In this episode of Innovation Answered, we wanted to know, “What are the risks when large companies dive into the venture capital game?” To get best practices, Innovation Leader’s Kaitlin Milliken sat down with Rudina Seseri, Founder and Managing Partner of Glasswing Ventures. Amish Parashar, Co-founder of the Yamaha Motor Exploratory Fund, also shares best practices and tips for corporate venture during COVID-19.
- Read Parashar’s tips for building better corporate venture capital funds.
- Learn how Aflac grew its venture fund in one year.
- Listen to the Head of Venture Investing at Citi Ventures discuss how their team works with startups.
This episode is sponsored by Planbox, the number one ranked innovation management solution provider by Forrester. Planbox is the most flexible and comprehensive AI-powered, agile innovation management platform and service. Their team helps empower enterprise-wide continuous improvement, corporate venturing, data scouting, digital transformation, and innovation systems. Planbox can help you innovate consistently and experiment cost-effectively while managing your entire innovation pipeline and portfolio. For more information visit, planbox.com.
Amish Parashar: I like to think of a corporate venturing effort as a two-layered cake.
Rudina Seseri: The worst thing that could happen is taking something only half way through.
Kaitlin Milliken: Hey, you’re listening to Innovation Answered, the podcast for corporate innovators. I’m Kaitlin Milliken from Innovation Leader.
In this episode, we wanted to know: What are the risks when large companies get into the venture capital game?
As of 2019, more than 1,800 corporate venturing programs were active worldwide. And according to Barron’s, more than half of last year’s VC deals included corporate money. But even though big companies have money to invest, these funds differ from traditional VC endeavors.
Most venture capital funds invest in startups and emerging companies. VCs look for early-stage businesses with lots of growth potential — they’re not hunting to just double their investment, but they want the 10x and 20x returns that come with discovering a true industry disruptor. VCs know they need to find the best entrepreneurs, move fast to close deals, then help those companies hire and find customers in order to push them along the path to a successful eventual stock offering or acquisition.
Corporate venture capital is very similar. But, big companies can move more slowly. Sometimes they need to get buy-in from lots of internal stakeholders, which means missing out on some of the best deals. Corporate venture capitalists are not solely driven by the need to earn a return on their investment. Oftentimes, organizations create funds for more strategic reasons.
Maybe they’re trying to understand a new technology or business model that could impact the industry. Or find a product they might eventually distribute. Or they’re scouting for eventual acquisitions.
With all of these competing priorities, it’s easy to lose sight of the financial incentive. However, putting returns on the back burner is a mistake.
Amish Parashar: I like to think of a corporate venturing effort as a two-layered cake. And the bottom layer of the cake is things like financial returns, right? How well an investment does. The top layer of the cake tends to be things like strategic returns. And, of course, you can’t have the second layer of the cake without the first.
Kaitlin Milliken: That was Amish Parashar. Amish knows both types of venture capital. He co-founded the Yamaha Motor Exploratory Fund, a $100 million dollar venture for the car company. Today, he is a managing director of Icebreaker Ventures. This Silicon Valley VC fund fosters collaboration between big companies so they can invest jointly in the mobility sector.
According to Amish, a venture capitalist’s performance is evaluated by financial returns. Corporate investors should face the same standard.
Amish Parashar: On the financial end of things, we want companies that are growing and doing well. We want companies to be able to make payroll, but also do things like grow and expand and end up commercializing things that they intend to commercialize, so that we can have the second tier of the cake — the strategic returns, the partnership opportunities the M&A opportunities, the ability to work with the company and have that company become a part of the futures of the industries we’re looking at.
Kaitlin Milliken: I recorded that interview with Amish in San Jose, California on a sunny January day. We were outside, sipping Blue Bottle coffee — unaware of how vastly different the economy would feel just a few months later. I recently called Amish for an update. During the conversation, we discussed the state of venture capital during the COVID-19 era.
Have the way that people pursue deals or the types of companies people are interested in investing in changed at all? And has the strategy dramatically shifted in light of recent events?
Amish Parashar: I think good strategy will survive, you know, emergency situations. You know, we are seeing some short term blips, right? We’re seeing an awful lot of pitch decks related to Coronavirus testing, right? At home testing, point of care diagnostics. Those are startups that — I only mean in the best possible way — are opportunistic, because we have this global pandemic, it’s needed solutions. Governments, venture investors, private industry foundations are and should be funding those activities because it’ll help with an emergency situation right now.
We’re seeing companies that focus on workplace collaboration, right? The ability to work from home, or the ability to work remotely kind of seeing a huge uptick.
On the challenging side, right. There are a lot of activities that are very difficult to manage remotely. So it’s very, very difficult to have a decent sized restaurant full of tables that’s usually busy on a Friday or Saturday night. So we’re seeing a lot in the hospitality industry kind of going way down.
R&D sometimes requires equipment and facilities. And hard to tell your plasma physicist to go home and work from their home office.
Kaitlin Milliken: Another huge effect that Coronavirus and COVID has had is economic. And a lot of that, we’re watching it unfold. We’re not at the point where we know where the economy is going to be where this is all over, because we’re right in the middle of it right now. How has that type of economic uncertainty affected the startup world?
Amish Parashar: The startup world is affected because a lot of companies are revising their revenue forecast or immediately have seen changes in the revenue, think of companies that are doing autonomous systems or robotics that were hoping to close a customer in Q2 of this year or Q3 of this year. They’re scratching their heads and saying, is that really realistic? Can we actually get business done while my customer’s entire workforce is working remotely? That my customer’s workforce is maybe shutting down factories or pausing global operations? Government customers are worried about a very important crisis instead of worried about integrating future looking technology.
We’re seeing that the revenue forecasts are being kind of pushed out a little bit. And then also, some companies, because of a drastic immediate effect, are laying off workers. And so we’re seeing kind of immediate impacts, economic impacts of that.
On the venture side, people who have raised funds are typically in it for a 10 year time horizon. So funds that are raised are operating kind of in steady state, making sure that they have enough cash reserves in case the economic downturn is kind of longer lasting. Relatively new funds are either opportunistic and say, “Look, you know that there’s opportunities right now. Valuations will be lower as the economy’s lower. Great startups will still need cash to survive. Great startups will emerge out of this.” And so, some funds are being successful in raising new money. Others are saying, “Now’s not the time” and putting the fundraising plans on hold. So I guess we’re seeing all three scenarios on the venture side and kind of examples for each.
Kaitlin Milliken: I sort of want to pivot to the corporate innovation space. A lot of times we’ll see that when there’s any type of uncertainty businesses start to tighten the belt, and they’re looking for places to make cuts. And quite often, innovation is something that is viewed as a nice to have, instead of a need to have. What should folks who are working in corporate venture capital do to protect their funding and continue to show their value right now?
Amish Parashar: We have several recent examples, right? The dot-com bust and kind of the 2008-2009 timeframe. When there’s a time of economic downturn, the projects inside a corporation that are 95 percent the way to being in the marketplace are easy to hang on to. A little more effort, and we get it out in the market. And it’s worth doing. We’ve made a significant investment already. Let’s push it out the door. Right?
The projects that are the opposite of that, that are 5 percent funded that are aimed for several years out, that need 95% more support, conversely, are the easiest to ax. And corporate venture can fall in that second category where you say, “Look, this is nice to have, but it’s not going to solve my problem urgently.” Maybe you’re a global automaker and your factories are shut down right now, and no new cars are being made and no new cars are being sold, and you say, “Do I really need to do corporate venture at a time like this?”
I think a corporate venturing unit needs to show the data and change the narrative on timeframe. Because the problem is if you’re one of those 5 percent progress 95 still remaining to harvest the fruits of your hard work… If you fast forward just two or three years there’ll be no innovation pipeline. We know that the disruption is happening more and more externally than internally from big companies. We know that it’s multi-corporate collaboration that matters. We know it’s collaboration with startups, including corporate venturing. If you fast forward the timeline just a few years, and you can do that using the historic data, you will show that the company as a whole will have less innovation prospects in just a few years.
So it’s really important to stay the course. If you’re a 10 person team or a 15 person team, and you’re planning on adding three or four headcount, you might turn down your growth plans. You might say, “Our investment pace needs to change a little bit.” But what would be catastrophic for the parent company would be to shut down that corporate innovation activity, because they won’t be catastrophic this quarter. It’ll look fine this quarter. It’ll be catastrophic in two or three years, when you look around and say, “I don’t have the sources of innovation that I really need right now.”
Kaitlin Milliken: That helps build trust with startups — when they feel like it’s an established corporate venture fund that they’re working with, and that it won’t go away at the first sign of economic strain or contraction.
Amish Parashar: It’s a very good point, right? You’re managing your own reputation, the reputation of the parent company, the reputation of the venturing unit, and then the reputation of the startups. Not many people would want a board member or an investor that at the sign of big trouble kind of walks away from the relationship, right? It’s not what we would want in our personal lives. It’s not what we want in the business world. It’s not what a startup wants from a responsible investor or corporate strategic partner.
It is very important to the extent that you’ve already made commitments that you keep those commitments to the companies that are in the pipeline that you’re negotiating with to the extent possible, keep those going. Because it’s the time of crisis that’ll kind of help define your ethics and how you work, right? And that’s very important for the reputation of a firm.
Kaitlin Milliken: So, my final question for you involves sharing some advice. Do you have tips for folks who work in corporate venture who are trying to just make smart investments and continue to do their job well in this moment?
Amish Parashar: The entire deal flow pipeline is now happening by videoconference and remote collaboration, right? So, I would embrace the fact that you no longer have a commute, no longer have an office to go into. Many of the internal meetings that aren’t outward facing those have kind of ramped down. I would take advantage of that fact, and schedule startup meetings, and offer advice, and be honest with the startups about your status.
“Look we’re not sure how many new deals we can do this year. But I still like what you’re working on. I’d still like to find a way to help you out.” Or, “As our company deals with this crisis. When we come out the other side, we want to make sure we have a hopper full of wonderful companies that we can work with, whether it’s as investment targets or collaborations or proof of concept projects or whatever.”
So I would encourage those in corporate venturing units to continue to take meetings, be very honest about the status of funding, but also try to add value to the startups they’re interacting with. The other piece of advice would be more to the corporate parent side looking backwards. As we talked a little bit earlier, I would make the argument that during this time of crisis, when the valuations are a little bit lower and the startups are really in need, is a great time to fill the innovation pipeline. Wouldn’t it be nice in three or four years to have several strategic options for the areas we care about? And the way we do that is right now at an early stage, with with not so drastic of a dollar, or time commitment, or effort commitment, but a way to get started now, so that we are sure that on the other side of this crisis, we’re not looking around saying, “What do we have on the table?” And not finding anything.
Kaitlin Milliken: Thank you so much for taking the time out to connect again and to give an update.
Amish Parashar: Happy to check back in, and take care out there.
Kaitlin Milliken: What else can corporate venture capitalists learn from traditional VCs? To find out, we visited Rudina Seseri at GlassWing Ventures on Boston’s Newbury Street . We’ll be back with Rudina after this break.
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Kaitlin Milliken: And we’re back with Rudina Seseri. Rudina is the Founder and Managing Partner of Glasswing Ventures, a fund that invests in AI and frontier technologies. Rudina has 17 years of investing and operation experience. Previously, she was the Senior Manager of Microsoft’s corporate development group. During her time there, she led acquisitions of IT and SaaS companies. She is also an Entrepreneur-In-Residence at Harvard Business School.
Kaitlin Milliken: So you’re a part of the venture capital world. What makes that different from the CVC space?
Rudina Seseri: In venture capital, our capital typically comes from multiple providers. In our case, it’s a fully institutional fund. So it’s endowments, and foundations, and access fund of funds, and pretty sophisticated pension funds. So the diversity of providers of capital is one distinction, I would say, given that in corporate venture it’s typically one provider — the corporate owner.
Secondly, it’s also the case that our funds have a lifetime and the capital is earmarked for a typically 10 year+ period. Whereas in corporate venture, there’s a lot of diversity of models. Some of them are structured very similarly to financial VCs, if you will. Others operate off of balance sheet. There’s either a target loosely defined at times each year, or no targets. And the corporate venture arm has to go for approving, an allocation of dollars for every deal. So it’s quite varied in that regard.
Kaitlin Milliken: Some folks who have CVC programs are off the balance sheet and other folks have a dedicated fund. Can you talk about the difference and the pros and cons of both of those setups?
Rudina Seseri: The ones that have a clearly dedicated fund, they look, and feel, and operate much more like what we are familiar with in the financial venture world, in the VC world. And also I think it gives us a sense of how they will operate, which is, they have certain horizons. Because it all has ramifications for the capital that comes in the portfolio companies, and what happens in the follow on rounds, will they maintain their pro rata or not.
This is not to say, though, that corporate funds that operate off of the balance sheet don’t behave the same way. Some do, some don’t. So, it comes down very much on a case by case basis, but there are a number of groups that operate off of the balance sheet that look, and feel, and maintain a set of principles that are very similar to the VC firms that operate for financial returns.
Kaitlin Milliken: So I’m sure that each fund has different objectives and a different purpose. But can you talk about just some of the benefits and reasons why venture funds get started?
Rudina Seseri: Fundamentally it’s one of the vehicles for driving innovation within established companies. It is very, very hard to disrupt oneself, especially for a large company where oftentimes the company’s the incumbent in the space. So how do you drive a sense of urgency, a sense of a need for transformation where you’re in a leadership position? And furthermore, because you have quarterly expectations, oftentimes public companies, how do you think about those five to 10 years, and I will call them moonshots or opportunities for disruption, that you may perceive but not quite fully see coming that could disrupt your business of today? They may be insignificant startups tomorrow, they’re your fierce competitors… You might have trouble responding because you’re a public company and you need to hit that next quarter’s milestones.
So one mechanism for driving innovation in that sense is the innovation that these corporates do within their R&D departments, innovation that they do within sort of entities that are affiliated, but at arm’s length, and then a mechanism is also corporate venture. Some make bets over a number of startups with different goals.
Some goals are quite tactical, we have this roadmap. The CTO has the roadmap and we need to hit it much shorter term. Some are, I want to pie in the sky, low-likelihood of success, but if it hits it’s going to be transformative for me. And then perhaps some of them even inspired to acquire the startups down the road.
Kaitlin Milliken: Great. So I know before we hit the record button, we kind of walk through some of the challenges that corporate venture capitalists face when doing their jobs or those funds face. Can you recap some of that?
Rudina Seseri: Those challenges come from the point of view of a startup and rather than label them as challenges, I’d rather label them as considerations. So from a startups point of view and of course from a financial venture capital investor of those startups.
So, some considerations are, will the venture corporate venture arm persist over time? So, the life of a startup could be as short as a few years, but could be as long as 10-15 years. If you have investors that you know lead or co-lead or are participating in a certain round, there are full on rounds of capital, will the corporate venture funders be there? Is what they have set up now something that the leadership of that company perceives as a must have in good and bad times? Also known as in times of high growth and recessionary periods? Or is it something that where, when the financial belt starts to tighten, when there is a recession, it is one of the things that gets cut? The startup has to continue, whether it’s recessionary or not, and you need to know whether your funders will be there. So many startups will be looking for those indicators or for that indicator, that’s one piece.
The other piece is oftentimes, and for good reason, corporate venture arms will need to have an internal sponsor — whether it’s a P&L owner, the CTO, what have you — to be able to make an investment in. And that’s analogous but different from what we do in venture. In venture, we will do due-diligence and talk to a number of people in probably very similar functions. But we will talk to many people, and many companies, and then make our own decision. For corporate venture, that individual or that P&L owner or what have you, is a gatekeeper. So that means that the decision is not just constrained within the corporate venture arm and its investment committee, they need to find a sponsor internally. It’s just different. It’s a consideration that they have to have. So I’ll probably highlight those two.
Kaitlin Milliken: Great. So we talked a lot about things that people should be thinking about. I’d love to talk about the folks who are doing a good job. What makes them so successful is how long they’ve been around and that they’ve been strong throughout their existence…
Rudina Seseri: Yes, and also the fact that they really get what venture capital is about, but more importantly, they get with the startup needs or what their company that they’re investing in really needs.The reason you take strategic capital in part is because they’re making a promise about some value add that comes through their company. And for some that’s truly value add. In other instances, it becomes a burden. They really held their portfolio companies through the power through the reach of their company. So that all of a sudden becomes value additive beyond the capital provided. That’s the key, they go beyond lead service and actually provide substantive value.
Kaitlin Milliken: We always ask about metrics on this show. What should folks who are doing corporate venture be measuring?
Rudina Seseri: Well, it’s interesting, right? Because in my business, dollars in returns out, and it’s quite measurable. And I think that is and should be a metric, perhaps not the sole metric in the case of corporate ventures, but definitely a metric around return.
I think they also… It probably goes back to why are they in the corporate venture business to begin with? Is it to drive innovation? Is it some other reason? And if it is to drive innovation, is there a mechanism for measuring adoption, or is the system reacting to the external piece of what the venture arm is bringing? Difficult to quantify, but is there an example of where they invested in a company and it’s now being used broadly within the entity. Or these were the learnings… So some mechanism beyond the financial return for not just the learning piece, but the adoption piece.
Kaitlin Milliken: So you work in VC, but I’m sure you’re also meeting with folks who are doing corporate venture, how should the corporate venture people be interacting with the venture capital community?
Rudina Seseri: We’re their partners in many regards. We’re driving innovation broadly, just like they’re seeking to drive investments and innovations within their own entities, which means that we are two interested parties on market making, if you will. So, leveraging us as a mechanism to discover portfolio companies, whether it is for investment or purely to use them as vendors. And then also to leverage our learnings.
The good news about our industry in terms of financial venture capital is it’s a highly networking based industry. So they will get the time and the attention and, it’s both to help them on the learning curve. We learn from them as well about their concerns. So it’s a two way relationship. But also, I think, a fast way down the discovery of innovation.
Kaitlin Milliken: And final question, do you have any parting tips or advice that you’d like to leave with corporate innovators who are thinking about VC?
Rudina Seseri: I think just make sure that from the get go, you know what your investment horizon is, you know what the commitment to the program is, and go all in. Because the worst thing that can happen is taking something only halfway through.
Kaitlin Milliken: So venture capital isn’t all coffee meetings, industry conferences, and reviewing pitch decks. Following through, long term commitment, and nurturing investments distinguishes successful funds — in the corporate world and beyond.
You’ve been listening to Innovation Answered. This episode was written and produced by me, Kaitlin Milliken. Additional assistance was provided by our intern Molli DeRosa. Special thanks to Rudina Seseri and Amish Parashar for sharing their insights. If you enjoyed this episode, be sure to subscribe to Innovation Answered wherever you get your podcasts. You can also get access to bonus content at innovationleader.com/podcast. Looking for more tips on corporate venture capital? Our website has tips from corporate venture capitalists from Jetblue, Aflac, and BMW. Thanks for listening, and we’ll see you soon.
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