These things surprise financial investors when they move into CVC

“It’s probably like having your first child. People will give you advice, but you never really figure that out until you do it. It doesn’t mean that one environment’s better than the other, it’s just different,” says Mario Augusto Maia, who moved into a CVC role as head of Novozymes Investments, the venture arm of biotechnology company Novozymes, in late 2018.

“You just have to embrace what’s better and absorb what’s different and try to make that work.”

Maia, who has subsequently founded advisory firm Cogent Venture Partners, where he is managing partner, says there are some common challenges in CVC investing for people coming to the profession from a financial investment or asset management background. When corporates are involved, a whole new set of considerations get thrown into the mix.

Working within a corporate structure is the main thing that takes some time to get used to. Different motivations, different time horizons and different goals make navigating the big company labyrinth a challenge. And that’s before the frequent restructurings that mix up the corporate labyrinth again, just as you’ve learned to navigate it. Maia experienced the first restructure just three weeks his tenure — and went on to see his unit come under the umbrella of four different C-level portfolios during the next four years.

Since late last year, Maia has been advising startups and investors alike – including CVCs – in the biotech space about how to overcome similar hurdles.                                

No rush to spend

One of the biggest adjustments that came with operating within a corporate is in the way budgetary issues are approached. Most business units in a corporate will find themselves in a rush at the end of the financial year to get rid of their remaining budget, lest it be deducted from the following year.

Investment arms, of course, are set up to operate differently, but if they are seen as just another division by the rest of the company, there can be an expectation they also spend in this way.

It was not the kind of capital discipline Maia had been used to. When you’re in the business of making smart, calculated decisions about which startups may become billion-dollar companies 10 years down the line, that kind of time pressure can contribute to suboptimal investment decisions and even worse portfolio management – as you’ll have spent the money because you needed to, not necessarily because you thought it was worth it.

“[Deploying capital] carries the expectation of delivering a return or creating value down the road, and also carries this reputational element on top of it, because you are deploying that externally, not internally, which perhaps makes the greatest difference between capital budgets.”

Managing stakeholders

One thing every new CVC has to contend with is getting the top executives on the same page in terms of supporting the investment unit. It is crucial to understand the different motivations, objectives and key performance indicators between the different power centres and relevant stakeholders within the corporate. The greatest lesson, according to Maia, of working in CVC is gaining this understanding early on before they become roadblocks.

Even though all CVCs talk about the strategic benefits of investing in startups, it is not always easy to convince the C-suite that the value is only financial. One of Maia’s first jobs at Novozymes was to show that the quantifiable value did not come just from selling your position in a startup.

“The main tangible value will be coming generally from partnerships and collaborations that lead us to be selling new products, to be reducing our operating costs, to be launching products faster to market, to be protecting market share. So there will be aspects that we can quantify. They’re tangible and that have an impact on the business,” he says.

In many ways, the fact that Maia’s unit ended up being shuffled across four different C-level portfolios during his time at Novozymes, was helpful. He go an insight into how different functions of the business – whether new business development, R&D, financial or operations – approached venture investing. This ended up being crucial when it came time to make the case for the CVC unit after each restructuring.

“The value proposition was the same with some tweaks in language to basically get the stakeholders to also to understand what you’re actually doing,” he says.

“It might sound obvious to us because we are working in the CVC space, but corporates have very different levels of understanding of what a corporate VC actually does and what is required for you to go out there and deploy capital, and the reputational aspect and all of those elements. So you have to be able to massage the value proposition even though the ultimate goals are the same,” Maia says.

Handling baggage

Handling the existing portfolio a company already has, especially when you’ve been tasked with mounting a purpose-built investment team from scratch, can also be tricky. When he signed on to build the CVC unit at Novozymes, Maia knew there were some legacy investments, but he didn’t know that there were nearly two dozen of them, all managed very differently.

Maia says it would be easy to think that an existing portfolio would make life easier. There’s already a starting point and it’s “just a matter of you shaping it up”. But it actually makes things harder.

“It’s a little bit like building a house. It’s easier, cheaper, and faster to build it from scratch than trying to build a house on top of another house, when the foundation of the first house has been built on sand. So rather than starting from ground zero, you’re actually starting two levels down.”

On top of having to build a new portfolio, Maia found himself in a position where he had to build what was already there back up to ground level, as ties with a number of the existing startups – who were less than happy about how the relationship had been managed up to that point – were fraught.

In a close-knit ecosystem like CVC, where news travels fast and reputations can be made or broken with equal haste, mending those relationships became a top priority in the early days of his tenure.

So what’s the best way to deal with a residual portfolio of companies that may be wary of you? The best angle, perhaps, is to start from square one and approach them as if they were new investments being made today. Do they fit the strategic goals the CVC was chasing? If not, they should be approached as purely financial investments that can be exited and recycled back into the coffers for more strategic investments.

Either way, the relationship needs time to heal. “It’s not just going be one conversation. Being straight to the point and telling them, this is how we’re going do this going forward – that helped. It was a bit of a reset across most of them, not all. But again, you have to rebuild and regain trust, and that takes time.”

The mentality around budgets, says Maia, is one reason why potentially sub-optimal investments are made by companies. The need to get rid of excess cash before the year is out is not conducive to being disciplined with your capital, and beyond that, can result in those portfolio companies being neglected, as the investment in the first place was something of an afterthought borne of budgetary necessity.  

Pick your battles

Despite the challenges, what makes corporate venturing so fascinating, says Maia, is that there is no such thing as a one-size-fits-all approach. Every strategy needs to be tailored to the specific nuances of the company.

He tells his clients – especially the ones just starting – to pick their battles, focusing on areas where their teams’ skills can have the biggest tangible impact to become valuable to the corporate. What they should also do, he says, is to objectively scrutinise the corporate strategy – and the extent to which their mentality is conducive to a venture operation – and see if it is right for you and provides the best environment to succeed.

“If you’re not [in the right place], then you will have a lot of thinking to do because you have a lot more to lose than you gain. Because if [the strategy] doesn’t work, you will be impacted and you could even become collateral damage to it.”