A successful innovation or corporate venture capital unit needs a range of conditions for success.
It obviously needs a healthy dose of capital, and commitment from the board and executive committee — but what else?
Heriberto Diarte, CEO of SE Ventures, the corporate venture fund of the French power management company Schneider Electric, can tick both obvious boxes. With €500m at his disposal, and a leadership team that agreed to his red-line demands when creating the CVC unit, the conditions would indeed appear firmly in his favour.
But money and a mandate alone aren’t always enough, Diarte told Sifted. There are a whole host of other factors, including connections with the outside world, the internal positioning of the CVC unit and hiring strategy. This is what others can take from the SE Ventures experience.
Embracing the outside
It’s really hard for large, established organisations to innovate. Although there are exceptions (Amazon, Apple), real disruption is far more likely to emerge from outside of an organisation than from within. Rightly or wrongly.
It’s why Blockbuster didn’t conceive Netflix, why Marriott didn’t build Airbnb and why Citibank didn’t launch Lending Club. As clichéd as these examples may be — and there are many more, from industry to industry — they’re overused because they’re true.
In the past, big ate small. Today, fast and innovative eats big
“You’re facing two megatrends,” says Diarte. “In the past, innovation ecosystems were primarily inventing new industries. Semiconductors, the PC, the internet, smartphones, social media. Today, they’re primarily disrupting existing and traditional industries — and that’s put us all on notice.
“Second, there’s been a paradigm shift. In the past, big ate small. Today, fast and innovative eats big. The world has far more innovation potential than the confines of your organisation, so you need to embrace the outside.”
It’s this need for externalisation which led to the creation of SE Ventures, the €500m fund of French power management company Schneider Electric (Diarte previously spoke to Sifted’s Maija Palmer about his three conditions for establishing the unit).
And it’s where, according to Diarte, the nearly 200-year old industrial firm has its antennae, its eyes and ears, and its partnerships with the outside world, all radiating from its Palo Alto, California base.
SE Ventures needed to exist on the edge of the organisation, mostly looking outside
“Our leaders knew that some of the best innovations in Schneider’s areas of interest were not going to come from its R&D unit, but from outside,” says Diarte, stressing that the firm is still very committed to its R&D agenda, spending the equivalent of ~5% of sales annually — a relatively high figure for an industrial company, he claims, and three times that of SE Ventures' total fund size.
“We needed a connection to the outside world and it needed to be sufficiently independent. At the risk of being primal, we are a species based on clans and tribes. Our instinct is to want to feel part of something and to belong and, as a result, we tend to view anything from the outside with an inherent distrust or scepticism. The same applies to companies — that’s why SE Ventures needed to exist on the edge of the organisation, mostly looking outside.”
In service of the corporation, not the servant
Sceptics might view SE Ventures as a prime example of the caricatured corporate venture capital fund, with its Silicon Valley location a far cry (literally and philosophically) from its parent company’s headquarters in the suburbs of Paris. Diarte is keen to rebut this.
“I don’t want us to be the cool kids in Silicon Valley doing all of the cool stuff, while the rest of the business is left to deal with the difficult operational stuff like cost-cutting and supply chain issues” he says.
He describes SE Ventures as “a tug boat that takes a transatlantic ship in the right direction”, and “a little hub that connects Schneider with the outside world”. But Diarte also acknowledges that the positioning of the CVC unit, while important, can take time and results to really bed-in.
I don’t want us to be the cool kids in Silicon Valley
“From the very outset, I have positioned our team as a service unit to the wider business. We are here to enable the organisation, and to give people the tools to be a more successful enterprise. Not to serve our own agendas.”
While SE Ventures operates with a clear executive mandate, it relies on influence rather than control.
Business units and regions are free to seek out and engage with startups independently, and to test new technologies. Diarte only encourages them to leverage the expertise within SE Ventures, rather than trying to ban such external connections.
“When a good idea comes along, there are a dozen companies trying to do the same thing” says Diarte. “You’ll have six in Silicon Valley, one in Boston, three in Shenzhen, one in Israel and one in Berlin.
“Only one or two of these will survive — but which? You need experts who can help you to make those judgements, and that’s part of what we can offer to our business leaders, so they increasingly bring these ideas or opportunities to us.”
Diarte admits that this can lead to difficult conversations. He has to sometimes advise a business unit not to use a technology or a startup because it is not viable, or because the CVC team know an alternative provider is stronger. And it can be hard to deal with senior executives’ pet projects and personal connections.
But over time, he hopes these difficult conversations will become less frequent, and less charged, as the advisory value of the CVC fund starts to become known.
Arms-length, but hands-on
Collaboration is something of an overused term, but in building a strong relationship between a CVC unit and the “core business”, it should be seen as more than a platitude.
While Diarte and team strive to position SE Ventures as a service unit to the wider Schneider organisation, they also stress the mutuality and two-way nature of the relationship, asking for a variety of different engagements from the core business.
I need to know if something is feasible, or if it’s against the law of physics
“When we’re conducting due diligence on a potential partner or investment, we look to draw on experts in our financial, risk and compliance teams,” he says. “Equally, when we’re looking at products or solutions that are mature enough for market, we want experts from within the business to road-test them and help determine whether the solutions are robust enough that we could use it as a customer or sell it to our customers.
Collaborating with experts from across Schneider is invaluable, says Diarte, not just in building trust and credibility across internal borders, but also in vetting potential investments, even in early-stage startups.
“We rely on Schneider engineers to vet the viability of unproven technology, and to give us a reality check. I need to know if something is feasible, or if it’s against the law of physics.”
It’s all about talent (but the key is in variety)
Statistically, innovation and venture building is typified by consistent failure, rather than breakaway success. Diarte highlights three common datapoints.
- The top 20% of investment firms capture 90% of the value
- The average VC firm loses money — more than 50% of venture funds return less than capital, and this is higher still for corporate venture capital
- The average return of a venture is 1.56x — and this includes leaders/outliers such as a16z and Sequoia, who are renowned for >5x returns
The people who can do this won’t typically have the profile of a company-person
“The odds are overwhelmingly against you,” says Diarte. “So ultimately this becomes a question of talent. You need the right people with the right skills to populate your investment team — people who can make judgments about emerging technology and new partners. And the people who can do this won’t typically have the profile of a company-person.”
It would be a mistake, however, to assume that an innovation or CVC unit should be filled exclusively with outsiders. Not only would this increase the already heightened risk of a culture clash with the core business, it would also risk losing the benefit of internal talent.
Diarte’s team at SE Ventures are structured in three groups, and the profile of each is quite different.
- Incubation team: a mix of Schneider insiders and outsiders, typically younger with a more external viewpoint, who are trained in a proprietary design thinking approach to building startups.
- Partnership team: almost exclusively Schneider “lifers” — highly-experienced professionals, well-known in the organisation, who have run lines of business, countries or €1bn+ P&Ls. They have gravitas and credibility within the business when it comes to introducing new technologies or new partners — “people listen to them because they’re cut from the same cloth”.
- Investment team: all outsiders who are either serial entrepreneurs with experience launching multiple businesses, or professional investors with 10+ years’ experience across a portfolio of investments. These people possess the judgement to know what good looks like, as well as a network of startups and others VCs.
Breaking the stigma of corporate VC malaise
Attracting outside talent to what might be seen as “legacy” or staid businesses is no mean feat. One aspect of the answer to attracting high-calibre, experienced entrepreneurs and investment professionals lies in compensation.
“You have to attract talent and that means you need to remunerate competitively,” says Diarte. “We fought hard to be able to offer a compelling package which includes carried interest — the ability to take a share of the profits from the funds invested. That’s the only way to get to the top talent which other VC firms are offering."
But that’s not the whole picture.
Independence is another significant factor in convincing talent to join an organisation like Schneider. “People want to know that their expertise and judgement will count, that they won’t just be doing the bidding of business units or validating their pet projects.”
People want to know that they won’t just be validating pet projects
Done right, Diarte says, corporate venture capital can be a dominant force. After all, venture capital got its start as corporate activity pioneered by organisations like DuPont and 3M. Diarte argues that corporate venture capital has a genuine and compelling edge over VC firms led by financial engineers alone.
“Every investor is going to tell the entrepreneur, 'I’m a value-added investor, I’m going to help you, I’m going to bring you more than money',” says Diarte. “Most of the time this is BS. If you’re lucky, you’ll get a very clever person on your board who’ll give you good advice as a CEO. We bring much more than that.
“We bring money, but we bring smart money, because we have domain expertise. We really know our markets and the technologies where we’re investing — and this can be used to great value for our portfolio companies at every stage of their development.”
- At early-stage or proof of concept: “We can help determine if this is a real business problem which people will pay money for, or just an engineer’s dream with no practical application.”
- In solution development: “We can mobilise the resources of Schneider, from its engineering to commercial teams, to help test the viability of solutions at low risk.”
- As customers: “Not only can we be a first customer, we can also be a channel to market and validation engine, opening doors to our own partners and customers.”
Corporate venture capital doesn’t have to be a story of underperformance or lagging freestanding Silicon Valley rivals. “We’re now attracting the inbound attention of startups and entrepreneurs with real potential — and we’re able to attract the right talent who want to work with them.”
TL;DR? Key takeaways…
- Most of the best innovations are likely to emerge from outside of your organisation — so you need antennae, eyes and ears and partnerships with the outside world
- Make sure the CVC or innovation is seen as the service unit to the wider corporation
- Use the core business to help evaluate the startups — your corporate business units have deep expertise you can tap.
- You’ll most likely need to bring talent in from the outside — but don’t flood your CVC with new blood alone, there’s value to be found internally as well
- Pay your corporate VC staff the same way VCs pay theirs. It is the only way to keep top talent.