dentons, interviewed Quinn Li, Global Head of Venturing, Qualcomm Ventures, the corporate venturing arm of mobile chip and semiconductors company Qualcomm. Li mentioned that Qualcomm Ventures had celebrated its 20th anniversary in November of 2020 and now has presence in the US, China, India, Europe and Latin America, sharing with the audience some reflections on what has remained the same over years: “There is a lot of innovation happening all across the globe – that has remained the same. That is why we have expanded internationally.” Li also pointed out that in some emerging regions like Latin America, Qualcomm had seen many opportunities and growth over the past few years, in particular agriculture, which he described as a “very big sector, particularly in Brazil.”
Boyajian asked Li about Qualcomm’s insights on one of the rather hot spaces of innovation – automotive technology. “We look at it like a computer or smartphone on wheels. We need sensors, radars, cameras, CPUs etc. to enable it to act like a human being. We look at it as a use case of AI [artificial intelligence]. We leveraged many of the technologies Qualcomm has developed for the smartphone industry,” replied Li, mentioning as an example self-driving car company Cruise, in which Qualcomm was an early investor and which would be later acquired by automobile manufacturer GM.
Li explained that Qualcomm Ventures seeks in a portfolio company to be a “good fit for Qualcomm”, primarily because the unit aims to be a value-adding investor: “We focus on areas we know best. And once we invest in we try to add value to the companies.”
Li also touched on collaboration within the investment community: “We work very well with other VC firms globally – both financial venture firms and strategic corporate investors like us, such as Microsoft. We share best practices on how to go about investing. We collaborate. Overall, it is a very collaborative environment in the corporate venturing world.”
Li’s advice to new corporate venture investors revolves around taking a long-term view as an investor: “It is a long horizon business. You need to have a long horizon view. You may or may not be able to get returns in a couple years. Develop a clear thesis on where you are going to invest and how you will work with those companies.”
If you are not earning carry as a corporate VC, you should be. Here is why and how
Kevin Ye, partner at Mach49, and Paul Holland, managing director of corporate Investing practice at Mach49, tackled the topic of carried interest and compensation in the world of corporate venture capital. Ye acknowledged that it can be “a very sensitive conversation for many”. Holland described a hypothetical example of a traditional venture firm that has raised $1bn fund, with four general partners (GPs) and staffed four other junior team members. The fund applies the standard 2/20 fee structure, that is – a 2% management fee charged over assets under management every year and a 20% performance fee on successful exits and over profits once realised.
The 2% management fee implies that the hypothetical $1bn fund would have $20m to cover all expenditures, of which – according to Holland – roughly $16m would go to cover compensation expenses. Of those $16m, about $2m would be spent on basic salaries and the remaining $14m would come in the form of bonuses, mostly for the GPs. Ye and Holland said that sometimes people forget about the share of bonuses but also pointed out that there is usually a cap on how much of the management fee may be spent on compensation and bonuses.
In terms of the carried interest (or “carry”) off the 20% performance fee, Holland pointed out that historically it has been the GPs that have kept a larger share of realised profits and junior team members a much smaller amount. He warned against being in a situation where you are undercompensating junior members that have made tangible contributions for successful exits: “Try to make sure you are not in a situation where someone who is a top performer gets the same amount of “carry” as someone who did not perform as well.” He pointed out this is the reason why compensation structures as “shadow carry” are sometimes put in place.
In the context of the positive evolution of corporate venture capital and its further professionalisation, Holland noted the need for proper compensation in order to retain talent: “The reason compensation needs to be where it needs to be is that there is an arms race for talent. You are competing with PE firms, large corporations and others who are going to have other ways to compensate more generously such people…To have the best people, we have to compensate them properly or they will just go somewhere else.”
However, Ye also addressed challenges on adopting traditional VC compensation incentives in the context of corporate venture capital. Such hurdles include but are not limited to: corporate HR and compensation policy, the potential costs of having carried interest compensation for the corporate parent as well as the potential to create severe inequality in compensation compared to other executives in the organisation.
GCV Leadership Society – New Member Spotlight: Blackberry
Christina Riboldi, programme director of GCV, interviewed Vito Giallorenzo, senior vice president of Corporate Development and chief operating officer IoT, BlackBerry. Giallorenzo explained to the audience that BlackBerry is “very well and alive”, now as a profitable software-only company after a transformation involving a shutdown of its device business.
He also told the audience about a joint project with Amazon’s cloud division AWS which tackles issues in automotive software and aims to foster an ecosystem of apps in automotive IT. “It is very important to attract solutions and build an ecosystem. You need that for the platform to work and be adopted. Amazon has done it in the past with the Alexa Fund,” said Giallorenzo.
He also shed light on BlackBerry’s strategic fund, which is based in California, was launched in April this year and has already closed a deal in a seed round. The fund engages in direct investments only and is stage-agnostic: “We have just completed a seed round recently, looking at a couple of series B rounds…Any application that uses data from a vehicle is a potential candidate for our portfolio.” Giallorenzo also clarified: “Ours is a strategic fund but that is not to say that we want to lose money on it. We definitely want to make money.”
Catalyzing Change: How Backstage Capital Is Creating Conduits For Diverse Founders
Allison Cooper, partner at law firm Fenwick & West, interviewed Christie Pitts, general partner at diversity-focused investment firm Backstage Capital. Pitts described Backstage as a vehicle investing in “underestimated rather than underrepresented founders”, including women, people of colour, and LGBT founders. The firm has been actively investing since 2015.
Pitts commented on the increased interest in investing in diverse founders despite the pandemic: “For most of us, the pandemic was unexpected. We put in a lot of effort into helping our companies in understanding PPP [the US programme to support small businesses during the pandemic]. During 2020, we continued to actively invest and saw that many of our companies were successfully raising money because there was great attention being paid to investments in diverse founders, after the unfortunate death of George Floyd.”
Pitts shared some advice and tips to corporate VC fund managers on how to invest in diversity. She suggested corporate first look at their networks and understand what diversity there already is in existing portfolios and then look for more diversity if it is not diverse enough. She also pointed various studies have shown that investing in companies with diverse founders and teams is more financially rewarding: “It is both a financial derisking activity and addressing social issues.”
As a former member of the CVC world, Pitts stated: “There is nothing more strategic than understanding who your future customers are and what they are like.” She also mentioned: “In general, corporate venture teams are more diverse than private VC firms and that is a good thing. Most corporate VC teams already work in organisations where D&I initiatives are taking place.”
GCV Digital Forum 2021: Best practices for raising a second fund
Speaking at the GCV Digital Forum 2021, Nicolas Sauvage, managing director of TDK Ventures, the corporate venturing arm of electronics producer TDK, has provided advice on how to raise a second fund.
The firm closed its sophomore fund on $150m in April 2021, collecting three times the capital raised by its debut vehicle, which was launched nearly two years ago.
“It is important to think about why you want to raise a second fund, and the reason should not be simply because you are running out of money from your previous vehicle,” said Sauvage. “You need to leverage what you have learned from fund one and show how you plan to accelerate growth in your next vehicle, by augmenting and optimising what you have accomplished before. Furthermore, strategy is also about deciding what you plan to avoid: make sure that you are explicit about what you are not going to do with your vehicle.”
Timing is also very important when preparing the launch of a new fund, as Sauvage explained. “You should estimate when you plan to complete building your first fund portfolio and make your final investment,” he said. “You also need to carefully plan how to spend your reserves, the capital that you keep for cash flow and build-up investments of your existing portfolio companies. This is particularly important because some corporate investors might not understand why you plan to start raising a new fund if you have not fully deployed your previous vehicle.”
According to Sauvage, it is also useful to establish clear criteria that will determine your sector focus. “We identified three criteria,” he explained. “Aligning our investments with the long-term strategy of our mothership; investing in sectors where there is space for growth, that are not already overcrowded and where it is possible to achieve long-term financial returns; and choosing areas which the team is very passionate about. Passion really matters, because with passion your team will deliver higher quality due diligence, better engagement with entrepreneurs and investors and higher added-value.”
Sauvage also underlined the importance of determining the size of the fund, which should be carefully chosen and only based on the firm’s investment strategy. “Make sure that it is your strategy that is driving your fund size and not anything else,” he said. “You should decide the size only once you have defined the strategy that the fund will follow and you have a clear view about it.”
Keeping Up With The Corporates: 500 Startups and TDK Ventures Share Insights On How Today’s Multinationals Are Catalysing Innovation
Alba Zurriaga Carda, head of global Innovation strategy at US-based venture capital firm and accelerator 500 Startups, and Nicolas Sauvage, managing director at TDK Ventures, the corporate venturing capital subsidiary of Japan-based electronics producer TDK, shared a number of lessons learned from interviews aiming to capture insights on how today’s multinationals are catalysing Innovation.
Lesson 1: Your team matters most. Sauvage explained the need to have “the right mix of skills and people in a team.” However, he also warned: “Technical skills and capital are not enough. You need to have investment experience. You need to also make sure you set the right incentives to keep your team empowered.”
Lesson 2: Develop a robust investment thesis. Zurriaga pointed that if that robust thesis features a significant strategic element, involving business units early is a must.
Lesson 3: Utilise pattern matching wisely. Sauvage acknowledged that pattern recognition in aiming to identify great startup teams and investments may encourage a shortcut approach and biases.
Lesson 4: Adding value is critical to entering a round. This is particularly true in a time when capital is relatively abundant and corporate VCs have to “pitch” to startups to differentiate themselves and be let in an investment syndicate.
Lesson 5: Capturing strategic value and returns is vital. Sauvage cited one of the executives interview who said that not caring about the business units’ support “would be a big mistake”.
Lesson 6: Dedicate resources for corporate connectivity. As practical examples, Zurriaga pointed how some corporate venturing units bring business development teams to the table right after a deal is done to make sure there is value captured by the corporate parent or others having a special team dedicated to connecting portfolio companies with the mothership
Lesson 7: Always be a good board adviser. Sauvage reminded that a board seats involves a fiduciary duty to the startup first. In addition, he stressed that the ability to develop relationship with the CEO and other key members on the board is instrumental in the investment process.
Lesson 8: Aim to quantify strategic returns, even if it is hard. Zurriaga encouraged reporting a different kind of ROI – return on innovation – including some measurement on how learning and knowledge were transferred it to the corporate mothership. In addition, it would have to include some quantitative measure of what gains the corporate parent may have obtained (market entry, new market category and so on) as well as the cost and time savings that investments have brought about.