Mawson: Where did you get your dealflow?
Askew: Dealflow is one of the most critical areas; it is the lifeblood of any venture capital (VC) firm. We recognised really early that a passive approach, where we just announced our existence and opened our doors, might generate deals but would not get us into the rarified atmosphere where the best deals are seen and done. Instead we set out to reverse the typical deal generation activities of independent VCs, which rely on networks and relationships to bring deals to them, across a wide range of sectors and designed a largely proactive approach.
Brown: We initially concentrated only on the markets which matched Reed Elsevier’s strategic focus or which we thought were interesting tangential areas. And we got to know them really well. We mapped them out and identified all start-up companies already funded by VCs in these areas and clustered them into sub-areas. Before we even started contacting the companies, these market maps were fascinating to Reed Elsevier management, who were able to see where capital was flowing to fund innovation. We were then able to do desk research on each of the companies to identify those we felt were most interesting. And we started cold-calling the chief executives (CEOs).
Mawson: How did those calls go?
Brown: Remarkably well. Most CEOs were intrigued to open exploratory discussions even if they were not raising capital. Some had never heard of Reed Elsevier, although the sub-brands (such as LexisNexis, Elsevier and Variety) had high recognition. This was the genesis of our proactive approach of targeting exciting companies in a focused set of industry sub-sectors.
Mawson: Did this sector focus give you any advantage in selecting the right investments to build an attractive portfolio?
Noble: It did. One of the main benefits of a corporate venturing fund comes from its strategic focus, which drives discipline and the ability to get a deeper understanding of the narrower range of sectors the team is investing in. Some of the biggest due diligence questions any VC will ask of a promising potential investment will be contextual about the sector. Is this genuinely a growth sector? Can it generate attractive margins? What do customers really want? What are the drivers of success? These are all answers that are hard to get at within a rapid investment time horizon if your deals are dotted across a broad universe of sectors.
Askew: This approach has contributed significantly to our financial performance. Taking the benchmark of European and US VCs, we are an upper-decile fund over the 10-year period. Our deep and narrow sector knowledge has given us the insights and access that has over time become our differentiator – both in selecting high-quality new investment and in making informed portfolio decisions.
Mawson: I thought most corporate venturing teams were reliant on the pure financial VCs for their dealflow?
Noble: This was not a strategy that yielded much for us in the early years and we did not make it a priority initially for a couple of reasons. First, top-tier VCs in the US and Europe are a tight-knit bunch with an understandable preference for syndicating the best deals among themselves. Second, our relatively narrow sector bias meant that even large VCs had only a small number of relevant companies in their portfolio.
Mawson: How do you build the reputation you want with VCs then?
Brown: Fundamentally, reputation develops over time and it is entirely based on the individual partners and board to investment interactions. Many top-tier VCs have firm level relationships that stretch back over decades and many individual partners have invested with each other across several funds. Even five years is a very short time in venture capital – as we hit our 10th anniversary we are only now beginning to feel the benefits of building enduring relationships with specific partners and firms.
Askew: Also we recognised there were certain things we needed as a minimum. First was financial alignment with other investors and the management teams. This was an important factor in us establishing the fund as a separate entity with standard VC structure and economics – principally partners earning carried interest, or performance fees. In addition, we needed to be able to make own decisions and run a VC standard process.
Reed Elsevier understood this requirement and worked with us to establish an investment approval and funding process that is at least as streamlined as that of a pure financial VC. Unlike some other corporate funds, our deals have neither a business unit champion nor blackball and we have a small and senior investment committee – Reed Elsevier’s chief financial officer, chief strategy officer and us – that is able to convene at very short notice.
Mawson: And how do you develop the right relationships with entrepreneurs and CEOs?
Askew: This is something that we have always paid a lot of attention to. Given our approach of targeting new investments via the management, a close working relationship with the entrepreneur or CEO is crucial from day one. All VCs have different approaches to this. Our style is typically to focus on creating the conditions that will make them successful and not second-guess executive decisions on a day-to-day basis. We make an effort to understand the skills and experience of all those around the board table – founders, CEOs, other VCs, industry independents – and focus our interventions on the areas where we can have the most impact. This varies significantly from board to board.
Mawson: In particular, how does the venture teamavoid being seen as an espionage team on behalf of the corporate?
Brown: Theoretically, that looks like a challenge, but it never materialised in practice. I think there were two reasons. First, we always made it clear that our primary motivation as a team was generating carried interest and therefore our incentives were aligned to all their other investors – to build value in our investee companies.
Second, we have always operated as venture capitalists rather than corporate development teams for Reed Elsevier. Corporationswithout a venture team tend to be hung up on control and this colours all discussions with entrepreneurs. We were very careful to be open and candid about how we worked at the beginning of any relationship with management, and once the initial questioning was over, it never really gave us a problem.
Mawson: What strategy did you take to investing? Were you early stage or later stage?
Noble: We were relatively cautious when we started. We wanted to be early enough to catch innovative companies before they became too obviously successful and expensive. But not so early that we would have too many failures, which I did not think a corporate would stomach even if the capital amount was small, or so early that they would be too raw to have any meaningful dialogue with Reed Elsevier. So we chose series B and later investment rounds as the right point to invest. This had the added benefit of giving visibility of all companies funded up to and including series A or later which drove our proactive dealflow strategy.
Brown: Although that was the right place to start, we havesince stretched this as we have built a deep understanding of our markets and we now invest from seed through to late-stage. We do not have hard and fast rules about amounts and stages, rather we take the view that we back smart entrepreneurs with novel approaches and transformative technologies. For example, our most recent investment was in a west coast US entrepreneur with an entirely novel approach to database technology – we led a seed round that will enable him to hire a small team and create a product. That is not something we would have contemplated 10 years ago. We have also done several deals where we are the only institutional investor and the other fundinghas come from founders andangels.
Mawson: Most corporations avoid leading investment rounds and take a passive view of postinvestment portfolio management. What approach have you taken?
Askew: Initially we thought we would be most likely to follow the lead of a financial VC in investment rounds. However, competition for the better deals meant that we were immediately drawn into leading deals. It turned out to be a good approach for us and we are very comfortable setting the price and terms of new financings, in fact we have led more than half of our deals over the 10 years. As for postinvestment management, our style is very hands-on and we would see no distinction between financial VCs and us. We are long-term investors and understand everything that this entails, good and bad – management changes, debt and equity financings, and aborted and successful exits.
Mawson: When you now look at the portfolio you built over the past 10 years, did most of the strategic value for Reed Elsevier derive from investments made?
Brown: Actually I think this is only part, and perhaps the minority of the strategic value Reed Elsevier has benefited from Ventures. The team has engaged every day for the past 10 years with venture-backed companies in Reed Elsevier’s sectors and we have had the benefit of hearing numerous entrepreneur perspectives on the evolution of technology, customer needs, data consumption and othercritical areas for Reed Elsevier.
We also track trends of where capital is flowing to fund innovation. The market maps described above are incredibly valuable to management. Although the portfolio has performed financially, it is the broad knowledge the venture team is able to impart on innovation, only part of which has come from investments actually completed, that is valued most highly by the senior team at Reed Elsevier.
Mawson: So how does Ventures affect the Reed Elsevier strategic agenda?
Askew: At the highest level we are the bridge between Reed Elsevier and the private marketplace. Over time we have developed two main ways of affecting the strategic and innovation agendas – market access and thought leadership. Market access is what every corporatelybacked venture fund aims to provide and we view this as a spectrum of activities.
We are constantly surfacing companies that the business units find interesting, either simply as forewarning of their existence or as potential strategic partners or even acquisition targets. Only a few of these meet our financial criteria and an even smaller number become part of our portfolio. Where appropriate we spend considerable time connecting these companies to the right places in Reed Elsevier and fostering relationships.
Over time, we have developed very good knowledge of each Reed Elsevier business unit and their strategies and have personal relationships across each of them. We have also developed a very wide network of entrepreneurs and investors, which we proactively share with the Reed Elsevier businesses. An example of this is the US west coast road trips where we spend a week exposing senior management teams to innovators, entrepreneurs, CEOs and investors. These have proven to be the best way to challenge and extend their thinking.
Brown: One of the things we have spent a lot of time on is developing our approach to sharing information with Reed Elsevier. There are a number of elements to this, from extending our own market maps to versions which are specific for our business units to more general market trend analysis and abstraction. Our brief is to help Reed Elsevier understand the rapidly changing nature of the media and technology landscape. This can take the form of ad-hoc input during strategy sessions or more formal distillations of our experience and knowledge into briefings that we give to various constituencies across the group – from a half-day workshop with a business unit leadership team offsite to a presentation at a group-wide conference.
Most recent examples of these thought leadership pieces include "Transformational media themes" (five broad trends we identified in driving the changes in the media landscape) and "The digital competencies blueprint" (nine key competencies that
are the source of strategic advantage for modern media companies).
Investments
Capital invested: $125m-plus
Current portfolio
Babylon, language translation, www.babylon.com
Healthline, health information, www.healthline.com
Palantir, investigative analytics platform, www.palantir.com
Recruiting.com,recruitment software www.recruiting.com
Fina Technologies, big data predictive analytics, www.finatechnologies.com
Partminer, electronics parts information database, www.partminer.com
First Life Research, crowdsources adverse events data, www.firstliferesearch.com
Intelligize, legal research software, www.intelligize.com
Logistics Health Corporation,healthcare delivery, www logisticshealth.com
Martini Media, ad network targeting the online affluent, www.martinimedianetwork.com
Spacecurve, geospatial database technologies, www.spacecurve.com
Exited portfolio
Inxight, unstructured data management, acq: Business Objects
Business.com, business search engine, acq: RH Donnelly
SRD, large data entity management platform, acq: IBM
Inpharmatica, discovery informatics platform, acq: Galapagos
Netli, applications data networking, acq: Akamai
Siperian, master data management platform, acq: Informatica
AllBusiness.com, small & medium sized business media, acq: Dun and Bradstreet
iPhrase, natural language search engine, acq: IBM
Intraspect, collaboration platform, acq: Vignette
Nextpage, peer to peer content management, acq: Fast