When Heriberto Diarte joined Schneider Electric three years ago he came with a list of demands. Diarte was being brought in to set up a corporate venture fund for the French power management company, and he wanted to make sure it was done right. He had seen too many CVC venture funds set up the wrong way — set up to fail right from the start — and he didn’t want to fall into the same trap.
These were his red lines:
1. The venture fund had to have the freedom to invest as it wanted to.
“In investing, you have to be able to be counterintuitive, not follow corporate strategy or someone’s pet project,” says Diarte.
Everything that makes you a great CFO makes you a terrible investor.
CVC funds are often derided as the lumbering “dumb money” — the only way to shed that image and get in on the good deals, is to have the ability to act fast. Diarte banned anyone from Schneider’s C-suite from being on the executive committee — particularly the company’s chief financial officer.
“I told him that everything that makes him a great CFO makes him a terrible investor,” says Diarte, who is known for his straight-talking style.
2. He had to have the ability to hire the right people.
“There are only two ways you can be a good investor,” says Diarte. “Either you have been a VC doing this for ten years, or you have been a serial entrepreneur. Anyone else will crash the plane.” It is not a job that someone from the corporate strategy unit can learn to do on the side.
Diarte wanted to hire big names from the industry and offer the right incentives. In other words, carry. Diarte ended up poaching Varun Jain from Qualcomm Ventures and Grant Allen from ABB Technology Ventures, bringing some fairly big hitters to the team.
3. The company needed to take a long-term view on the CVC unit.
Diarte wanted Schneider Electric to commit $500m for 12 years. “I told them that for the first 6 years I would only give them bad news. The value of a $100m investment would go down to $65m because the tech didn’t work, or because the company got outcompeted,” says Diarte. “Then in the 7th year there might start to be good results.”
Diarte did not want to run the risk that the venture fund would be shut down at the first sign of poor returns. He quotes Vinod Khosla, the cofounder of Sun Microsystems, who maintains that if you aren’t losing all your money 80% of the time, you are not taking enough risks. Diarte, in fact, promises slightly less risk — he expects to be losing money 50-75% of the time.
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Schneider Electric takes the risk
Schneider Electric, which was eager to be seen as a leader in digital transformation, agreed to all the conditions. The multinational company had previously been struggling to find a corporate innovation strategy that worked. It had invested in Aster Capital as one of multiple LPs for several years with mixed results. The success of the investment funds of rival industrial companies like Siemens and ABB were also sharpening Schneider Electric’s appetite to have its own fund. There was a growing acceptance, in 2017, that this might mean putting up with the rock-star attitudes of venture fund managers.
Diarte had a relatively rare background, too. He was a serial entrepreneur with 7 companies under his belt (he had started the first one when he was still a teenager) but had also spent 20 years in industry at companies like Alstom and Cemex, so he understood how big corporates worked. He had a reputation for being unorthodox, but effective.
Inside corporates I was considered a cowboy, a bull in a china shop.
As he puts it himself: “Inside corporates I was considered a cowboy, a bull in a china shop. But I achieved great results — I moved sales up by tens of percentage points. So I got support. I was allowed to be an entrepreneur inside the company.”
Diarte had to take a pay cut to come to Schneider Electric, but was seduced by the idea of being able to make a difference to a big company. He got his $500m fund even if the C-suite did still struggle to understand the extreme risks of venture investment.
I will lose all the money most of the time.
“After a year, the CFO came to me and said: ‘I get it, I understand you are going to lose all your money sometimes’,” says Diarte. “I told him: ‘No, you still don’t get it. I will lose all the money MOST of the time.’”
To be fair, while $500m is pretty big for a corporate venture fund, its pocket change for Schneider Electric. The company had revenues of $27.2bn in 2019. It invests $1.5bn in R&D every year, three times the amount allocated to the corporate venture fund. So it can afford to take a few risks.
How it works
While SE Ventures operates independently in its investment decisions, it still tries to serve the needs of Schneider Electric.
“The first criterion for an investment is whether it would fit with SE in 2030 as a supplier, partner or customer. If it doesn’t won’t, we look at it,” says Diarte. “Then we have to decide if it is a good company.
Some of the investments have seen a long stretch away from the Schneider Electric business. For example Diarte invested in a battery management company — Titan Advanced Energy Solutions — aimed mainly at mobile phone and EV batteries, and the company wondered why they were buying into a very early-stage startup so far away from the core business. Schneider Electric thinks about battery storage at the grid level, not individual mobile phones.
A CVC fund's job is to identify opportunities before they become obvious.
But part of a good corporate venture fund’s job is to identify opportunities that are still several years out, before they become obvious. Diarte was adamant that the consumer battery optimisation technology could be scaled up to many other applications. Now that there is a big push to invest in green energy in Europe, Schneider Electric’s investment in a once-obscure gigafactory-builder Verkor is starting to look smarter.
In addition to making investment in companies, the 22-person SE Ventures also incubates small companies, and has a partnership practice, which connects Schneider Electric business units with startups that might be useful to them.
It has, for example, a partnership with (and an investment in) Claroty, a New York-based cyber security provider for factories. Schneider might have been able to create its own business in this area, but it would have cost at least $150m and taken 3-5 years. Instead, they partnered with Claroty at a fraction of the cost, and are enjoying a revenue share from the 200+ factories the software has been installed in.
We have brought companies inside the company too early and killed them.
Occasionally venture investments can turn into full-blown acquisitions. But Diarte is very cautious about not acquiring portfolio companies too early.
“We have brought companies inside the company too early and killed them,” he explains. “Schneider Electric is an efficiency machine. It is in the DNA to optimise everything. But that approach just doesn’t work with startups,” says Diarte. Startups are anything but efficient. As they test things out they require overinvestment, they fail, projects are scrapped.
The right moment to acquire a startup is when it has become a stable business. “It needs to have an ebitda that is higher than the host unit we are thinking of putting it into. And it needs to be in a stable mode, where there is a formula for how to do things and you just need to execute on that,” he says.
What SE Ventures invests in
The portfolio includes a lot of power management software, and factory-focused tech, from AutoGrid, the power network balancing AI, to Poka, a Slack-style communications platform for factory workers.
Investment priorities going forward include solar energy and battery power.
“The price of solar is coming down to the point of parity with the grid in most geographies. Batteries have developed to the point that you can have them in your house and pair them up with solar, using the grid only as a backup,” Diarte says.
Industry 5.0 will be about sustainability and creating a circular economy.
In addition, electric vehicles are being adopted fast, and by 2025 we are likely to be at a tipping point when most new cars sold are electric. Investments in EV charging companies like Volta and QMarit are preparing for that.
Diarte is also looking ahead to Industry 5.0. Industry 4.0 was all about efficiency — digitising factories to make running them as smooth and profitable as possible. In contract, Industry 5.0 will be about sustainability and creating a circular economy.
Long-term, Diarte is still waiting to see a really good proposition for grid energy storage. A lot of what has been proposed so far, flywheels, gravity, storing heat in molten salt or down mines — just doesn’t seem to work well enough.
Another long term interest is the holy grail of the energy industry: cold fusion. That’s not something Diarte says he can invest in yet, but there are a growing number of cold fusion-related proposals crossing his desk these days, so things may be progressing.