Are Corporates the New Cleantech Venture Capitalists?

Rumors of venture capital’s demise may be premature, says Steven Taub, senior investment director at GE Ventures.

Taking into account the rising tide of corporate venture capital, and the fact that many institutional VCs have recently taken new jobs with their corporate cousins, “there’s also been a bit of a game of musical chairs going on,” Taub said during a session on evolving funding models for energy technology during the 2013 ARPA-E Energy Innovation Summit. “So the [venture capital] pullback is real, but I think in some cases it may be a little overstated.”

The rising presence of corporate venture capital dominated much of the discussion, both in the panel in in the hallways during the summit. In 2012 there were 565 deals involving corporate venture groups, representing 15.2 percent of all venture deals, according to the latest report by the National Venture Capital Association. Those were the highest totals since 2008.

“I think the strategics are moving in,” said Christina Karapataki, whose corporate venture unit at Schlumberger, an oilfields services company, typically invests $2 million to $5 million in its first series with a new company, she said

That could mean big changes for cleantech startups and other venture investors.

“I think the corporates are only going to be getting more pronounced,” said Grant Allen, senior vice president of ABB Technology Ventures, which has completed 13 deals worth $150 million since it began investing in 2010, with initial investments ranging from $2 million to $10 million. “There’s a reason why I left an institutional venture fund and came to a place that has $5 billion in cash behind it. We can add value very, very fast.”

Corporate venture capital is especially important in the clean energy sector because of the long lag time between the research phase and commercialization, said Ben Rogers, managing partner of Broadscale Group, which he describes as working with utilities including Duke and National Grid to identify promising startups and help them bridge “this valley of death” between the lab and commercialization.

That bridge is often made of money, in volumes that only corporate venture groups can supply.

“There’s no two guys in a garage creating energy storage or energy efficiency. It’s just too difficult,” said Rogers, who is focused on finding companies developing microgrids, energy storage, Big Data analytics and system-hardening technologies. “So it takes a longer pilot process to get things up on the grid. So you need large strategics to be able to have capital for five, seven, ten years.

True to their reputation, however, the panelists agreed that their corporate venture groups tend to be more slow moving than institutional venture firms. Taub described a meeting with a hot tech firm that was looking for capital.

“They said, ‘O.K., let us know by tomorrow afternoon if you want to make an investment commitment,’” said Taub, whose unit has invested in 48 companies since 2006, with an average investment of $3 million apiece. “And so that was an easy answer. No. We can’t do that.”

The relatively slow speed of due diligence at many corporate venture firms forces startups, and other VCs, to think differently about performance milestones. More seed money may be necessary for companies that go this route, so “they understand how long it takes and maybe they can manage their monthly burn rate,” Rogers said.

Institutional venture firms and the startups they support may balk at this slowness, but the deliberative process at corporates has some advantages. First, corporates aren’t slow just to be slow. They spend time doing due diligence, testing ideas and technologies against their own in-house experts, to make sure startups have merit.

“That’s one of the reasons why people want corporate investment because people view it as conferring an endorsement,” said Taub, whose primary focus is on finding companies that bring Big Data analytics to the energy sector and other GE machinery. “We don’t give that lightly. We have tremendous technical expertise and market knowledge we can bring to bear, but it does take time.”

That vouch is particularly important in the energy business, where access to utilities—and their millions of customers—is so crucial. “It’s a first step in giving you access to channels that you would never otherwise be able to sell into,” Allen said, “because there’s too much fear that you as a fly-by-night startup might not be around in ten, twenty years when the utility needs to have you around.”

Another advantage is that unlike institutional venture firms, corporate venture units often serve as intermediaries between startups and their own large organizations. For startups, the venture unit can “give you a hunting license to go around the company and broker business” with other units, said Allen, whose primary targets now are companies developing software and control systems that generate analytics, monitor maintenance issues and improve efficiency.

Inside their own large companies, corporate venture units play two major roles, the panelists agreed. The first is to serve as “technology scout,” said Allen, keeping the company on the leading edge strategically. For example, ABB recently acquired a tech company that Allen’s venture group invested in 19 months ago.

The other internal value such units provide is simple, much-needed revenue.

“At a company the size of GE, you have to add tens of billions of dollars in revenue a year just to maintain the growth rate that the market is expecting from you,” Taub said. “And that’s pretty challenging.”

Which means that while corporates are often looking to acquire new companies, that’s not the only way that tech startups and corporate goliaths can partner.

“We’re not just talking about investing in technologies that our companies would want to own,” said Taub. “We might be investing in a company that could become a supplier, or a customer.”

Likewise, corporates depend on institutional venture firms, as well as angels and government programs including ARPA-E, for earlier financing rounds, since the members of the panel rarely get involved before Series B. The one exception is ABB, which has done some Series A fundings and plans to do significantly more, Allen said, with checks as small as $250,000.

Corporates also depend on institutional venture capital—sometimes heavily—to bring them deals. That often means going
so far as to write up terms and contracts. “We very rarely lead the deal,” Taub said. “We’re looking for VC firms to source deals.

Looking to secure funding from a corporate venture group? Here are some tips:

– Reach out early, before the startup needs corporate-sized investment. That helps the startup begin the due-diligence path, and may help integrate its technology with existing commercialized products. “My only advice is to engage in dialogue as soon as you can,” Allen said.

– Find the people who love you. “One thing for the startups to realize very quickly is who the main decision makers are,” said Karapataki of Schlumberger, where funding decisions are driven by the engineering group’s need for high-temperature materials and electronics.

– In addition to traditional VC concerns about revenue, corporates also look for ways that new investments can create in-house synergies. “We have to balance both sides of the house: strategic and financial,” Allen said.

 

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