“Anyone can do venture. If you have a logo and a chequebook, people will take your money, it’s not that hard to do. But if you want to deliver impact, you have to have all these different skillsets. You need a really well-rounded team,” says Dave Stevenson, chief operating officer at Merck Global Innovation Fund.
Corporate investment programmes usually start small — more than 70% of the teams have less than 10 people, and those individuals tend to handle everything, from making the initial investments to helping the startups find joint projects with the parent company.
But as the investment portfolio grows, things get more complex. It makes sense to create a separate team to handle the liaison with the startups in the portfolio. The team often goes from being a small band of senior professionals to having more levels of junior staff who are learning the trade. This often happens around the time when a second — usually bigger — fund is raised. At this point the unit usually needs to appoint a chief operating officer, who can manage a varied team.
“You’ll know when the time is when you have acute needs around managing your own LP and managing your portfolio when stuff starts to get out of hand. That’s where you need somebody to kind of shepherd all of that,” says Stevenson, who handles this role at Merck, alongside his role as an investor.
CVCs at this inflection point face a number of questions. Should team managers be hired from inside or outside the company? How do you structure career progression and pay? How do you incentivise the parent corporation to interact with your expanding list of startups?
Stevenson and Alex Kamenetskiy, chief operating officer at Munich Re Ventures, shared some of the best practice that they learned as their CVCs took this step, in our webinar CVC: A professional sport.
Merck Global Innovation Fund started in 2010 as a $250m fund and has grown to be a $500m evergreen investment vehicle. The team has 40 portfolio companies, managed by a team of 10.
Munich Re Ventures started in 2015 as a $50m fund and has grown to have more than $1bn of assets under management. It is still solely funded by Munich Re but has an independent legal structure. It has 30 people in the team and 60 companies on the portfolio.
Here are some of the observations they shared:
1. A mature CVC unit needs a chief operating officer for your team — and that role is complex.
“I like to joke that [the role is] not really the chief operating officer, it’s really the chief other officer. I do all the stuff no one else wants to do. So it’s the financial reporting responsibilities and making sure that we do the portfolio management aspect of reporting back to Merck, and making sure there are no surprises. It’s the marketing and communications piece,” says Stevenson.
Stevenson still acts as an investor alongside his COO role. Kamenetskiy at Munich Re, on the other hand, does not invest, although he does sit on the investment committee. He takes on most of the management functions of the unit.
“It’s all of the traditional functions of the CEO, CIO operations. I wear the CFO hat as well, marketing and legal as well,” he says, describing the role as something of a “catchall”.
2. One of the key roles of the COO is to manage the junior team members.
“The junior investment professionals report to me as well as part of our overall focus on development and talent, recruiting and retention,” says Kamenetskiy. Both he and Stevenson have made an effort to create an environment where younger team members can learn and develop.
“We wanted to make sure that there was consistent cross-functional development of our junior staff,” says Stevenson. “I [to make sure I] don’t have somebody getting pigeon holed in one area and not getting developed in another.”
Kamenetskiy, similarly, masterminds a development programme for staff in the earliest stages.
“Once the juniors become principals, they report to a managing director and their training turns into more of an apprenticeship model, where they are learning by shadowing their manager in the boardroom and on deals. But the foundations are built initially by the COO making sure they rotate around various roles,” says Kamenetskiy.\
3. Internal or external hires? There’s no simple answer.
A CVC unit needs to have a lot of different strands of expertise.
“We have ex-consultants, we have ex-investment bankers, we also have PhD molecular biologists and IT professionals. You need a variety of domains and expertise to really build a well-rounded team that can meet the needs of the organisation,” says Stevenson.
But one of the trickiest questions for CVC group leaders is whether they should source people from inside the parent company or externally. Merck does a bit of both, possibly leaning more towards internal hires.
“In portfolio development it is critical for people to come from the inside,” says Stevenson. “You really need the deep network, the deep relationships, and an understanding of how stuff gets done in a big corporate.”
On the investor side, it’s more of a mix. “If you’re starting a programme, you probably need a couple of people that have been around the block and run a venture programme before, so you’re going to hire from outside but then you want to match that up with internal people who can navigate the organisation,” he says.
The Munich Re Ventures team, on the other hand, is made up of only external hires. But it takes care to connect with the parent company, for example, by having people from the business development team embedded in the business units of Munich Re.
Also, its junior hiring programme is starting to produce people.
“We started hiring more junior folks fairly early, and now, as we scale and we need people in more senior positions, we’re not hiring people from the outside, we now have someone that has been here for four years in a more junior role, who is able to step up. That has been especially valuable on the investment side, having people who really understand Munich Re and have really grown up to be strong investment professionals with a really solid reputation as as VCs,” says Kamenetskiy.
4. Retention is about finding people with the right motivation.
One of the tricky questions for CVC unit managers is how to keep people. The venture capital sector is famous for its lucrative carried interest arrangements for investors. Few corporate units are able to offer the same arrangement.
It is one of the reasons that Stevenson says Merck has been reluctant to hire from the venture capital sector.
“We have tried to hire people in the past from traditional venture backgrounds and if they’re always chasing the carry, you never keep them,” he says.
But, if you have identified the right individuals who are motivated by more than just the financial side of investing, you tend to keep them for life, Stevenson says.
“Frankly, those are the people who tend to stick around because there aren’t many jobs that offer this level of intellectual stimulation.”
5. There is no silver bullet for incentivising the parent company to get involved with portfolio companies.
Corporate venture units usually want their portfolio companies to connect with the parent corporation on joint projects. But people in the parent organisation may not always have the time or incentive to pursue these. Trying to motivate everyone to work together is a big part of the COO role. Both Kamenetskiy and Stevenson admit there are no shortcuts to this.
“I think we’re still looking for the right answer,” says Stevenson. Mainly, he says, it is about finding like-minded people at the company who are interested in startups.
Munich Re has put in place a few structured programmes, such as internal insight councils involving senior managers at business units.
“We meet with them at least on a quarterly basis and talk about strategy, what we’re seeing, what they’re seeing. It’s part of an ongoing, higher-level, strategic conversation about what’s important, what’s relevant,” says Kamenetskiy.
Sometimes the incentives for corporate executives getting involved with startups is very simple.
“One [piece of] feedback we received was: ‘When I speak to my client companies, I’m able to speak about technology or things and it makes me look better.’,” says Kamenetskiy. “It’s simple [but] things like that matter.”
On the flip side, sometimes the CVC unit has to actually protect the startups from too much attention from the parent company. Stevenson says that plenty of corporate personnel are interested in spending time with portfolio companies.
“They’re really curious and really want to learn, but they have no budget, they have no intent to actually do anything. And so it’s a complete waste of time for our portfolio company. So, we try to protect our portfolio companies on some levels from Merck personnel, in that we’re trying to qualify leads for them to make sure the time spent is well spent,” he says.
6. The COO role is all about communication — but still flies under the radar of shareholders.
“We manage [Merck] like they are a traditional LP. So, there’s monthly reporting, there’s also a lot of communication back around what’s in the portfolio, what we’re seeing, where we’re going to invest,” says Stevenson.
But even these more established corporate investment units fly under the radar of the corporate shareholders — for now.
“We’re not relevant to the shareholders. The impact to the dividend or the performance at this point has been minimal. The asset side of Munich Re is massive, so we don’t move the needle yet,” says Kamenetskiy.
But this part of the role may be coming, as CVC becomes an even more established tool for companies. Kamenetskiy, certainly, is hopeful.
“It is an aspiration for us to matter [to Munich Re] from a balance sheet standpoint,” he says.
Watch the full replay of the webinar here:
This webinar was part of our The Next Wave series. Previous webinar episodes can be viewed here.
The next webinar in this series will be on Quantum computing: How to invest in the next big opportunities on June 14, 2023. Sign up here to secure your place.
