There are two schools of thought when it comes to corporate venturing. Some believe that the investment arm should be as independent as possible, while others argue that the venture arm should work very closely with the business units.
Giancarlo Savini, investments and partnerships director at Honeywell Ventures’ new vehicle for investing in sustainability startups, tends to follow predominantly the second school.
“Moving your CVC operations outside the corporation is like trying to be Superman without the S,” he says.
Honeywell has taken the relationship between corporate and portfolio company one step further over the last few months. Savini says that in the sustainability field, Honeywell PMT (the business unit focusing on performance, materials and technologies) prefers to invest in startups if partnerships can be created with the parent company. Yes, it can be complicated to pull off, admits Savini. But he is convinced the strategy will pay off.
Moving your CVC operations outside the corporation is like trying to be Superman without the S
Other companies have focused on knitting venture investments tightly to their parent businesses through commercial tie-ups with portfolio companies, though not as strictly as Honeywell. ABN Amro Ventures, for example, takes great pains to make sure the bank is actually using the products of the companies it invests in. Maersk has recently shifted to focus more explicitly on building links between investments and the parent company.
Savini is a 14-year veteran of corporate venturing, including three years at Shell Ventures, and says he is tired of seeing corporate investments come to nothing.
“I have seen a lot of overpromising by corporate VCs. They are often attracted by big names but there is no real match between the startups they invest in and the business,” he says.
People ask themselves why the corporate isn’t doing business with the company despite the investment
In the best-case scenario, the investment ends up being just a random financial bet for the company. In the worst case scenario it can send a negative signal about the startup.
“People ask themselves why the corporate isn’t doing business with the company despite the investment,” says Savini.
Slow and steady wins the race
This is a relatively new stance for Honeywell, tested out in the last two deals the ventures team has done, including an investment into a startup creating sustainable aviation fuel. Honeywell not only established a solid partnership to upscale the technology but was also instrumental in connecting the startup to large airlines such as United Airlines — which recently flew its first flight using 100% sustainable aviation fuel. The deal was framed before the investment was finalized.
Setting up the partnership can be difficult, says Savini, despite the fact that the strategy has the support of Honeywell’s senior executives. The venture investment itself is usually the easy part.
“The investment term sheet is very standard, with some 14-15 terms. The difficult part is the partnership,” he says. The Honeywell Ventures team has worked hard to streamline it for the benefit of founders and business units.
You have such high multiples in sustainability deals that spending a month or two making sure you can justify [them] is time well spent
“We took the typical contract Honeywell signs with large corporates and reduced it from 56 pages down to 20. We tried to get it to 15! But we were trying to make sure that startups could use them easily.”
Nevertheless, it can mean that a deal takes a few months to set up, bringing in the relevant departments at Honeywell. But here Salvini is happy to be a contrarian among investors — better to take time to establish the right partnership than to focus on speed..
“There is a lot of hype in the VC space about signing term sheets in a few days, but my point of view is that right now you have such high multiples in sustainability ventures —that spending a month or maybe two making sure the right partnership is established (with right future revenues streams) could have substantial implications in the company future valuation.”
Sustainability is a key focus for the Honeywell team right now, like it is for many corporate venture arms. It is not just that there is pressure to move to more planet-friendly technologies. The high valuations of many sustainability startups — many of them trade at a 50x multiple — make them difficult for stock market listed companies (which generally trade on lower multiples) to buy outright.
Up to now, the Honeywell portfolio has skewed towards software and IT companies, like FogHorn and even CQC, the quantum computing software company that Honeywell recently combined with its own quantum computing business.
Some 80% of the companies they speak to are sought out by the team, with only 20% coming from inbound pitches
Now Savini’s team is looking for investments in four main focus areas: energy storage software, plastics recycling, green hydrogen and biofuels.
The team takes an active approach to finding investment targets. Some 80% of the companies they speak to are actively sought out by the team, with only 20% coming from inbound pitches.
An investment will typically be between $1m-15m. Honeywell invests at either the very early seed stage, or else at Series B when a company typically already has some $1-2m in annual revenues.
They avoid the middle ground because Savini says it can be challenging for a big corporation to help at that stage.
The overall investment fund is open-ended. Honeywell originally set up a $100m fund in 2017, but now that this has been allocated it has switched to a less defined funding format.