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Spins on Corporate Venture Capital

Slides from my talk on corporate venture capital and spin-outs in Will Porteous' VC Seminar at Columbia Business School on April 13, 2015.

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@NYUEntrepreneur
Spins on Corporate
Venture Capital
Frank Rimalovski
Executive Director, NYU Entrepreneurial Institute
Managing Director, NYU Innovation Venture Fund
Adjunct Professor, NYU Polytechnic School of Engineering
@rimalovski
April 13, 2015
@NYUEntrepreneur
Agenda
u  Corporate venture capital
o  Motivations & models
o  Challenges & consequences
u  Corporate Spinouts
o  Challenges
o  Lucent’s New Ventures Groups
o  New Venture Partners
u  Universities
o  NYU Innovation Venture Fund
o  Similarities & differences
@NYUEntrepreneur
Corporate Venture Capital 101
Motivations
u  Strategic *
o  Provide a window on new
technology (85%)
o  Support/leverage existing
businesses (69%)
o  Provide window on new
markets (58%)
o  Develop new products
(56%)
o  Seek new directions (55%)
u  Financial
o  ROI
Models
u  Direct
o  In-house venture teams
o  Separate CVC groups/
funds
u  Indirect
o  Invest as LP in externally
managed funds
u  Incubators with or
without venture funds
o  Spin-in
o  Spin-out
* Source: Corporate Venture Capital Study, NIST/MIT 2007
@NYUEntrepreneur
Corporate Venture Capital 201
Challenges *
u  Lack of well defined/
shifting missions
u  Insufficient corporate
commitment
u  Inadequate
compensation
schemes
* Source: Gompers & Lerner, The Venture Capital Cycle
Consequences
u  Conflicting agendas
with VCs/
entrepreneurs
u  Slow decision making
u  Shallow pockets
u  Short lived funds
u  Attracts ‘B’ players
u  Not welcome by some
VCs/entrepreneurs
@NYUEntrepreneur
Corporate Spin-outs
@NYUEntrepreneur
The Search for Innovation…
“The search for innovation needs
to be organizationally separate
and outside of the ongoing
managerial business. Innovative
organizations realize that one
cannot simultaneously create the
new and take care of what one
already has...”
~ Peter Drucker, 1974

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Spins on Corporate Venture Capital

  • 1. @NYUEntrepreneur Spins on Corporate Venture Capital Frank Rimalovski Executive Director, NYU Entrepreneurial Institute Managing Director, NYU Innovation Venture Fund Adjunct Professor, NYU Polytechnic School of Engineering @rimalovski April 13, 2015
  • 2. @NYUEntrepreneur Agenda u  Corporate venture capital o  Motivations & models o  Challenges & consequences u  Corporate Spinouts o  Challenges o  Lucent’s New Ventures Groups o  New Venture Partners u  Universities o  NYU Innovation Venture Fund o  Similarities & differences
  • 3. @NYUEntrepreneur Corporate Venture Capital 101 Motivations u  Strategic * o  Provide a window on new technology (85%) o  Support/leverage existing businesses (69%) o  Provide window on new markets (58%) o  Develop new products (56%) o  Seek new directions (55%) u  Financial o  ROI Models u  Direct o  In-house venture teams o  Separate CVC groups/ funds u  Indirect o  Invest as LP in externally managed funds u  Incubators with or without venture funds o  Spin-in o  Spin-out * Source: Corporate Venture Capital Study, NIST/MIT 2007
  • 4. @NYUEntrepreneur Corporate Venture Capital 201 Challenges * u  Lack of well defined/ shifting missions u  Insufficient corporate commitment u  Inadequate compensation schemes * Source: Gompers & Lerner, The Venture Capital Cycle Consequences u  Conflicting agendas with VCs/ entrepreneurs u  Slow decision making u  Shallow pockets u  Short lived funds u  Attracts ‘B’ players u  Not welcome by some VCs/entrepreneurs
  • 6. @NYUEntrepreneur The Search for Innovation… “The search for innovation needs to be organizationally separate and outside of the ongoing managerial business. Innovative organizations realize that one cannot simultaneously create the new and take care of what one already has...” ~ Peter Drucker, 1974
  • 7. @NYUEntrepreneur Intrapreneurship challenges u  R&D not always well linked to markets u  Lack of true entrepreneurs u  Underestimating time & funding required u  Overestimating corporate synergies u  Lacked “credible threat” of discontinued funding u  Different biz models make it hard to support u  Different metrics lead to poor decision making u  Ignores portfolio theory u  Different decision making/funding timelines u  Risk tolerance/acceptance of failure
  • 8. @NYUEntrepreneur Intrapreneurship challenges “The interests of a corporation and the venture capitalists are seldom, if ever, aligned.” ~ Jonathan Schwartz CEO, Sun Microsystems 8
  • 9. @NYUEntrepreneur 1996: Lucent forms New Ventures Group 1876   1947   1954   1958   1962   1969   1999  
  • 10. @NYUEntrepreneur 1996: Lucent forms New Ventures Group u  To commercialize “discontinuous” innovations u  For strategic innovations that can be developed faster in a venture model u  Mission o  Leverage Bell Labs technology to create new ventures to innovations to market quickly o  Create more entrepreneurial environment that nurtures & rewards speed, teamwork and prudent risk-taking o  Realize value by selling ventures to Lucent BUs or external investors and/or corporations 1876   1947   1954   1958   1962   1969   1999  
  • 11. @NYUEntrepreneur NVG Experience u  Challenges o  Finding the right people to join a startup (inside/out) o  “Spotlight effect” o  Ebbs & flows of macro & micro economic factors o  Contributing to quarterly & annual targets o  Lacked “credible threat” of discontinued funding (early on) u  Critical success factors o  Executive sponsorship with “use it or lose it” POV o  Strong supply/deal flow with lots of pent up supply initially o  Good timing = strong demand / ease of syndication o  Aligned comp incentives: people do what they’re paid to o  Syndication led to more entrepreneurial behavior, risk sharing, etc.
  • 12. @NYUEntrepreneur 2001: New Venture Partners formed © New Venture Partners
  • 13. @NYUEntrepreneur 2001: New Venture Partners formed u  Raised fund to buy out portfolio in 2001 u  Operating as independent VC fund since Dec 2001 u  Focused on commercialization of corporate innovations through creation & funding of spin-out ventures u  Identified, founded & funded +35 corporate spin-outs u  4 offices & 12 investment professionals in US & Europe u  Experience spans materials & components, to software &services across IT, comms & cleantech u  Cumulative capital under management of $800M+; closed last $300M fund in April 2006 © New Venture Partners
  • 14. @NYUEntrepreneur NVP: Strategy and Focus •  Transform corporate R&D into valuable assets through venture spin-out creation •  Formal & informal partnerships o  2 cornerstones o  Many non-exclusives •  Three types of deals o  Early-stage disruptive technologies o  Non-strategic commercially-ready products & services o  Commercially-ready “incubands” •  Provide capital & services in return for equity in new ventures—a value-added investor, not a consultant Business  maturity   Product  maturity   ?   © New Venture Partners
  • 15. @NYUEntrepreneur NVP: Why do Corps do Spin-outs? u  Strategic o  Corporate BUs become a customer or partner o  New channels to markets for tech corporate BUs can’t or won’t do o  Preserves option to re-acquire or re-invest later with diminished risk u  Technological o  Brings culture of entrepreneurship to labs, attract young researchers o  Increases clock speed of innovation o  Elicits market feedback to shape project direction o  Relieves researcher frustration u  Financial o  Creates financial gains through equity ownership o  Accesses high risk capital funding otherwise not available o  Complements, does not compete with, a licensing program © New Venture Partners
  • 16. @NYUEntrepreneur How NVP Does it Opportunity   Iden=fica=on   Market   Qualifica=on   Transi=on   Venture   Value   Realiza=on   Form  new   company   New Venture Partners’ Role Traditional VC Role Go/No  Go   Go/No  Go   Corporate Decision NVP Decision Exis=ng  product  line   © New Venture Partners
  • 21. @NYUEntrepreneur NYU Innovation Venture Fund u  Philanthropic seed fund u  Evergreen: NYU sole “LP” u  Active diligence u  Help build smart syndicates u  $100-200k direct investments u  Converts, Series Seed & A u  Board observer seats u  Opportunistic follow-ons 21 I V F
  • 24. @NYUEntrepreneur By the Numbers 24 Investments 10 Sectors Info Tech: 7* Life Sci/Health: 4* NYU Founders (School) CAS: 2 Medicine: 6 Eng: 1 Stern: 5 Dentistry: 2 Law: 1 Courant: 1 NYU Founders (Type) Students: 8 Faculty: 8 Researcher: 2 IT Investments Hardware: 2 Software: 5 Invested Capital Invested: $1,125,000 Value: $1,289,309 Female Cofounders 40% Total Capital Raised $20,490,000 (>18x)  
  • 25. @NYUEntrepreneur Why this investment model? u  Participate in larger rounds to achieve meaningful milestones & value inflection u  Invest as part of a larger syndicate o  Leverage diligence, expertise & connections o  Follow-on financial support o  Co-investors to serve on boards u  Other sources exist in/outside NYU to fill pre-VC needs 25
  • 26. @NYUEntrepreneur Critical Role of the Fund u  Return on investment u  Demonstrates University commitment & importance of entrepreneurship u  Raises NYU's profile amongst peer institutions & government agencies u  Credibility & bridge building with NYC investor community u  A catalyst for entrepreneurship within NYU 26
  • 27. @NYUEntrepreneur Money not 1st item in critical path 27
  • 28. @NYUEntrepreneur Universities & Corporates Similarities u  Often based on research u  Publishing & recognition driven u  Gov’t & corporate grant funding u  Need to evangelize entrepreneurship u  Personnel not always suitable for a startup u  A lot of handholding Differences u  Limited development u  Not measured on IP creation u  Less access to commercial validation u  Less aware of IP & commercialization pathways u  No secondment u  College is a lot more fun!