In this episode, we talk about Strategic Investors, detail what they are, their underlying realities and structures of operation, and present the case For and Against them. We also share Lessons Learnt that can be of value to you, if you are an Entrepreneur, a Financial/Institutional VC or a Strategic Investor.
- Intro (01:33)
- Section 1: Context Setting (02:44)
- Section 2: The Bad Examples (12:01)
- Seciton 3: The Good Examples (21:39)
- Section 4: Other Players Join the “Party” (36:30)
- Section 5: Lessons Learnt for Strategic Investors, Entrepreneurs and VCs (41:25)
- Conclusion (51:31)
- Bertrand Schmitt, Entrepreneur in Residence at Red River West, co-founder at App Annie, business angel, advisor to startups and VC funds, @bschmitt
- Nuno Goncalves Pedro, Investor, Managing Partner, Founder at Chamaeleon, @ngpedro
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Bertrand: Welcome to episode 28 of Tech DECIPHERED. This is a special episode on the topic of strategic investors. What are they, who are they, and are they helpful, how helpful can they be? I think it’s one of the typical questions as an entrepreneur you would have to answer when you are considering getting financing. What type of investors, should I bring on board? And typically, early on, you might look at business angels. You might look at seed fund. And at some point, you would consider working with VCs. And you will probably discover that you have different type of VCs.
On one side the sides we typically hear about in the news, in the press we are talking about more financial VCs. And on the other side of the spectrum you have what is called strategic investors, strategic VCs. Strategic sometimes for short. And we are going to talk about them. Who are they, what are they helpful for, how useful they are, how bad could they be for your business, for your startup.
Welcome, Nuno, good to be with you to discuss this topic. How are you today?
Nuno: I am well, in sunny California, so very well.
Section 1 – Context Setting (02:44)
Nuno: Maybe starting by defining what is strategic investors and where does that come from? The notion of they invest in, but they also contribute something that is more strategic. Maybe in the form of a partnership, or in the form of resources or other types of things that you put at the table. Normally, strategic investors are looked in the light, or as opposed to financial investors. So investors that are solely driven by the financial return and therefore, also solely driven by the capital that they put in.
The world has become a little bit muddy over the last decade or so. There’s now, investors that are more what I would call operating investor. So operating investors that jump into the company, and spend a significant part of their time in the company, sometimes even taking a significant part of the company, not just the classic minority in the company. But in order to simplify our discussion today, let’s stick to the financial investor side, and the strategic investor side. So a financial investor would be someone like Chameleon, Red River West other VC firms that are out there, Sequoia Capital. We are investors that invest in a company, the biggest upside we can get is really financial.
And obviously, we will produce value for the company under the form of helping the company scale, helping the company hire, helping the company get access to resources, and a variety of other things. So there is a little bit more operational minus in VC in general today, but the key objective of the whole thing is financial returns. A strategic investor, in many cases, when we talk about it, we use strategic investor as opposed to corporations, but it means the same thing in our minds. Their main value out of investing in the company is not actually just financial. In many cases, it might be more nonfinancial than financial. And that’s what it being mean, strategic in that sense.
So it’s not strategic, necessarily to the company they’re investing in, but it’s strategic to themselves as investors. They’re trying to reap benefits from investing in that company that are not just financial returns. And why would they do that? They would do that because they want to tap into a specific technology that’s being developed over time, and that they want to be one of the first users of it. They want to use it, and they want to tie it to other activities that they have within the company. So maybe to really set the stage of how do investments fit into, for example, corporations, let’s start with the broader remit of what a corporation does.
Corporations grow in two way. They grow organically, and they grow inorganically. Organically is through their own products, their own existing resources, et cetera. Inorganically, normally this fits within what we call development, which includes business development and corporate development. Corporate development, historically, is mergers and acquisitions, investments, we will come back to it in a second. And business development, on the other side, is partnerships, strategic alliances, and other formats of basically working with an industry at a very strategic level without necessarily buying anyone or investing in anyone.
In many cases, business development, corporate development are under the same person. The Chief Strategy Development Officer, in some cases, under the CEO directly but it’s a pretty vital piece of how big corporations in particular, grow. As part of that, and as they’re looking at this right mix between inorganic and organic, basically what corporations do is what assets should I allocate to each of these pools? Should I be active within M&A? Should I be buying companies out? Or merging parts of my area of production and development with other companies out there? Should I be doing joint ventures? Should I be investing in companies tapping into it?
So classically, investment fits into corporations that want to tap into earlier stage type of innovations. Not necessarily early, but earlier to where they are. And in many cases, it’s linked to R & D. It’s a way of externalizing some of their R & D, it’s a way for them to really figure out what’s out there in terms of technologies. It might be because they want to tap into that market, understand the key trends of what’s happening into that market. It might be that, they want to go into a space that might be disruptive to the space that they are in the first place. There are cases where corporations go into spaces that are totally greenfield to them, so that are totally new to them as a way of expanding their horizons and starting to explore new ways of accelerating their growth outside of their core business.
So there’s obviously a lot of reasons why a corporation would start investing. It fits within the larger realm of inorganic growth, as I mentioned before. It is normally a space where I want to tap into that space earlier in terms of innovation, but also I don’t want to necessarily own that space. And why would I want to do that? Why wouldn’t I just acquire a company? Because in many cases, if it’s very early in the development, if I’m a big corporation acquiring someone, I might just, by the virtue of the scale that I have, killed that company upon acquiring them.
I bring them on board, and then what happens to them? They’re sort of basically killed by all the processes internally, all the governance. And so I actually don’t want to buy into that company. I just want to help them, I want to invest in them, I want to basically shepherd them to a stage where they might bring some value to me. And we’ll come back to that notion of value to me, because it’s really important this helps us distinguish between good strategic investors and bad strategic investors and how they act as agents in this market. But again, that’s in a nutshell, where it fits within the realms of the company.
Bertrand: Thank you Nuno, I think that is very helpful to get a good sense, and if we keep going into where do they fit as a company, I would say typically, of course, you will see these teams as part of a bigger corpdev team, itself usually split between M&A, biz dev, alliance, partnership or direct investment. Maybe we can also talk more about how do they invest, typically. And I think there is a big difference with typical financial investors, is that some corporations can invest directly from their balance sheet. Which might mean actually that compared to a more traditional firm, they might not have a limit on their time or horizon, at least not technical limit.
Nuno: Yes and we will come back to it, on what are the motivations and incentives part. On one hand to your point if they invest from their balance sheet they are not bound by 10 year funds, and you know the recycling of capital and all of these things, but at the same time corporations have another dynamic to them, you know, CEOs do change. And sometimes more often than funds, some CEOs don’t last 10 years or more in a company. So it depends really you know under which part of the organization this seats.
Our episode today, as you guys will figure out is going to be very nuanced. There’s a lot of nuances to the discussions we’re gonna have. There isn’t a black and white answer to whether, strategic investors can create value for you or not. Already, that’s the punchline of our episode today. But there is definitely a lot of nuances on the organization you’re working with, who’s actually commanding that investment, where does it fit within the larger corporation. Is this part of the overall strategy of the company? We look at some corporate venture capital arms, we’ll talk about them later that have been around for several decades with similar structures. They’ve evolved the structure but very similar structures.
Whereas, you have certain corporations that their, structure of investing changes every three or four years, again, with the CEO. And so obviously, there’s a little bit of limitation to it. So certainly, as you were alluding to Bertrand, firstly we have companies that invest from their balance sheet. We have corporations that creates separate funds. And separate here might mean many things. They might still be linked to the big corporation or might be only funded by the original corporation. And classically, we would call those corporate venture capital arms, CVCs for short. So they have funds that they operate.
They, many cases are called something ventures like, Verizon Ventures or Comcast Ventures. So they have funds that they’re deploying, they have their own teams, they link back to the mothership into the big corporation. But there’s a little bit of independence, and there’s a little bit of focus on really creating those returns. There are, as we will discuss later, some firms and corporations that go the extra mile. And what they end up doing is they end up basically seeding new VC firms and funds. In some cases, being the only limited partner in those funds, but over time, giving some of the value to the fund managers.
And then, effectively the general partnerships, the fund managers become independent from the original funders from the original corporations. There’s also ways for people to participate in ecosystem but don’t relate to direct investment. So in some cases, for these strategic investors, it’s not all about me directly investing in the startup, but I might actually deploy capital into financial VC firms or VC firms that have direct access to the market, and be in a limited partner to them. So there’s obviously a lot of interesting pieces around that and how would you structure that for you to get value as a corporation. So just to say, there’s a panoply of setups that you can create on the investment side if you’re a large corporation or midsize corporation or corporation of any size really, in order to deploy your investment capital.
Bertrand: Thank you Nuno, I think that’s clear from that perspective.
Section 2 – The Bad Examples (12:01)
Bertrand: So to transition let’s talk about some bad and good examples of corporate VCs because, of course, as usual there’s some good and some bad.
Let’s start with the bad first and maybe one thing we won’t give names. Some of you might guess. I don’t know. But what you will probably understand from some of these “bad” corporate VCs, is that many actually are not coming from the tech industry.
And maybe I will start actually with a tweetstorm from Mark Suster from Upfront Ventures, its was a few months ago, in April last year, and it was very hard on corporate VCs. Actualy I think he concluded by “actually it’s like having a scorpion on your back” to have a corporate VC, it was how it ended. It’s pretty hard core, and his perspective is around the fact that. And he is talking about strategic quote on quote, because his perspective there is nothing strategic at least from your startup perspective, and the big issue is that they really have different incentive than a financial investor, and of course being a financial investor himself, you could argue that there is a some level of vested interest, but having been an entrepreneur myself, I must admit that I used to share by default, not in specific, by default being more careful when talking with strategic investors and considering to bring in strategic investors to the cap table.
And definitely that might be something you might conclude from our discussions, that of course not everyone is bad, and there are some really good ones to work with. But by default, you want to be careful. And let’s share a few points about why it is the case that you want to be careful.
There is really a different alignment. The financial investors, they are here for the financial success of their portfolio. So it might not just be your own company, it’s from a portfolio perspective. Here, it goes beyond that. It’s not all about the financial success of the companies invested in, it’s about the financial success of their own firm. So that means that they might care more about your product and getting access cheaper to your product, getting cheap access to the technology, position your companies to grow, but not too much, not too fast, not to get too much capital, because at some point they are very excited to acquire your company but they don’t want to pay a premium. The more capital you raised, the faster growth you have, the more they will have to pay a premium. From their perspective, it might not be interesting to end up paying a premium if they purpose to acquire the business.
I will say one thing I always kept in the back of my mind if I’m bringing a corporate VC, is that it might be sending a signal the day we consider potentially selling the business that to potential acquirers, is that what happens if my corporate VC on the board is not interested to acquire the business? They are the first in line, they know all about the corporate history, if they’re not interested to buy the business or if they’re not bidding high, it could be sending a pretty bad signal to potential acquirers that, hey, people who have first visibility in the business are actually not interested to invest. Of course, there are many things you can explain. But from my perspective, that has always been a worry.
Another piece has been… And we can talk later, but, do you have the best of the best in front of you working with you on your side? And I’m asking that because it depends on the incentive structure. But if you are a true corporate VC, you might not have the right and same incentive of a financial VC. Less carried interest in the fund, that sort of stuff. And that might not bring the best talent around on the corporate VC side. And as an entrepreneur that means that you’re not populating your board with the best of the best, but potentially from second tier investors. That’s some of the issues I’ve always considered, when thinking about corporate VCs. Nuno what has been your take?
Nuno: I would say the bad examples that I’ve seen around corporate VCs are actually normally not around Machiavellian corporate vCs, right? it’s not about people that are saying, “Oh, I’m gonna get in there and I’m gonna steal all your tech. And I’m gonna do all of that and …”Or, “I’m gonna kill them at the end because I’m the only potential acquirer.” And it does happen those situations. And I’m sure Mark has seen a few, I’ve seen a couple of as well. But it’s more than that. It’s actually normally the reason why some of these corporate venture capital arms or strategic investors are not very good or they’re bad, is because they don’t care much about you, it’s because they don’t bring much value to the table.
It’s because it’s difficult for them as well, to bring their mothership to the table and do deals with you, it’s as difficult as if you went directly sometimes. And that is actually where I see some of the bad things. So there’s a lot of operational opportunities interfacing with mothership, et cetera, that I would say are not great practices. So they say, “I’m gonna bring all the strategic value,” and then they don’t bring it. They just don’t bring because they’re sometimes not even capable of bringing it to the table. Now, I see a lot of bad examples around that.
Bertrand: I guess it might even bring negative value in some ways. At least, some of them. Because, for instance, me, what I like is to be able to move very fast. Because, sometimes the situation requires to move fast. To make a decision fast. To accept the term sheet fast. To consider a new opportunity like a strategic acquisition fast. And one thing I’ve seen typically is that the fastest are the financial investors. Strategic investors because you have internal processors and things. You are not the first of mind for the CEO of the business. It would take longer.
I’ve not seen a situation where they move faster than financial VCs. At best, they move as fast. But typically, they move much slower, and that might create really issues in deal.
Nuno: I once saw a venture capital arm that shall not be named telling me they were very proud they’d reduced their whole process of decision making, and putting a term sheet in front of a startup to 6 months.
And I didn’t dare to tell them that I can pull this off in two weeks if I need to. And if we go all hands on due diligence. But good for you. Good for you. Yeah, you are down to six months great. there’s a corollary to what you’re seeing with it’s very important.
Not just the decision making in the investment itself, it’s then once there’s exploration of the strategic aspects of that investment in the first place now you can tap into our team around AI in our headquarters or whatever, they basically send all these resources on you. And then your team is filled with resources of an investor of yours, right? And there’s no progress. It might mean nothing, sometimes nothing happens. And that’s even worse, right? It’s ’cause you’ve wasted time from your team. Everyone spent a bunch of time, you’re not getting those revenues anyway. Nothing’s gonna happen out of it, and you’ve just wasted it.
I would say the worst examples that I’ve seen in terms of behavior of corporate venture capital arms, corporations investing from their balance sheet strategics in general, are actually related to very poor governance or to rotation in leadership. It’s when the CEOs there said, “We’re gonna absolutely make this work, this corporate venture capital arm.” And two years later, they’re out. And the new guy coming in is like, “What, is this venture thing we have? Can we kill it?” And all of a sudden, you’ve invested in 10 companies, and you’re without a mother, right? The startup is like, what happened, right? Where are my partners, right?
And that happens all the time. And that’s super negative, because they’ve may have taken some co-lead positions in some companies. They may be pushing some hardcore programs at that point in time. And so even, it’s even the worst of all scenarios. Maybe there was progress in the first instance, and then there’s nothing else after. And that happens all the time, because companies go through their own cycles. And it’s very rare for a company to be under the same CEO, again, for the same period of time that you run a fund for 10 years or so, so there’s definitely an element to that, that brings a lot of bad habits.
And I’ve seen, I will not name names, but I’ve seen at least a couple of CVC firms that have gone through, three, four refreshes. They change their partnership, again, they have a different angle how to create strategic value. And at some point in time, people are in the market like, “I don’t believe these guys anymore. I don’t want these guys on my cap table.” Because they’re gonna go through the same thing in two years and it’s just a pain in the neck, you can get you know, easier money somewhere else with less strings attached and don’t need to go through all of this.
Bertrand: You know we talked about reaction time when it’s time for a term sheet for instance, the reality is that you can judge people based on that. Don’t expect investors to move faster than when it’s time to give you a term sheet to have the opportunity to invest in your business. Everything will get slower from that in some ways. That’s a good test to see how good they are internally.
But that doesn’t change the fact that yes, in two years a team might disappear, might change that business has in new strategy. And you’re left in some ways, not really hanging the bag, but you have someone in your table that might not be providing value at all and that will become an issue for you in term of running the business, growing the business which is the most important. And, maybe a corolary to that is, some investors we talk about them like being tourist investors. And I think that in some ways, some of these corporate VCs have been really representing the worst of the tourist investors. Because, as you said, they might have a strategy for a few years, and then after a few years, they disappear.
And typically it’s because of, as you say, potentially a CEO change or simply change in the market. If you’re dealing with financial investors, very different story. They’re there, good weather, bad weather, they have to keep investing. They’re absolutely trying to do well so that they can raise the next fund. Their focus is only on one thing. it’s to grow their portfolio companies and get good returns.
Section 3 – The Good Examples (21:39)
Nuno: And I have worked in setting up at least five corporate venture capitals in my life. Worked with a variety of corporations around their investments, corporate development pieces … I’ve had corporate LPs to my funds. And so you know, like everything in life, not everything’s bad. So not all not all investors are bad, not all corporations are bad. There’s gradients within that. So maybe moving the conversation a little bit to the positive side. And that’s the side that normally doesn’t get as much attention. The guys who did well, the corporations who figured it out in some way or another.
And here, I think we can go by and maybe talk a couple of names out. In some ways one of the granddaddies, Bank of America corporate venture capital arm, which is sort of migrated into Scale Venture Partners, probably one of the most active enterprise software investors out there in mid-stage who’s Series B, Series C, huge amount of great successes. I don’t know actually the history, the genesis of the history on how it turned from this corporate venture capital arm into an actual arm’s length play. But I’m sure there’s a great story in there that at some point we will get to know. SAP, which obviously started with SAP and then SAP Ventures, and now is known as Sapphire.
And still, until very recently, were running mostly with a single LP, which was SAP, which is incredible. Their general partnership is independent. They make their own decisions. They have their own incentives, they make their own money. And if you go and talk to someone, again, on the enterprise software space, maybe classic VC to growth stage, highly respected player in that market. A player that stands when they come in.
Bertrand: Yes, they definitely have great reputation. If you are in SaaS – Software As a Service – business they have a great repetition. And especially on the enterprise side of things.
Nuno: And definitely one of those great examples of although they sort of split, because a lot of people by now could say because they have split away, right? they are no longer part of the corporation they sort of are. The one LP they had for most of their fund is still only one.
And the way I’ve got to know the team, and the CEO and founder of the Sapphire entity. They are very operationnaly minded, and they try and tap into SAP for value, and they try and bring their portfolio companies in some ways they do treat them as clients. Their portfolio companies to the table, and generate synergies for them through SAP and through other people that they know in the ecosystem is pretty severe.
So I think there is actual value add. There is actual value add in many of the things that they do. They’re certainly one of the guys that are ranked the most out there.
In sort of the splitting personality, they started somewhere and then they went somewhere else. We have I think they’re now called Headline. I want to be very respectful of that. They used to be called e.ventures, and before that they were BV Capital. They were Bertelsmann, one of Bertelsmann’s funds. I know Bertelsmann still has some funds themselves. Bertelsmann has been always relatively aggressive around creating different firms and different funds and letting some of them go off to their lives.
I have a special part of my heart for BV Capital. I actually share a board seat with Headline, with the e.ventures, in one of the companies that I’m in. But I have a special place in their heart because BV Capital still credited but one of the few, or one of the early companies or VC firms that started using data in the web world to figure out outbound lists and to figure out which startups were interesting and reaching out to them, et cetera. So there’s still a very special place in my heart being such a quant in tech augmented guy for them.
Bertrand: Sorry to jump on this. Yeah, I totally agree with you. I have lot of respect for the teams at eVentures. And you know they have different teams. They have European teams, US teams and they have Asian operation as well. And I’ve been very impressed. I worked with them in the past, and they had invested in my business, App Annie, and they have been very supportive investors. So as you say very data minded investors who understand data. Very technical very impressive. And yes, there were some roots with Bertelsmann originally.
Nuno: Bertelsmann still has other vehicles I believe, they have an Asian vehicle still, that might be linked to them, at least has their name on it. They’ve always experimented quite a bit.
One of the big guys in the space, like if you’re talking about corporate investment is Google, and Google does everything under the sun, as I call it, so they have obviously, GV, which used to be Google Ventures, which is now more focused on classic ventures of series A and beyond. They have Google capital for growth and late stage. They have gradient for AI-linked projects for very early stage. I think they still invest out of their balance sheet as well, or I don’t know if it’s alphabet, I’m not sure which one it would come under now.
So it’s one of those cases where it’s everything under the sun, and we will just invest. And it’s magical to me how they make it work. I’ve had a couple of experiences in particular with GV and with Gradient and they’ve all been very positive, extremely good people. Really trying to tap into Google’s value and engineering prowess and resources. Being very thoughtful and strategic on how they bring that value to companies. I think they’re actually a relatively good example. Nobody’s perfect, but they probably bring more value than most other corporations out there.
Bertrand: Yes, they definitely have great reputations on the market.
Nuno: In the tech side, Intel Capital.
Bertrand: I guess it is a bit tough for Intel Capital, because I think they have made significant changes in their venture capital arm, depending on as you talked about, CEO change. I remember 20 years ago, 15 years ago, it used to be a very valuable sign to have Intel, specially if you are in the semi-conductor industry
if you’re in the semiconductor industry. But, that’s definitely one of the case where they could definitely acquire your company if they are in the same space, so if they don’t, it’s sending a specific signal to the market. But I guess yes, there has been too many change of strategy at Intel in the past 10 years.
Too many change of CEO and typically, that’s one thing when you get the investment from the market leader in the industry. But, I feel Intel has lost some of this shiny star proposition that they used to have. And now without being too aggressive, it’s more of the underdog in the industry, at least, if you compare to TSMC, to an Apple, to a Samsung. It’s not the same shiny, and everyone knows they are restructuring the corporation. And they have big challenges in front of them.
Nuno: They were the grand-daddy, I mean they were one of the first big.corporate venture capital arms, ramped properly, professionals, heavy investors, veru much trying to do some market making as well. Maybe to your points, maybe of the last decade, things have changed. And that change is also linked to the mothership change as well, in terms of relevance which we’ve discussed in other episodes. Certainly still respect them, certainly in the areas that are core to them. If they come in and look at something, and if it’s exciting, I’ll definitely take it at a second look ’cause they do seem to know their stuff. But at at the same time, agree with you, maybe time to restructure a bit. But they were the granddaddy, they were sort of for a long time the case study of a good corporate venture capital arm
Bertrand: guess nothing forever. so if we go to another one, maybe going to Asia with Tencent. Tencent has been amazingly successful successful in term of venture investment, and they have not just invested in venture stage companies, they took shares in some much bigger firms all over gaming. Maybe not typical. They do early stage, but they also do very very late stage firms that are either public or shounld have been public.
They have made amazing investments. They were in JD, I believe, they were in lot of very successful businesses. Some case In areas they knew very well like gaming. But they did a lot outside gaming. Especially eCommerce and FinTech.
Nuno: For me Tencent is a great example of a great I know some people there, so I am not fully neutral and I have a lot of respect for them. But more than that the resources they put at the table for their portfolio companies in terms of knowledge. Even as much as growth hacking, right? We have a bunch of experts as you can imagine, imagine, do you want to talk to them, right?
So that level of involvement is amazing. But it’s even more than that. For me, it’s a great case study of what I would call an holistic corporate development strategy, and I know some of the guys will live that there. And I have a lot of respect for them as well.
It’s not just investing, sometimes it’s acquiring, sometimes it’s partnering. And they’re very good about it, so in some ways, we rarely hear these stories over though they screwed me, right? They deflated my value, they bought me for nothing, and now it’s going through the roof. We don’t hear that often, when it regards to them. So clearly they’re doing something right because they’re so large that we would have heard of it
Bertrand: Yes, that’s true
Nuno: So it’s like they do something well. They understand the lifecycle of companies, as you said, they invest at very different stages from very early to very late.
They sometimes take you know, majority positions on companies and leave them by themselves to running themselves, which is amazing.
Sometimes they just took ownership
Exactly. And they’re good at that. So it’s for me it’s maybe the best example of everyone that we’ve mentioned to now that I think because of that is very good at holistically managing you know, their full lifecycle of corporate development. Very good at doing it.
Bertrand: But here we might run into a situation where it’s not their decision but, they’re challenging how the Chinese government sees overseas investment from their own companies, from tech companies. That might force them to change and adjust their strategy over time.
Bertrand: And you as entrepreneur have to take that into account.
Nuno: And maybe just finalize with a shoutout and maybe my parochial interest, the shoutout to the guys at DTCP, which were known at Deutsche Telekom Capital Partners, but they are really of an independant play, obviously wit ha lot of dealings with Deutsche Telekom and T-Mobile.
Used to be called T Ventures, they went through their own cycles. I would say they have had some more successfull cycles recently, maybe some less successful cycles if we go back in history. And a lot of respect for the team there and for what they do. Very thoughtful about their investments, very thoughtful about the value that they can bring to the table, but also very thoughtful about the limitations they have. So really interesting guys.
And then a final guys, just out of parochial interest, I’ve had some significant corporate LPs in my own funds. So again, they’re investing in me as a venture capitalist. And, I’ve had some good and bad innings. But honestly, I would qualify that as very positive. And if I had to take away something from it, is in these relationships, from the beginning, we were always very explicit about what was win-win. What were the things that none of the parties really wanted to give away or deal breakers. What we expected over the long run. And I think I was lucky, in particular, with two of my most significant corporate LPs over the years, to have corporate LPs that were led by the same person for a long time.
So very stable leadership, almost like founder / CEO type place at scale. And that allows you to know, okay, that person is gonna be there tomorrow, and then the day after, and then in one year, in two years, and three years, obviously, at some point, they might not be, which is always complex. But that gives you that stability of saying, “Okay, we are agreeing to something and we know what’s the path to get there.” And they’re more or less aligned with our cycles. They’re thinking through 5, 10-year cycles in their strategy, not just the next three years or the next quarter, which is even more. Again not everything is rosy, not everything is perfect. There has been my share of complications as well along the way.
But I would say it’s mostly been very positive. And it’s because of that explicit discussion interfacing. In some ways, I would say, and I’ll come back to this later, we venture capital firms, sometimes street, the financial venture capital firms, the institutional venture capital firms, sometimes street LPs is just cash [laughs]. And we should also think through what is fundamentally valuable to them. They want something out of the system, not just cash. How do we fit into it? So for example, things that we’re very aggressive about going through is how can we share deal flow with our LPs or corporate LPs in a way that is clean, right? That obviously, we’re not bringing any confidence with other startups that come to us. But at the same time is value add to both startups and to those LPs.
It’s a basic thing, but it’s if you think through it, again, back to my corporate development analogy in terms of lifecycle, the interest that these guys have in being an investment VC firm is not just to invest in the companies. They want to see deal flow, they want to see companies that maybe we as a VC firm are not interested in but they might be interested in. And so how did they get access to that? Basic things, what sort of capability building do you do with them? How do you educate them? How do you basically work with them?
There’s a lot of opportunities in my mind, not just for corporations to be better LPs, but also for VCs to treat corporations better as LPs. And I think that’s sort of a two-way street. It’s really a tango, right? How do you make that work? So again, just to leave that shout out, I know it’s very parochial, but some of my LPs, I’m very proud to have worked with them for many years and look forward to working with some of them for many more to come.
Bertrand: Makes totally sense as a VC you have very different type of investors from family office to instutitionals, some big companies who as you say want to really have actually either a look about what’s happening on the market or thanks to their investment in the VC firm the opportunity to invest at a later stage alongside theses VCs funds where they are LPs a direct stake in that investment, and what better ways to that in a “safe way” if not by investing first trough a fund you’re investing in, and then later directly.
Moving on to other type of corporate VCs I think there’s a special category in some ways for what you could call conglomerates, and quite often they might be family owned. And I guess there is some good, there’s some bad with that. I think one interesting example has been SoftBank Vision Fund. Vision Fund One, Vision Fund Two now. So technically, SoftBank is also a telco but we’re thinking more from, yes, that conglomerate side. As we know they had a lot of external LPs for Vision Fund One, mostly from Middle East. Vision Fund Two, I believe has been structured pretty differently with lot of investment from SoftBank itself.
There has been some very bad stories. I think more recently some better stories. Of course, WeWork has been a symbol of excess and pushing too hard a company to take too much capital. But, they have not been the only one. There have been many situations where SoftBank put too much money too early pushing companies in some very tough situation. Burning through capital and not able to run without so much capital, which early on might be a real problem.
And, actually you could argue they might have invented the concept of capital as a moat. And I’m not sure it was a good concept. Because it’s not clear it’s really working capital as a moat. Especially in a world where capital is cheap. And they had early on I remember that reputation that if you don’t take their deal they’re going to put their money in your competitor. It was not a great approach to business, to I would say it’s a small world, the world of capital investment in early stage. And we know that some tier one investors have actually asked some of the portfolio companies to pledge, more or less officially not to ever take money from them . Which is really not a great situation, and pretty extreme. But, I guess some VCs felt they got burned seeing companies burned through the ground because of too much investment. And if, on the headline you saw in the press, the investments were a great valuation, everything, what the people were not discussing were the terms, were actually very tough. And so it had ultimately a big impact.
But on the positive side, it’s clear that they have done some great investment.
Section 4 – Other Players Join the “Party” (36:30)
Nuno: Yes, and you know, maybe this is a good segue to talk broadly about other types of strategic investors that we see emerging in the market place and maybe let’s talk a little bit more about very large family offices and sovereign wealth funds, I mean very large family office like Investor AB from the Wallenberg family, sovereign wealth funds like Mubadalah for Abu Dahbi, UAE.
BPI for France, PIF for Saudi Arabia, Casana from Malaysia, and a bunch of others, GIC / Temasek for Singapore, depending on the side of the fence that you sit on in terms of capital.
So there’s a lot of really involvement about it, the first question that many of you might ask is, what is strategic about them? They seem just like a fund of funds and financial investor, is there anything strategic about them? There can be and there can be, is because of what? Because some of these funds are so significant, so large, even you know, when I was talking about Investor AB at the beginning, that they own corporations. They’re not just investors, they’re not just financial investors, they own corporations. And because they own corporations, that gives them the ability to connect you with those corporations at scale.
So think of it as a multifaceted, portfolio where there’s a lot of assets being managed, but even on just equities, it might be that they have ownership of very large companies, and then they have investments in smaller companies. And because they have in their portfolio, they can make those connections certainly work. Now, does it work all the time? No. Does it create all the time? Rarely. It might be in some cases that you find the right sort of conduit to those vehicles, that you might find the right person or people or team that will give you the right access to those other companies that are part of their portfolio, and are actually owned by them, that will give you that value.
So again, I would say some of them are trying to play that strategic angle more aggressively instead of just capital. I think it’s formally correct that they do.
The jury’s still out on how much value is being created or not. But certainly, there’s a lot of potential for that value. If you own the largest asset for that country, which in some cases sovereign wealth funds do, it would be good if you introduced me to them, because maybe I can do business with them or I can partner with them.
So again, there’s definitely a route there that I believe is being more and more explored. Still early days, judge is still out or jury’s still out rather. We’re in a market that has jury rather than judge. And at the end of the day, I feel this is sort of a little bit of the future of sovereign wealth funds as well. How do they really position themselves in terms of value add and strategic
Bertrand: Yes and these one that I know a bit better as French man, BPI, Banque Publique d’Investissement, BPI France, and CDC, Caisse des Depots et Consignations are really 2 of the big sovereign French funds.
When we talk about big, I was looking at the revenues, and wow, talking about really big. Trillion plus in term of revenues combined. I mean it’s huge. I can tell you one thing, is that, 80% of all VC firms in France have investment from BPI, from BPI France. Most of the biggest French corporations have direct investments, sometimes control from either BPI or CDC. It’s really big.
And so they can open a lot of doors. And what they do either they invest through other funds. Or sometimes they also have direct investment programs, even for start ups, so they can go really early. They don’t just do equity, they do loans. So it’s really a key part of the ecosystem and I think you have similar situation in lot of countries. It’s very different in the US have, you have pension funds, you have all of this. It’s not the same in France. It’s not developed in the same way. And it’s probably true in similar ways in most of Europe.
Nuno: It is true, and again to be clear, because these significant ownerships of very large in some of these players, again you need to figure out if there is access.
If the people that you’re dealing with will get you the access you need. Again, if you’re an entrepreneur, if you’re taking money from these organizations. Or if you’re a VC firm and taking money from these organizations, you need to understand, do I get access to those corporations? Do I get access to those pools of capital? Do I get access to those products, to those organizations? It might be that you don’t, right.
And so in some ways, it’s always baffled me a little bit. I’ve also participated in the creation of the venture arm for one sovereign wealth fund in particular. And I’ve been, on the sidelines of several others. But for me, it’s always baffling how very little focus there is on that notion of interfacing in portfolio, just portfolio services, portfolio management, portfolio connectivity within the sovereign wealth funds themselves, ’cause that’s a ton of value that is there to be untapped, if you just found ways of at least tapping into these companies and connecting them to your portfolio companies on the earlier stage, private equity or venture capital side, you would untap a ton of value overall. And it’s not like you don’t have a lot of assets under management, right? We know, a lot of the guys we’ve been talking about have hundreds of billions, if not more assets under management. So some have trillion as well under management. So it’s that type of thing that I feel is something we definitely need to think through.
Section 5 – Lessons Learnt for Strategic Investors, Entrepreneurs, and VCs (41:25)
Bertrand: What about some lessons learnt Nuno?
I think that, maybe a few points. First how should you work with strategic investors, and I guess it starts with the beginning, trying to understand why are they investing, why are they interested to invest?
What could it bring.
And try to validate that as much as you can. You can talk with some of their portfolio companies, and actually you should. I strongly advise every entrepreneur getting financing, to check existing portfolio companies, to get a sense of the plus or minus of working with such firm. Not just corporate VCs.
And it’s key to get that sense. Even if you always have to keep in the back of your mind that whatever they tell you might be the truth, but tomorrow might change pretty dramatically and quickly. Which is typically different from a financial investor.
Nuno: That is true and again to your point Bertrand, be very clear about what are your motivations? What is your strategy? How does this align with your strategy? Why are you investing specifically in us? What value do you think you can bring to the table beyond just capital? What are your expectations of investing in us? What success looks like of investing in us? How will you work with us in terms of process? How we’ll really operationalize this relationship? If there is some strategic value to it, what is the 100-day plan of us working together once you’ve put the capital in? What’s the first year objectives for this?
So start talking in language that they also understand, KPIs and what needs to be done and all of that, and just be very clear on what you expect from them. And in the same way, also be very clear on what you can bring to the table, that you have resource limitations, you still may be scaling, that you’ll have tollgating through that process. For example, if it’s like a one year project with that company, we’ll create tollgates along the way to see if we’re coming to that right direction and see if we’re basically scaling it to the right side.
Very interesting thing that happened with me, I’m an independent board member of a company. And, there was some discussions with a very large automotive supplier about coming into the company, which, given the focus of the company, didn’t seem like an obvious link. And then we’re discussing, are you guys going to be an investor in this round? Are you going to be a co-investor and all that stuff? And in the end, we came to a really good conclusion, I think, for everyone involved, which is they became investors in the company. They created a joint venture into company for the automotive vertical, which didn’t really fit into the core business of the company.
And, they took a board observer seat in the company and to be honest, it’s been a pleasure to work with these guys on our board. Actually, I think I can say their name ’cause they’ve been so great. And it’s French, Bertrand, FORECIA. They’ve been great in their involvement in this company. Very thoughtful, very focused on making the joint venture work, but also willing to put capital at the table even for the mothership for the startup itself.
And that all started from this discussion where the entrepreneur was like what are you guys gonna do for us? What can we do together? And it became very clear that what they could do together was actually not your classic arrangement of you just put capital in us and we’ll interface. There need to be more skin in the game and that’s the joint venture formed out of it.
Bertrand: to your point we of generalities, are a few top players in that space, from Artemis the holding of the Kering group to others like LVMH that are pretty big in the industry and can really help you accelerate. You know how to work with them and I think that could be, depending on your industry, a critical part of the game or not.
And you need to run your diligence about a specific firm at a specific point in time, how can they help you accelerate. And in some cases they can really help you accelerate. Another example we did not talk about it’s the pharma industry. If you think about it, in the biotech world, there’s lot of situation where, as a smaller company you cannot reach the end customer.
You cannot manufacture at the scale needle if your product is successful. It’s very typical to have strategic investors in your capital that are going to help you manufacture as well as distribute your product at scale. And that might actually be in some industries like near mandatory piece of the puzzle for you to be successful as a business.
Nuno: And we talked little bit about the entrepreneur side of the table, but if you are a strategic investor, how do you think through these topics?
One is to have clarity of strategy and alignment. And the emphasis here is on alignment. Having a strategy on a piece of paper, and having people say yeah we are all aligned on that is great, but a strategy is you know basically a set of actions that leads to sustainable advantage, right? So that’s what a strategy is. A strategy has actions. Integrated set of actions, that leads to sustainable advantage.
And so define those actions and create alignment. I’ve seen a lot of organizations where there’s seemingly alignment, but then the first time you start going through it, it’s like everyone around the table is like, “Yeah, I told you so,” right. What do you mean, I told you so, right? Why are we not going all in the same direction? Why are we not pulling in the same direction? So the question of alignment is a very complex thing to do at scale, within the senior ranks, in particular. Certainly the senior ranks are involved in your investment activities. But it’s very essential.
Secondly, the creation of interfaces. A governance system in some ways that allows you to make sure that there is value being brought to the organization, but at the same time, allowing for speed, which is, as we discussed before, not something you normally attribute to corporate investments or corporate venture capital arms. So how do you create that speed? What sort of governance mechanisms do you have to also create value? Being very thoughtful about how that works, and the devils in the detail. Who are the people in the boxes? Who is doing that? Who is doing the interface back to headquarters?
Who is the person responsible for making sure that there is business development with the business units that we need to do it with, once we started investing in that portfolio companies? All of that, the devils in the detail. The third thing I would say is do what you’re good at. Many corporations think they’re good at something but they’re actually good at something else. And just figuring that out early on, and sometimes asking companies that you started working with VC firms that you might have been an LP to, et cetera. It’s like defining with them and having these interviews, almost like user interviews, as you would do in a startup, what do we create value on? What are we good at? And what can we potentiate that really works for you.
And if that’s a very small sliver of what you thought your value add stack look like, so be it. Focus on that, be really good at that because everyone will value that. The piece around sustainability, timing, staying in the market, relationship building, not disappearing is very important. Again, you’re, in some cases, competing or working alongside financial investors that are in the market for very long periods of time. They’re running 10-year funds, and so they know each other, they’ve been around for a while. The classic thing is this outpost in Silicon Valley where some corporate venture capital arms and some person for a term of three years, and then that person rotates.
That doesn’t scale, so do you have local team? Do you have people that are there for over three years? How do you create these relationships institutionally? How are you present in the market? To your point earlier, Bertrand, are you a tourist or not.
Governance, pretty essential. Investment committee, who makes the decisions? How autonomous is the investment committee to make the decisions? Who is on the investment committee? What rights do they have? I’ll give you a stupid example. But if you create an investment committee where the day-to-day people have no votes, that’s almost for sure gonna be a bad investment committee.
If you create an investment committee where there’s someone there that’s not involved in the day-to-day that has a veto right, unlikely that investment committee is gonna work as well, right? Because you’re gonna have this chairman-like person or chairwoman-like person in your investment committee that will have final call on something and just veto stuff because they can, and they’re not involved in the day-to-day, they’re not involved in the due diligence process. They’re not involved in any discussions with the founders. That does not work. And entrepreneurs, at a certain point in time, and companies that are talking to you will realize that. They’ll understand there’s broken parts of your system.
And then they’ll be like if this is for an investment, where they’re still trying to get in, what will happen in the future if we need more capital, if there’s difficult decisions to be made, et cetera?
Talent, bringing in talent, the right talent to these organizations be it off balance sheet or be it of corporate venture capital arm is very difficult. How do you compete? Creating the right incentive. Are you giving carried interest to your team? I think the answer should be always yes. In what form are you giving them carried interest then becomes another problem.
Are you giving them great salaries but not carried interest? That might be a problem as well the other way around. It’s then these people just have a job. They’re not really incentivized by upside. The way they look at risk is very different.
How is that team led, right? Who’s leading that team? Is it someone that has experience in doing investments or not? So again, we’re almost giving you a laundry list of things you need to think through. There’s a lot more to talk about. But honestly, the point is the devil’s definitely in the detail. The nuances create tremendous value. The right person in the right position, like the person, for example, leading this new corporate venture capital arm, that can create a ton of value or just destroy a ton of value. And so being very cautious and thoughtful about these things is of the essence. Running the right processes being very clear and transparent on what good looks like and what bad looks like.
Working with your partners, be those partners other VC firms that you co-invest with or that you’re an LP with, with portfolio companies being clear with them is very important. Last but not the least, something I’ve been talking about for years, there needs to be a fundamental shift on how strategic investors, in particular corporations, work with their investees with their VC firms as well.
The mindset shift needs to be from what can you do for us, shifting it to what can we do for you?
If you change that mindset to a service mindset, we as a large corporation, what can we bring to the table that facilitates our portfolio companies or the VC firms that were involved in? Then that becomes interesting. That service mentality is something that is essential because only that will really untap value.
Bertrand: Yes that’s a great summary of how strategic investors should think in term of building a corporate VC arm, and I think that hopefully most are listening to this because there’s a lot of value to think carefully this through. And, it’s key for your reputation as a firm, because if your venture capital arm, is not up to the task that’s a pretty big issue.
I think we’re at the end of this episode. And I hope it was useful for you, our listeners, to learn more about what are strategic investors, who are they, how they work. How to work with them. And hopefully that will limit some mistakes and create opportunities for both parties.
Thank you Nuno.