Additional Resources:

  • Listen to our last podcast on what corporate venture funds can learn from traditional venture capitalists.

Transcript

This episode is sponsored by Highline Beta, a hybrid venture studio and seed-stage venture capital firm helping large, successful companies identify new growth areas by co-creating new corporate ventures internally or externally. Highline Beta’s extensive knowledge as entrepreneurs, product leaders and investors helps organizations strengthen their venture building capabilities by accelerating their path to commercialization. Whether you’re looking to build new businesses in-house, spin-out new startups, or partner with others, Highline Beta can help. They’ve worked with numerous clients including AB Inbev, Intuit, Royal Bank, American Family and more. For more information, visit highlinebeta.com.

Kaitlin Milliken: Hey, you’re listening to Innovation Answered, the podcast for corporate innovators. I’m Kaitlin Milliken from Innovation Leader.

In this bonus episode, we’re taking a dive into the world of venture capital, Silicon Valley style. Venture capital funds provide the gasoline startups need to get from an initial sketch on a cocktail napkin to a global-scale giant like Uber, Amazon, or Airbnb. Silicon Valley VCs are continually on the hunt for fledgling businesses with growth potential — startups that have glimpsed the future and are racing towards it, often faster than more established companies. They assemble diverse investment portfolios, vetting thousands of potential startups to find the few that might have unicorn potential. But they know that plenty will flame-out along the way. VCs serve on startup boards, and try to help them make it to an eventual stock offering or acquisition. Those big wins return money to the funds — and let them continue the investment cycle in another wave of startups. 

Corporate venture funds have attempted to mirror that process but within the strategic constraints of established companies. Business leaders often define a mandate that guides their mission. That could be finding strategic technologies or generating financial returns.

With so much change over the last year, we wanted to learn more about the dynamics of venture capital in 2021. So I drove out to Los Altos Hills, California to sit down with Hemant Taneja, one of venture’s power players to understand what’s on his mind half way through this year. Hemant is a managing partner at General Catalyst and the founder of the firm’s Silicon Valley operations. The venture fund has successfully invested in AirBnb, Canva, Grammarly, Instacart, Kayak, Warby Parker — and that’s just a sampling from a long laundry list. We’ll be back with Hemant for more after this break.

[AD JINGLE]

Kaitlin Milliken: Okay, I have to say it: I’ve missed you. I’ve really missed seeing the Innovation Leader community in person at events over the last 16 months. But, I’m so excited to announce that our team is hosting a series of in-person events in the fourth quarter of 2021 and in early 2022. We’re taking our annual Impact conference — complete with breakout sessions and keynotes — and bringing to several cities around the US. Our first event will be in New York this November and our second will be in Silicon Valley in January of 2022. We’ll also have smaller events in Boston, Chicago, and other cities. We’ll be gathering together innovators, R&D experts, and product developers to share best practices for moving their industries forward in the midst of uncertainty. BUT, our team wants to keep everyone safe, so we have a limited number of tickets. Find out how and when to reserve your spot at innovationleader.com/impact.

And we’re back with Hemant Taneja. Hemant is a managing partner at General Catalyst — a venture fund that has invested in unicorns like Airbnb, Hubspot, and Instacart. During the conversation Hemant shared best practices for making investments and discussed venture buyouts — an emerging trend in the field. But first, we started with a lightning round of terms you need to know. 

So let’s get started with some just quick definitions, lightning round short responses. So big question, what is the general mission of venture capital funds?

Hemant Taneja: Venture capital funds are focused on partnering with founders to help build next generation businesses. There are venture capital firms that focus on software and technology as the core innovation that those founders are leveraging. And then there’s others that are focused on platforms like biotechnology, or innovation as well.

Kaitlin Milliken: There’s a lot of terms that are specific to the VC world, like the different stages of startup seed stage, Series A, Series B. Can you talk a little bit about the differences between those different startup stages?

Hemant Taneja: So seed stage, to me is there’s the beginnings of a founding team and an idea that are in place. Obviously, the next phase after that is trying to conceive a product in the context of the idea that the team is pursuing. That is typically the Series A Stage. Series B stage is often when the founders have started to sell that product. And there are some early indications of product market fit where the customers, like what they’re building and are willing to pay. And then after that, there’s a bunch of series, which are generally about different levels of growth that the company is going through.

Kaitlin Milliken: And what determines, from your perspective, the amount of an investment that you’re willing to make in a startup?

Hemant Taneja: It’s more of an art than a science. We obviously generally, in the early stages, think about how much capital does the team need to be able to make progress to the next set of milestones in the context of those stages that we just talked about, and make sure they’re fully funded to hit those milestones, and then be able to to attract additional capital from us or from others. And then as companies go large, then it comes down to if they need capital for growth, and M&A. And that starts to become more scientific, if you will, because you can start to be able to model that out.

Kaitlin Milliken: So moving into the more you know, how you execute on the art of venture investing, how are you approaching venture investing in 2021? And has that changed at all from pre-pandemic ways of doing this work?

Hemant Taneja: The fundamentals of our business are still the same, right? We like to back great founders that are building ideas into companies that can be next generation, enduring companies that are great for society. That’s sort of generally the way we think about it. Perhaps what the pandemic has done is accelerated the path to the future, because technologies out of necessity had to play a great role in keeping our society going. When businesses and many of the core services were shut down, the promise of technologies, and what they were trying to do has become more clear. And so those larger companies have been accelerated. So innovation is the answer to managing ourselves to the next pandemic, the importance of that innovation and the value just became clear. So it just gives us more intentionality in terms of reinvesting.

Kaitlin Milliken: I know that you’ve made many successful investments in different unicorn startups. And those successful investments. In some cases, the startup grows by 50X, there’s really large financial gains, how did you build a portfolio, knowing that not everything you invest in is going to have that type of exponential growth? 

Hemant Taneja: Going into investments, especially in their pre-revenue, early stage companies, it is very hard to tell which of them are going to become the next generation. So the signal is all in making sure those are great founders that have a great reason to be building what they’re building, and it’s aligned with where we think in general technology and the various industries are going at a very high level. Beyond that, it’s hard to predict which one of those are going to be 50x isn’t where the founders may not be able to sustain a business. And so, you know, what we try to do is stay first principles on every investment we make around those criteria. Frankly, the portfolio gets constructed in hindsight, to be honest, in terms of which ones are going to be the winners and which ones are not.

Kaitlin Milliken: What makes a great founder, and how are you keeping track of the technologies that are important in those sectors?

Hemant Taneja: We’re going through a technology cycle right now. This technology cycle was powered by social, mobile, and cloud advancements, and artificial intelligence and the role that it can play in transforming society digitally. That’s happening across every part of the economy today — in healthcare, finance, and education everywhere. And so what we’re looking for, generally is founders that have a point of view on what specific part of that transformation they’re interested in. It could be building infrastructure tools that enable that transformation as a whole or it could be rethinking the lives of consumers with certain chronic conditions in the healthcare space.

I think seeing that the founders have a point of view that’s differentiated; we do look for the ability to create followership, and those founders can attract a great team. Can you attract investors? And lastly, as I said, we do think about, is the market ready to adopt innovation or not? And based on those ingredients is generally how we end up making these investments. There’s a lot of judgment in the early days of these companies, because there’s nothing really to be able to do diligence, because there’s not enough history with customers, if any, and there’s not enough history around the products. And so it comes down to sort of conviction in the founders, at least the way I look at it.

Kaitlin Milliken: Having a portfolio is important. And it’s something that you’re evaluating over time, obviously, a company’s performance changes. The longer you stay with it, and the more rounds you go through together, there are ones that are pulling your head that you want to keep in your portfolio. What happens to the ones that fall behind, or may not be as promising as when you first made an investment or first started in engagement with them?

Hemant Taneja: I started by saying we’re actually in the anti-pattern business. It’s not that every company that becomes really successful is a straight hockey stick up. There’s ups and downs. It takes patience, both on the parts of the founders and the teams and investors to build great companies. And so generally, if companies are not progressing as we thought they would, we try to understand what the reasons are. Sometimes it’s just, there’s a lot to learn and iterate because the market’s not developing the way you thought. Sometimes it’s the execution capability of a team, and they may never get there. And so depending on what the reasons are, and are they sort of controllable and fixable, we make a judgment call on how to keep pursuing or not, because there is something about failing early when an idea is not working, because it frees up the founders and their time and the team members and their time.

If the belief is there in the long term vision, you want to keep going as well. I think there’s a lot of judgment involved in making those calls along the way. Of course, the ones that are working, our whole mission is to invest in positive, powerful change that endures. So if you feel like a business has great financial and societal return, and it’s working, then we think about how do we keep compounding and continue to invest in those companies and increase the return for investors.

Kaitlin Milliken: I’d love to just talk a little bit about the stages of startups that you’re investing in and how you’re finding them in your work today. I know that that’s changed a lot in the last year. I’m sure a lot of engagements have gone digital. What is your way of scoping for startups and determining fit, especially when it comes to you know, the size or maturity of what they’re offering? 

Hemant Taneja: Yeah, so we invest across all stages. We have multiple funds, and many times, our engagement with the founders really starts at the seed stage. We do a lot of seed investing. Those are largely founder bets in markets that we understand — sometimes even more — because those founders are so exceptional, and we want to get started with them.

We have an early stage fund that will do pre-product market investing. We have a growth fund that will do investing in businesses that are perhaps between $10 million and $100 million run rate. And then we have an endurance fund, which invests in companies that truly could be a billion or billions of dollars in revenue, and can be long term sort of compounding businesses. We’re multistage in that sense. And we have teams that are experts at identifying excellence at each of those stages inside the forum. We also have teams that are excellent at providing governance, and those different stages inside of the firm.

Kaitlin Milliken: What makes for a good relationship between a startup and a venture investor, and is that different than a positive relationship between a startup and a corporate investor?

Hemant Taneja: First and foremost, it starts with trust. And I think if you build a great trust between the investor and the founder, then my test is you get the call when something is wrong, versus when something is right. Because I feel like when you’re getting a call and something is right, you’re being managed. When you get the call, when something goes wrong in the company, there’s trust in you and confidence. They can help them think through it. So I think that’s the first thing. Second thing is, I think that trust builds, because there’s a common understanding between the founder founders and the investor around sort of spending time together when time is valuable.

It’s a competitive industry, there’s a lot of pressure that investors have either to associate with their best companies because it builds their brand, or to focus on companies that might be failing, because failure is a blemish and can be bad for your career. And our belief is to invest time with founders where your time can make a difference, because that’s really when you should be taking their time, because the founders are really busy too. And so that kind of relationship where you’re respecting the founder’s time goes a long way. I would say in the context of corporate venturing in time, it is no different. And if you are spending time with the founders, in this dynamic of “Hey, let’s meet and give me an update.” It’s annoying for the founders to do that to every single investor that they have when they have so much going on. If you sit there and you talk about how you can help them accelerate their business, or you have specific things that you think that cooperation the strategic partner can bring. And that’s the purpose of sort of having a dialogue that will build a relationship.

Kaitlin Milliken: I know that you’re working on venture buyouts with your team. And that might be a term that not everyone listening is familiar with. Can you explain what a venture buyout or VBO is?

Hemant Taneja: It’s a term we’ve just recently started using. So let me give you a context of sort of what’s happened over the last 10 years or so. So I moved to Silicon Valley to build our firm’s office in 2010, 2011. For the first several years, I was entirely focused on investing in platform companies, companies like Stripe and Gusto and others, which were giving superpowers of big companies to small companies. It was all about how do you rent all the sophistication big companies have to these small companies could truly compete in these big ideas and big markets. That technology was starting to take hold in sort of just to elaborate on that a little bit.

The technology industry used to be a vendor, an efficiency vendor, right? Here’s a set of tools that financial services companies or colleges or hospitals can use to become more efficient. And now technology companies are building new banks and new hospitals and online schools. It was all about how do you give them that sophistication. So I think that’s what the first decade was. This decade, what’s now happening is, well, if you’re going to do a true digital transformation of society, it requires us to actually now give these superpowers of small businesses to big companies as well, because they are the predominant share of the economy. And there’s this whole phrase around digital transformation for businesses, we think that’s a myth. You can’t really transform these businesses that have been around for decades and decades, digitally, from inside.

So lately, what has happened, given our radical collaboration with enterprises, whether it’s hospitals or banks, in various verticals that are strategic to us, a lot of these companies are coming to us to say, “Hey, how do we give ourselves some of this sophistication to provide modern experiences to our businesses, our customers as well?” And that has led to us partnering with them, often sort of spinning out parts of their business into a venture capital setting where we can bring that same agility and innovation that a small company has to transform those parts of the business that these corporations are looking to do. We think this next phase is going to be about our venture capital firms like us partnering with corporations to actually transform businesses for growth. And that is a very different mindset that requires the venture capital company building mindset. I think it’s a really important tool when we think about the next phase of innovation.

Kaitlin Milliken: So functionally, walk me through what that would look like. So a large company comes to you and they want to transfer themselves by having a small group of their team work with you. What does that entail?

Hemant Taneja: Let me think about a product or an experience that an existing large enterprise business has in a portfolio things that they’re doing. They’re basically saying, “We think this is really core to us. And we need to scale this.” But sitting inside of a big company, with all the resource dynamics and and sort of complexities of product resources and how they get shared in supply chains, it’s really hard to give that company that singular focus that a founder is able to give to their company in the early days to move fast. This really is sort of an evolution of the intrapreneur model to say, “Hey, let’s truly partner with the technology ecosystem. And, you know, bring some of those ideas or products or divisions to scale with the growth orientation, the innovation orientation, without being hamstrung by being inside of the company.” We think that more and more companies are going to take that path to hit some of their strategic objectives.

Kaitlin Milliken: And is this any different than a spin out?

Hemant Taneja: Putting a division out, to me, is still more of a private equity-esque mindset. What we’re talking about is these are true transformations, where you’re going to take some assets from a corporation, but marry them up with new platform and technology capabilities that are required that don’t really exist in their business to build something new to build sort of a new experience. That’s a little bit more of what you’re doing. The typical venture capital startup spin outs to me tend to be around existing businesses that are mature and you want to again, bring sort of a financial optimization to, as opposed to “Hey, let’s build a business which has got venture capital type of risk to it and a transformation.”

Kaitlin Milliken: If you were to summarize the benefits of pursuing innovation at a large company specifically in that way, what would you say?

Hemant Taneja: It’s a way to infuse a Silicon Valley mindset into the idea that you’re bringing forth the laser focus on consumer experience and ability to bring diversity of thought. So you have the benefit of being able to construct a team that has solved similar problems in other industries. So it just brings a lot of fresh thinking. And it’s a way to attract the very best out talent to come work on your strategic problems. And it’s got the upside of what could be a very successful startup. So it’s going to attract those types of people to come work on that problem for you.

Kaitlin Milliken: What closing advice or thoughts do you have for teams that are looking to get started in the venture space? So just closing out all of the different wide ranging conversations we’ve had today.

Hemant Taneja: As the role of companies that we’re building becomes more and more profound, going back to my earlier point, we’re not efficiency vendors. We’re redefining core services and society. Now, as a technology industry and the founders of these companies. In order to build long-term, enduring companies, you truly have to think about the intersection of financial and societal return. And so thinking with that great intentionality, towards the change of bringing about thinking about the regard having regard for unintended consequences that might emerge from such transformation. And having that long term mindset is going to be the differentiator for the ones that become the biggest outcomes and the most impactful outcomes in the next 10 to 20 years. 

Kaitlin Milliken: Great. Thank you so much for your time.

Hemant Taneja: It’s my pleasure. Thank you.

[MUSIC]

Kaitlin Milliken: So successful venture capital investing goes far beyond a cup of Blue Bottle Coffee in Silicon Valley. Hemant shared his perspective from a traditional VC fund. But what are some best practices specific to the corporate venture space? To find out we sat down with Marcus Daniels, Highline Beta’s Founding Partner & CEO. Highline Beta is a hybrid corporate venture studio and VC firm working alongside large companies to co-innovate with vc-backed startups. Highline Beta is also a sponsor of today’s episode.

So to get started, can you share some of the benefits of running a corporate venture capital program at a large established organization?

Marcus Daniels: Absolutely, I think it’s important to first maybe start defining a bit CVC. I think there’s a lot of misunderstandings of what that actual name is. It becomes more of a catch all name for different forms of equity investments, exercised by corporations. There’s really a range of new models and systems that have been deployed by these corporations, as almost as diverse as the corporation’s themselves. The primary benefit really is developing strategic capabilities of the parent company. Often secondary benefits include some sort of financial return. But historically, it’s really been focused on building strategic capabilities and giving, hopefully a strategic edge to the parent company.

Kaitlin Milliken: Great. And I know that sometimes there are different challenges when it comes to setting up a venture program, building the right foundation is essential. Can you talk about some obstacles teams might face and what they can do to overcome them?

Marcus Daniels: I mean, it really starts with what are the objectives of the specific CVC program? Is there a natural fit with the objective of the parent company? The first step is really trying to establish clarity on what are the winning conditions? And I really see that in three specific areas. It’s really having to make a real important decision up front, and what is that clear structure? Secondly, what is the interface and engagement of making corporate strategy collaboration work is the whole point of CVC is making an investment in driving a strategic partnership from us with a startup on the outside to the parent company. And the last piece, which often gets overlooked, is really establishing proper incentives, specifically with the internal talent and also alignment with the incentives of the entrepreneurs and also other potential co-investors in these deals.

Kaitlin Milliken: The last year has been difficult for innovators facing tighter budgets or layoffs. How can they make the case that their venture program should be protected? 

Marcus Daniels: Traditional venture capital funds have a life cycle of 10 years really setting forth the expectations of not only the strategic value, but some of the other elements? How are you getting out of the deal? And how are you managing this portfolio of investments? Another thing that we’ve seen recently that has been established in the ecosystem is exploring different models of corporate venture capital. Historically, we’ve seen larger CVC funds being created. And now just like in traditional venture capital, new models are being put forth which is really giving an opportunity for those who probably wouldn’t make the case for a corporate venture capital fund or investment function, to actually have an opportunity to experiment on shorter horizons.

Kaitlin Milliken: Are there any that feel like they’re unexpected or that people may not know about that are becoming more popular,

Marcus Daniels: Historically, there’s really been three types, right you have the direct investments that are coming off the corporate balance sheet, then you have the traditional GP/LP model, which is really an internal dedicated fund. And lastly, you have corporations investing into traditional funds that have some strategic interests to help kind of fuel their objectives. Often the most sophisticated and more experienced are called CVC functions, and do all three. They have different alignments of what their purpose is and how they get structured. But we’ve noticed recently is these new SPV vehicles being created, sometimes to pilot program accelerators, or shorter horizon vehicles that really become interesting for experimentation. It’s almost a way to test before really investing hard or deeply into a full fledged function.

Kaitlin Milliken: When it comes to building an initiative at a large organization, who should be hired to be on staff? Should it be folks recruited from other parts of the organization who know the company quite well? Or should it be folks who know the ecosystem well, or know how to do standard venture investing very well?

Marcus Daniels: So we start with investing off the balance sheet, you have to get alignment and engage internal corporate talent for sure. We might bring on some external advisors, that could play more of a venture board kind of functionality, who have traditional venture capital experience to kind of bolster and help in many ways support the process of sourcing deals, evaluating opportunities for the internal corporate talent. If you’re building out a dedicated traditional GP/LP corporate VC fund, I would say you have to really have a mixture and a dedicated resource allocated towards it opposed to using shared resources.

Often we’ve seen experienced traditional venture capitalists going in house to help lead those initiatives. Again, the combination of always making sure there’s the right level of engagement of internal corporate talent and other strategic partners within the organization and other business unit leaders are quite essential. And then lastly, if you are investing in an external fund, you probably can use shared resources internally to help manage those relationships. But ultimately, given the lifecycle of managing these funds, these external funds are at least 10 years. We do see the need of having dedicated functions and internal resources being set up to the mirror 10 year life cycle of a fund.

Kaitlin Milliken: What are some best practices for finding potential startups and vetting them?

Marcus Daniels: It really starts with stage right? If you think from a corporate venture capital perspective, typically startups that are at the series A, Series B stage really meaning they’ve they’ve hit product market fit. They have had maybe some levels of experience of working with other corporate partners, not just as a customer, but also as maybe a co-innovator. Ilike to tie it back to the horizons.

You think of even an H1 horizon, really about protecting and evolving the core business. That has to be aligned with the objectives of the startup. Are they really interested in integrating into the core, and helping to support and leveraging internal distribution, and the nature of our business, which is really about helping organizations grow beyond the core? We really look at the opportunities of these venture capital investments to really give and accelerate access to the future of industries, and really find ways in the H2 horizon of co-innovating new products and services, not just trying to integrate into the core business.

Kaitlin Milliken: The bigger the company, the more process there might be, and startups sort of have the reputation for being scrappier. How can teams nurture their investments without overdoing it and suffocating them?

Marcus Daniels: It’s very hard for a startup to navigate the right stakeholders after there’s an investment. And that’s where there’s usually a bit of a drop off. And so not being able to empower the right interface or we’ll say for less than word of a program that allows the build momentum in the strategic partnership is often where I think these investments don’t yield the right level of value for both parties. We are biased towards establishing pilot program accelerators as a programmatic layer that allows corporate startup collaboration to flourish.

Kaitlin Milliken: Can you leave our listeners with one last tip on corporate venture that folks should take with them when the episode is over

Marcus Daniels: Upfront establishing the winning conditions. The three things to really contemplate is really what is this clear structure that you are going to establish. There are various models of CVC. There is no one right way. There’s ways you can experiment early with maybe a pilot program accelerator to help create that right structure and interface. Also ensure that the right level of incentives for all parties involved corporate partners, receivers, ensuring that they’re engaged but also assurance that these startups don’t get smothered and have opportunities for other co-investors to help them transform the industry in partnership with you.

[ACKNOWLEDGMENTS]

Kaitlin Milliken: You’ve been listening to Innovation Answered. I’m your host, Kaitlin Milliken. I edited and wrote this episode with our summer intern, Collin Robisheaux. Special thanks to Hemant Taneja and Marcus Daniels for sharing their insights. For more bonus content, subscribe to Innovation Answered wherever you get your podcasts or check out our website, innovationleader.com/podcast. Thanks so much for listening, and we’ll see you soon. 

[SPONSOR MESSAGE]

Special thanks to Highline Beta for sponsoring this episode. Whether you’re launching a startup or leading a large company, we can all agree that innovation is hard. How do you identify emerging markets? How do you know what people want? And how do you bring new products to life? Today, more than ever, ambitious companies must innovate quickly, experiment, and build a portfolio of new ventures in order to stay ahead.

The team at Highline Beta has decades of experience helping to create innovation systems within corporations. They leverage their venture capital lens to unlock new business growth areas and investable opportunities and support internal innovation teams by providing the structure and support needed to build balanced venture portfolios.

Highline Beta helps corporate innovators find and validate new ideas and markets quickly in order to build the next big business in their industry. The team has also designed and executed award-winning corporate-startup collaboration programs such as the AB InBev 100+ Accelerator and helped others such as RBC Ventures build their operating model to help innovation thrive across the company.

Whether you’re looking to build new businesses in-house, spin-out new startups, or partner with startups through a corporate accelerator, we can help. Visit highlinebeta.com for more information.