Gerald Brady, SVB (pictured right): So I would like to introduce Adam Caper. To put things in context: I manage the bank’s outreach to the corporate venture world at Silicon Valley Bank and also run our start up banking. For those of you who are not familiar with Silicon Valley Bank, we bank about seven per cent of all start ups in the US but also work with a large number of corporates, both as funds that we bank and as clients for access to technology. Previously, I was at Siemens so I have got plenty of war stories but Adam has some great ones. So let’s kick off, Adam, with a quick introduction of you and what you are doing with Synchrony?
Adam Caper, Synchrony Venture (pictured left): Thank you, Gerald. My background is that I come to this space as an entrepreneur and one of my favourite definitions of ‘entrepreneur’ was something a friend of mine once said – that he was a compulsive problem-solver. He tended to see the glass as 20 per cent empty instead of 80 per cent full so there was always that urge to top it off and perfect things. I encountered Corporate Venture Capital after I was the CEO of a dot.com in Boston that did this – as many did in the area – and I was doing advisory work for start-ups around business plans, financing and it turned to the syndication business, where I would be helping people round up their rounds. I became involved with a company – in fact a couple of deals, of which Zipcar was one. With a few other people we helped make sure that that did not run out of cash and we did a big restructuring –
Gerald Brady: If you don’t know Zipcar, this is like a huge, very successful company!
Adam Caper: Yes! That was an exciting experience and because of that I was sought out by the people in Massachusetts who had bought the US franchise from Manganese Bronze, which makes London black cabs and their company was called London Taxi of North America. I ended up becoming deeply involved with the company and went on the Board, trying to solve what was really the fundamental problem, namely a founder who had sold a bagel franchise and then he took his post cash out, vacation with his family to London, got into a taxi at Heathrow and said – ‘This is a great cab’. So that vacation lasted all of the red eye and he then turned around and started the company. One of the investors was London Taxi International of Manganese Bronze. He negotiated the deal, unfortunately, in pounds, so when they started it was $1.20 and it went to $1.80, so we spent quite some time trying to fix that problem which, clearly, was not fixable.
Anyway, London Taxi was the investor and they did a number of things which – to put it politely – were not necessarily in the interests of the portfolio company. As a compulsive problem-solver, I said that this was not right, these kinds of things should not happen, and I became very interested in corporate venture capital. What I saw, as an entrepreneur, was something that I felt was quite broken. This goes back seven years and I’m sure it is not broken any more but at the time, I saw a number of big problems around what should be a very high value, good proposition of bringing start ups – which is where I came from, where my heart is – together with large corporations to create mutual value. After LTNA (London Taxi of North America) went under, largely because of two big – one corporate and the other which might be described as a corporate distributor – fighting over it and ended up in the ash heap, I decided I needed to understand this a little better. There seemed to be a good opportunity here and I started to develop Synchrony.
Gerald Brady: That’s great. One of the other companies you are working with is Schlumberger. What was the catalyst for them thinking about corporate venture capital and why did they decide to take a different path from bringing it in-house and go instead to you to work with them on that?
Adam Caper: We encountered Schlumberger when they were just starting their activities and they are focused strictly on textiling. I suppose I have an almost religious belief that the only reason to do CVC is open innovation. There are many other rationales for doing it but at the end of the day, the best and highest use and the most successful places are where a company says, ‘There’s technology out there. I’m not going to get my hands on it – or I might not do for a long time or I might not do in a competitively advantageous way – unless I’m making investments and partnering these companies and actually buying their product.’
So when people ask me what Synchrony does – and my friends who have no idea what corporate venture capital is, were in my company for a while and helping me get over the hump and getting it started – I say: ‘Here is how it works. If you are a venture capitalist, you write an equity cheque and hold that in one hand but what we want to do is hold that in one hand and hold a massive purchase order in the other.’ We think that is probably a good way to go about attracting high value opportunities and to make a portfolio of companies successful over time. We think that if you do that again and again and again, you will have very good outcomes. As an investor, therefore, I like to be in the seat where I’m writing an equity and then a massive purchase order a few months or a little longer, further down the line.
So, getting back to Schlumberger, there was a great deal of synergy between the way they viewed the world and the way we did. A part of what I also believe is that there are certain things that it is easier for an outsider to do than for an insider, particularly when it comes to doing diligent investigation into what the gaps are, where you can improve things. There are a lot of things that get away if people who are in companies are doing it and it is better than a partnership; they agreed and we got started together and it just became the relationship that it is today.
Gerald Brady: One of the topics that has come up a lot today is around strategic value, which is clearly used a lot by all investors but corporates obviously have a struggle sometimes between strategic value and financial return. What about your approach to strategic value? Because you have gone a step further than just talking about it. You have tried to put some idea around this so perhaps you could give us a bit of background to that?
Adam Caper: One of the things that made me scratch my head when I started doing this way back, was why there was so little definition around what the relationship should be, what the value proposition was and so on. I started out as an extension of technology development or purchasing or anything else, where you would say, ‘This is what we need. Let’s go find it.’ That is, in a vague way when I started Synchrony, the idea I had: that there ought to be a way to articulate strategic value. I pondered on that for a while and in the last couple of years have got a lot crisper on it and I ended up with some IP that we have just filed a patent on for quantifying strategic value.
Simply put: what we are doing is trying to transform the internal discussion from a pitch deck – or an internal deal memo – which goes to people, most of whom do not have the context to understand it nearly as well. Then there are a lot of agency issues: how much is the person trusted? What are the politics? Move from that to somewhere where you can score deals and say, ‘Look, this deal scores here.’ From our whole population of deals we can pick out which are the ones that are highest value. So we have created what essentially is a screening mechanism and we call it the innovation capital method. Put very simply, there is the saying about comparing apples and oranges. That is what you have to do when you are deciding what strategic deals to go after but it is not just apples and oranges, it’s apples, oranges, lemons, pears, bananas, grapes and so on, each of which has a different set of value methods!
The trick is that you have to level the playing field, be able to compare all of those things and communicate that to your internal stakeholders in a way that it is pre-vetted and they can say, ‘Yes, I know this is valuable. It was built from this rigorous internal review of gaps and opportunities – we call them ‘gapportunities’ rather cleverly! – and they took part in defining it. If somebody takes part in defining it and then you empiricise it and are able to say, ‘This gapportunity is particularly high value and we have been through it an compared it to the other gapportunities and decided that this is the one that we are going to pursue’ and you come back to them with a deal that speaks to that, it is a very different conversation from the one that many of you probably have, which is where you wave your arms about. Did anyone see the movie The Hudsucker Proxy? He goes around the whole time drawing circles and saying, ‘Get it? For kids!’ Everybody thinks he’s an idiot and at the end of the day, you realise he’s talking about a hula hoop, something very valuable, but because it’s a circle and they don’t really know whether he knows what he’s talking about – because they’re the experts and he isn’t – he can’t get any traction till suddenly at the end of the movie they build a schematic and everyone sees what it is and it ends up making a lot of money. I think that metaphorically what the task is of a CVC person: you bring in something that does not necessarily fit with the existing value firm – you can’t talk about margins or any of the things you usually talk about – so it is very haphazard as to whether you get uptick and we want to empiricise that.
Gerald Brady: And what has the reaction in Schlumberger been to what you are doing on innovation there?
Adam Caper: We start up processes that we call a tech-brief, whereby somebody has 15 different technology silos, as we call them – one of them is advanced materials, which is a 40-page memo on the state of advanced materials, where there are innovation opportunities, what their strengths and weaknesses are – and when we went through that process, they loved it. Nobody had ever done it before and that alone was valuable. We like to say, ‘Forget about this CVC stuff. We will just help you do this thing that we’re really critical on your doing’. But then they very much lean to this processing, saying, ‘Okay, now we know that if you bring us something it’s been vetted through this and we don’t have to wonder if it’s worth … ‘
Gerald Brady: They understand methodology –
Adam Caper: And they’re involved in it. We involved over 30 internal technology experts, specific experts within advanced materials. So it went extremely well and it is a very difficult thing to do as in an insider. The reason there are management consultants is to do this kind of thing you have to come in, first, with a beginner’s outlook but also to be much less politically charged. We have better … and people are surprised at the information we get and the openness when we do this.
Gerald Brady: Thanks, Adam. Sadly we only have a couple of minutes, so are there any questions?
Martin Kelly (IBM): So when you talk about open innovation, a lot of the time the corporate does not know what they want either. The interesting thing is when you find the thing that is really disruptive and bring it back in, versus where they say, ‘Go out and find this for us’. How do you manage that?
Adam Caper: That’s a great question. Our system – what I just described – is actually only intended to be about 70 per cent of the activity and the other 30 per cent are golden swans. Our system works in such a way that there are two conditions that can trigger a response from us of, ‘This is interesting but we don’t have any way of evaluating it against the system.’ One can be if one of the strategic parameters is off the charts but the other drags it down below the threshold. We can then say that there is one outlying element, so the average would not get you there but the one thing is really exceptional – quite off the curve. That kicks out when you score the deal.
The other thing is that our scoring matrix can’t be applied to it but intuitively, we know that it is interesting. So there is rather an elegance about that because as our system scores deals as they come in, if it looks like a lot of them are not going to work within the system, then you know that you have set your strategic parameters incorrectly. So we can go back to the internal stakeholders and tell them that what they think is important doesn’t map to the market. It is more likely that the market is telling you that you didn’t know what you didn’t know in the beginning, so let’s bring that back is as market intelligence. With Schlumberger we aim for about 70 per cent.
Aris Constantinides (NBGI Ventures): Your system seems to work with when they want to enhance existing or, as we heard earlier from P&G, they have a strategic position in certain markets and want to enhance that with new technology and innovation. I was interested in your approach about white areas and white spaces. Does this system work where a corporate that is not involved in the space but has an interest in expanding in a place where they were not able to before and want to identify ways to get in there?
Adam Caper: The question is probably a function of my not having described it well enough. The gaps that are identified within the existing value chain are only part of what we feed in. Internal experts, typically, have enough cogniscence of where some white space might be that they can put it on our radar and that is all that we really need to do. We can go out and characterise it and build that into it again and as I said, the golden swan system accounts for that on one level. It is very rare though that something comes up so quickly and is so far out. We are going to do this once – we have to rejig this on a semi annual basis – so it is very rare that something would come so quickly that it was a total white space one month and, six months later, something that is massively important and we have missed it. I don’t say it would not happen but that is designed into how things work and you have to do that as well or you are not doing your job.
Gerald Brady: Adam, thank you very much and thanks to all our panellists. [Applause]
James Mawson: And thank you very much to Gerald, that was a great series of stories.