Powerlist Q&A – Heriberto Diarte, Schneider Electric Ventures

Emmanuel Lagarrigue, chief innovation officer of France-based energy management and automation technology producer Schneider Electric (SE), said: “We look to partner with companies – entrepreneurs bring disruptive ideas and agility and we bring deep customer knowledge, resources, and channels to test and scale ideas.”

The firm launched a dedicated corporate venture capital (CVC) programme, Schneider Electric Ventures (SE Ventures), in November 2018, led by Heri Diarte, head of open innovation and ventures.

Diarte said at the time of the launch: “The investments we have made and the companies we have incubated so far are central to Schneider Electric’s vision for the future.

“These innovative technologies and services we are investing in will make a huge contribution to creating a world that is more connected, greener, efficient and sustainable.”

1. Any highlights from the past year?

We hired two new general partners, Grant Allen and Varun Jain, and new investments in Natel Energy, Titan Advanced Energy Solutions and Volta, for example.

2. What are the plans for the year ahead?

Continue our strategy of finding disruptive companies helping to build the new electric world.

3. Could you mention some milestones achieved at your unit so far?

Only started in late 2018, but now have 18 direct investments and participate in six global funds. We have successfully built an incubations and partnership practice that builds new companies and partners companies with our lines of businesses.

4. Please mention some pain points and opportunities you have encountered in corporate venturing.

Getting a Fortune 500 corporate VC unit off the ground is not for the faint of heart, especially if your goal is, like ours was, to structure it properly, have carry and other incentives to attract the right people, and be a nimble unit able to get into attractive investments.

In the case of SE Ventures, a new €500m venture fund backed by Schneider Electric, our LP has previous history with venture capital. Aster Capital was set up in 2010 as a multi-LP fund and, before SE Ventures even existed, Aster was Schneider Electric’s primary bridge to the startup world.  But the company wanted more and in 2017 took the first steps to create a new platform that was different along three primary dimensions:

(1) Schneider Electric would be the sole LP, with the fund functioning much like GV or Sapphire Ventures, (2) we would have a more defined investment mandate that, from a strategic perspective, was more aligned with Schneider Electric’s longer-term areas of interest, and (3) a relatively independent investment team of seasoned VCs would be complemented by a band of insiders in the form of a Partnerships team that would be a tight link back to Schneider and ensure we could deliver on the true promise of CVC, which is to be a revenue force multiplier for the company’s with whom we partner. And in order to be this force multiplier, you have to have some inside agents who know the company well and are willing to roll up their sleeves.

Of course, as with any large CVC group trying to achieve liftoff with this level of autonomy and aligned VC incentives, we faced some pushback. The big areas we had to focus time on to get the corporate parent on board were:

• Convincing Schneider to permit investors without intimate knowledge of the company to directly allocate capital;
• Convincing Schneider that these individuals would also have a high level of autonomy and decision-making authority;
• Convincing Schneider HR that we would have to offer market-rate, venture capital salaries and a carry structure in order to attract and retain these individuals. You always get questions around not only the relatively high base salaries but the admittedly unlikely case where an investment goes so well that the investors could make outsized bonuses in a given year given the carry they have in place.

Thankfully, the opportunities in getting SE Ventures off the ground were enormous. We are lucky to have a CEO who was very excited to move ahead with a nimble, sizeable, and strategically aligned CVC unit and a Chief Innovation Officer (CIO) who was not only actively engaged with the details down to driving pipeline, but a positive evangelist inside of the parent company. Without strong advocates like this, we would have found the process of getting SE Ventures to the place it is today much more difficult.

5. What do you think all CVCs could do better to make it a stronger industry? 

Show that we are savvy with deal-making, and not be willing to pay insane valuations Show that you can help drive value for portfolio companies.

6. How did you leverage your previous experience (at SE Ventures and elsewhere, professionally and academically) when devising the CVC unit?

Schneider Electric was looking for a very specific profile, someone who had managed a significant P&L and been a senior manager at large companies, and would understand and have credibility within the group, but also have been an entrepreneur, preferably more than once, and thus had been in the trenches starting and managing a startup, knowing what it takes, and speaking the language of entrepreneurs. This person would also need to understand and speak the language of the large company and have some investment experience. This combination of professional traits ended being very useful for setting up SE Ventures in the right way, because we are, after all, something of a scrappy startup inside of a large company focused on engaging with scrappy startups outside the company.  You have to navigate it all.

Firstly, my knowledge of the investment world helped me design a structure and incentives that would work. Secondly my understanding of how large companies operate provided me with the language to explain to the group the plan and a very different set-up than what they were used to and the skills to navigate the lengthy and complicated political decision-making process, and the patience to keep at it. The entrepreneurial experience helped us set-up the standards and methodology of our incubation practice to be successful. The understanding of both the corporate world and the start-up environment was helpful in getting some early traction and wins on making partnerships between Schneider and the start-ups actually work. And finally, my contacts in the investment world were instrumental in bringing deal flow and in helping me find my partners.

The two senior partners I ultimately hired to work alongside me came from other CVCs and also spoke both the internal and external languages. Varun Jain came to SEV from Qualcomm Ventures and Grant Allen from ABB Technology Ventures, respectively, and they bring with them over 18 years of venture investment experience and 5 years of running their funds (Grant as head of ATV and Varun as head of QCV’s Early Stage Fund). Qualcomm in particular has been in this business for 20 years and has demonstrated how you can drive stellar financial returns while also achieving outsized strategic impact on the parent company. To date, it’s one of the most financially successful CVCs and that pattern recognition is something Varun, having worked under both Nagraj Kashyap and Quinn Li, brings to SE Ventures.

Everyone on the investment team, including Kevin Deneen who was formerly at Aster Capital, brings a unique set of skills and experiences, including varied but complementary domain expertise, and we feel we are well situated to assess any investment opportunities, ranging from AI-enabled robotics to zinc-bromine batteries.

7. How did you identify talent when staffing your group? Did you hire internally from SE Ventures or externally? Did you look for previous VC/CVC or other types of investing experience?

Within SE Ventures we have 3 practices: (1) Incubation, (2) Investments and (3) Partnerships. The first practice is about scouting for ideas, talent and creating incubation projects and new companies. We’ve worked with external parties like Mach49, Greentown Labs, Microsoft, Station F, Powerhouse, and Brinc in Hong Kong to source fantastic entrepreneurs and get these companies off the ground. The second practice, Investments, is self-explanatory: we inject equity into great startups that can become even greater companies with the addition of Schneider’s brand, channel, and so forth. And the third practice is equivalent to Next47’s Catalyst function where we have Schneider investors

In terms of staffing the three groups, the requirements were diverse.

For the investment professionals, I wanted to have external VCs who have exceptional financial track records and a deep understanding of the areas relevant to Schneider, such as industrial technology, IoT, and energy. The team needed to be diverse in both thought and background, and also have a strong belief that investing time engaging with a corporate parent and leveraging that parent to advantage their investments is a net positive and a critical competitive advantage.

For the Partnerships team, we wanted to who have an intimate knowledge of Schneider, deep Rolodexes, credibility within the company and who can act as strong bridges back to the mothership.  These people had to be open-minded, willing to challenge the status quo, move fast, and be willing to shake things up in their own way.

The Incubations team has to be a mix of both skillsets. Today, we have it staffed mostly with professionals from within Schneider.

8. What advice do you have for newer CVC peers as they interact with their corporate parents and startups?

Our advice on interacting with the corporate parent is to set expectations from the outset, put your cards on the table, and not to be afraid of fighting with the corporate machine.  The best pearls come from a certain amount of friction, and innovation is never frictionless.

We are also clear to avoid what we refer to as the Five Deadly Sins of CVC:

1. Lacking long-term commitment
   These are the invariably short-lived CVC groups that do not understand the J curve and the length to find success. They come to the value with 50 or 100 million, start executing on investments and maybe even find some gems, but their corporate backers can’t stomach the high failure rate, want to see returns in years 2, 3 or even 4 (knowing the typical venture investment deal takes much longer to see liquidity) and thus grinds activity to a halt. Once you stop investing, the games already up.
2. Not hiring the right people.
   Some groups rush to hire bright insiders (we all know that super sharp BU CTO who loves talking with startups) or ex-consultants or ex-bankers who do not know venture and who usually lack the venture network, the ability to add value to the startups they work with and/or the venture pattern recognition to help them avoid the dogs (and spot diamonds in the rough). They are bound to fail. We feel the best performers are ex-entrepreneurs and professional/experienced VC investors with great networks, a variety of experiences and grit and hustle to source and execute on the best companies. Even if the company believes they should hire professional investors, good ones are not cheap and often companies baulk at what they have to pay.
3. Not creating the proper incentive system, completely aligned with the goals of the CVC. Best LT Incentive is to give carry or a pseudo-carry incentive that lets investors participate in some of the upside of their portfolio. Sadly, many CVCs, even ones getting off the ground today, link performance to corporate benchmarks such as NPS or EBITDA margin.
4. Putting in place bad governance or, similarly, thinking you shouldn’t expend the time and effort to properly codify processes, thinking it will help you when it fact it just sets misaligned expectations and will come back to bite you. Our advice is work hard in the early days to manage the independence, distance and collaboration properly. Have those tough conversations at the beginning and document everything, ensuring everyone is on board with the procedures. A common pitfall in CVC is an overabundance of corporate ‘pet projects’, and this often stems from inadequate ‘air gapping’ from the parent (i.e. not enough independence). At the other extreme, leaving the CVC completely independent and alone is a missed opportunity and as those groups go off-piste, they lose the ability to actualize the corporate machine, thus becoming impotent in their ability to deliver the very value the startups came seeking from them. The corporate can add value bringing deal flow, help in the due diligence (technical & commercial) of prospect companies, and most importantly building win-win partnerships with the startups like becoming a reseller, that can add more value to a start-up than any amount of money any VC can invest.
5. Corporates fail to embrace the innovation that the CVC can put on the table. This is perhaps the toughest challenge of all, but the most mortal of sins because if the corporate wakes up and decides it isn’t getting adequate strategic value from its innovation arm, or if the economy starts to slow, the CVC group can quickly be put out to pasture. One of the reasons we see many CVC groups having a shelf life of 4-6 years – the approximate time of one CEO turn – is that they optimize around short-term objectives, which are more strategic in nature, at the expense of really game-changing longer-term plays. They get fall prey to myopic, incremental thinking that can often plague large corporations and then not only do they impair their ability to achieve the strategic goals of the group such as opening up the aperture of the company to the next billion-dollar business but they sub-optimize their financial outcomes. And then, when the CFO starts to scrutinize the group’s performance and it doesn’t pass muster of even average venture returns, they shut the group down.  So you need, from day one, to be dead set on delivering solid financial performance, even if you are concurrently messaging internally that your raison d’etre is purely strategic acceleration and innovation enhancement.

For interaction with the startups themselves, the advice is even simpler: be transparent, never ask for special rights (ie ROFRs or other things a VC would never ask for), and move as fast as you possibly can. Be a startup-first advocate, and let your CEOs know that. In the board room, where most VCs are neutral and some net detractors, frankly, strive to add value as you play sherpa helping the company navigate the big company you represent.  Because, at the end of the day you will win a seat at the table with the best companies because you provide the differentiating ‘edge’ of the corporate you represent, so you need to be an active, sometimes pushy advocate for that startup inside the mothership.  Thankfully, at SEV, we have a dedicated team to drive those discussions and projects, maximizing the leverage we can deliver for our startup partners.

9. As an industry, how do we debunk the “dumb money” myth? How can CVC arms survive when facing headwinds?

Easy. To dispel the myth of dumb money, you need to show you’re savvy with dealmaking and are not willing to pay insane valuations, and once you’re in you need to show you can drive value, something many VCs cannot. The more CVCs looking and investing like “normal VCs” and then going beyond that and delivering on their strategic promises, we professionalize the industry overall and get away, collectively, from this ‘dumb money’ stigma which I believe is an artefact of corporates behaving sometimes badly through the early 2000s but today is a seldom held belief, especially in the industries in which operate where CVC is not only a fact of life but a critical tool to deploy to overcome long industrial sales cycles. In fact, we’re seeing more and more rounds being taken up entirely by strategic and other companies, such as Pixeom, which was just acquired at a hefty premium by Siemens, funded from the ground up entirely by CVCs. That ended up being a fantastic outcome for the CEO and at each funding, he made the conscious decision to choose value-add, strategic capital (which brings with it ready customers!) versus purely financial investors. In that, the purely financial VCs were clearly the ‘dumb money.

10. How did you set up best practices for measurements and metrics to evaluate the success of your CVC unit?

We have a clear strategic mission at SE Ventures and a set of OKRs in place but are still in the process of developing a set of specific, granular KPIs to track our progress.

At a high level, we are measuring across two broad categories: (1) financial and (2) strategic.  The financial side is easy as it is MOIC (aka TVPI) and IRR. The second, strategic side, is admittedly more nebulous.

Strategic impact depends on what your OKRs are but for most CVCs it is about accelerating and enhancing the innovation agenda of the parent company. At ABB, where Grant Allen used to lead Ventures, the group reported to the CTO and the OKRs centred on new technologies to complement ABB’s tech to make it better, safer, etc. At Schneider, the OKRs are more around opening up enormous new markets for the company, and to do this you have to test a lot of things, or as we put it: kiss a lot of frogs.

The problem with building huge new businesses, or any good business for that matter, is that it’s tough to tell during the actual building process if things are going in the right direction. But whether it’s the earlier stage incubation we get into at SEV or the traditional venture deals, we like to look at both exertion and impact.

By exertion we mean are we exerting energy and – excuse the baseball metaphor – swinging the bat enough times to hopefully get some hits. And you have to be swinging at the right pitches (the style of the opportunities) on the right fields (the sectors). Swinging at the right pitches and avoiding the crummy curveballs (say the early-stage science projects) give Schneider the appropriate strategic lens into the areas we have collectively identified as strategically important.  The key KPI here is the gross number of qualified startups in our pipeline and those that make it through our first gate screen.

And then by impact, we mean that we are translating that action into results, i.e. actually getting some hits, getting on base, and ideally scoring runs occasionally, to continue with the metaphor.  And just like Bill James in the early days of sabermetrics came up with the on-base percentage, which takes walks and hit-by-pitches into consideration, we think of prosecution of strategically relevant partnership engagements and investments as a similar progression around the bases. We measure our productivity by numbers of partnership agreements/MOUs, partnership agreements with real teeth (eg reseller agreements, embedding a startup’s technology into a Schneider offer), POCs, full-blown pilot projects, associated revenue lift, offset R&D expense, acquisitions, and so on and have effectively defined a hierarchy of startup engagement. The first step gets the ideas to the plate, a small incubation check gets them to first base and so forth, progressing them through the pipeline and with us measuring activity at each stage, increasing the rigour and assessing the strategic impact at each stage. A small number of companies round the bases, but those are truly transformative startups.

I have yet to hear of any group that doesn’t get questioned on how much strategic value it’s driving – it’s simply tough to measure – so don’t overthink it. Regardless of what system you devise, aim for simplicity, create a clear dashboard everyone can agree to and stick with it.