Nicolas Sauvage: Welcome to the Corporate Venturing Insider series! Where I interview top practitioners in the CVC world and learn with you the best practices and golden nuggets that they have accumulated over their career. In this episode we will be learning from Gary Dushnitsky, from the London Business School. Gary could you take a few minutes to share your story and how you got to where you are today?
Gary Dushnitsky: Good. So this is a great question and it made me reflect back on my childhood. I have a confession. It's between you, me, and maybe our viewers. And that is that I was a geek as a child 11 year old, I would sit at home and write machine code and assembly code. I would write all kind of programs and softwares and I would enjoy it a great deal. I would write software to write software and So on, so forth. And fast forward, I found myself in New York in the late nineties during the height of the.com bubble. This was a really exciting time. There's lots of money um, in going around lots of exciting innovation. There were all these venture capitalists, but equally it was a very important moment for Corporate VCs. There were an influx of Corporate VCs going on there. And I was thinking about how can these corporate investors help geeks such as myself maybe have a better go-to market strategy or better one, maybe align their technology with the corporate technology, and that's how I got interested in it. I um, got my degree in the us. I then moved on to become a faculty member at the Wharton School university of Pennsylvania, where I'm still a senior fellow at the MAC Center for Technological Innovation. And over the last just over a decade, I've been a faculty member here at London Business School which actually allows me to open my eyes and look at venturing, not just in the US but globally, and that might be something that will get to in a second. A lot of my academic work is around entrepreneurial finance and corporate venturing, I also do consulting and teaching within this space.
Nicolas Sauvage: Very nice. Can you walk us through the past and what we should be learning from that past?
Gary Dushnitsky: Sure. And this is actually an excellent question and it's always good to start at the beginning. depending on the resources that you are looking at many people place the starting point of corporate venture capital in the 1960s. At that point in time, those of you who are history buffs might remember in terms of corporate America, there was this big wave of conglomerate building these empires, it was partly fueled by the fact that companies started having a lot of cash flow, it was also partly driven by the fact that at that point in time, technological innovation and venture capital became more and more celebrated in the ARD, which is one of the first institutional VCs started in the late forties and some of its offsprings have really proven the venture capital model. And you started having corporations from Exxon and others investing in entrepreneurial Ventures. By the way, some of them were internals, other were externals. This party went on up until the fuel crisis, the collapse of the market in the early seventies. At that point many corporations rationalizing their activities, corporate venture capital being the casualty so that was arguably the first wave. Fast forward to the eighties what we see is again, another new wave of corporate venture capital. This was partly driven by various innovations, we've had digital equipment and other companies coming to fruition, we also seen a growth of the venture capital market. Those of you who followed the venture capital industry, there's what's called the prudent man rule in 1979 that allowed pension funds to allocate a larger share of their asset, AUM to risky projects, which unleashed money into our VCs, corporates followed suit, and again 1987. Was not a good year for the market and have seen many corporates seize operations. So we have these excitement by the corporates, and soon there's a truncation. And most recently, relatively recently the period where I lived in was the 1990s you had the.com, but you also had some really exciting innovation on the hardware side with the telecommunication fiber optics and so on, so forth. And you've seen entrance by VCs, end corporations, and when the.com in bubble has burst, we've seen many corporate exited. These are the waves. I would like to maybe leave you with is two observations in one observation is that often time these waves of Corporate VCs have paralleled waves of technological innovation. We've seen a growth in certain technologies. In the 1990s, it was the telecommunication routers and so on, so forth. Cisco was a big investor of the time, Intel capital in others. And there are studies, including studies that I've conducted basically showing that companies that engage in corporate venture capital have a higher patenting output than the industry peers. And the more corporate venture capital you engage in the more, and the higher quality patenting you have. And this is, I think, an insight that has stayed with people. There is one element that I want to flag here, and that is it created this notion that CVC is a tool to gain a window on technology. and I think it is but what I'd like to leave you with is that maybe the other ways of using CVC. So that might be one observation. The second observation is the fact that CVS will soon to exit and we will probably talk about red flags at some point in time. It is true to understand that VCs who were at times left with some of the syndicate members out of their picture have developed some concerns about corporate investors and one has to approach these heads on. Now it doesn't mean that we need to throw the baby with the bathwater. Just because something didn't work out once doesn't mean that it'll never work or that it's not fit for purpose in other situations.
Nicolas Sauvage: Yeah. Especially when the context is different. I like to always try to stress test what looks like correlation and causation. And let me ask a question, maybe cheeky, because I do like the idea of CVCs will drive more innovation in corporations, but is there an argument to say that corporations that have CVCs already have the right mindset to create more innovations? And it may not be the CVC itself, but the CVC plus all the other corporate venturing tool set coming from that DNA of we want to explore and learn?
Gary Dushnitsky: So this is an excellent question and in fact this is what kept my PhD not just two months, but two years because you need to tackle this issue of endogeneity. Could it be that there's this latent variable they're just more innovative and they both do more patents and they also do more CVC, but it's not a CVC that is driving the innovation activity? And this is where you do any number of things in order to do that from actually talking to people and understanding how visibility into the startup ecosystem helps with driving innovation. And it can be because the startup you engage in are working on projects that allow you to become better, it can be because walking around those startups actually makes you aware of other where you as a corporate have the capacity to push this forward, and it can be that walking around startups can actually show you what doesn't work and so you are more effective at relining your internal R&D so that you have a better punch for the buck. And so talking to people, you get a sense of what the underlying mechanism and then as a good academic and in atrician you also engage in various strategies in order to attempt to address what we call an endogeneity concern is.
Nicolas Sauvage: I used to say that my ROI, what I'm expecting from our first one was 50 million. I used to say my financial performance on that fund is 10 billion revenue increase for TDK and this is really what you're getting at now. One thing that strike me from the past, so I want to also continue asking a few questions about the past, is when you are in crisis, you have two mechanism: one is to shrink and one is to look for opportunities. And in the past the CVCs have shrunk or stopped but in the last two years and a half with covid and lockdowns and geopolitical issues and supply chain issues, we ended up with half of the active CS investing during this period, being new CVCs. Can you speak to that contrast from the past where corporation would shrink versus now, whereas it seems to be reacting to crisis in the positive way?
Gary Dushnitsky: Yeah. I dunno if it's in a positive way, but it's spurring more Corporate VCs. I think that a number of things are happening I think that we need to take it in a context. I think the first one is that what this crisis did, and especially the last two years with Covid and everything else as you've mentioned, have just made it so visible how digital disruption is upon us. And the fact that you need to engage with the dig digital disruption, the fact that many, some of these startups that were not on your radar screen on a day-to-day basis, actually clients are going to these startups it's not just that annoying strategy head or CVC wannabe are telling the board that we need to do that but you have your business line telling you we are losing business to companies that were not on our radar screen before those are startups, some of them. We see that in higher education, by the way that gave a sense of urgency to many corporations due to Cs in consumer goods, digital disruption and empowerment in FinTech and otherwise these have been very important. And then at the same time what is you see an overall excitement rejuvenation within the world of venture. We've seen bigger funds, but also what we've seen are emerging managers. And I'm sure that you've seen, it's not just that you have lots of new time, CVCs, you actually have a lot of new time VCs. More than ever before. I think I've seen some stats that the last two years have seen more emerging managers, more new VCs than maybe the decade or two before that. And you have very bright people working within these corporations so not with the VCs, but within corporations saying, actually my friend or a person I know is setting up a venture fund I think I can do so too. And so both that kind of urgency that you feel in the product market as well as the benchmarking of individuals and the fact that, I dunno if to call them mid-level managers are, but people who might not be at the board level, but people who drive strategy innovation, see that emerging managers can build new VCs maybe we can also build a CVC and taken together that explains some of the resurgence of CVCs
Nicolas Sauvage: I have to double click on this one, but do you see this massive number of emerging managers, VCs and CVCs being a good thing and it's actually, if we think about supply and demand getting to an equilibrium, or do you think we're overshooting and then we are going to see a return to a fewer number? What would you expect?
Gary Dushnitsky: If you ask me whether a hundred percent of the emerging managers will be with us in five years time, I think the answer is no. How do I calibrate it? It's difficult to say. What I would like to think is that one of the things that these emerging managers have done there are a new path to introduce diversity along multiple dimensions. And so many times very successful people within a corporate setting saying, I had enough, I'm gonna start my own venture. And when I ask them, can you explain to me why would you leave a corporation that I put aside all the personal kind of benefits, but that has a footprint of clients across the world that has the capacity to give you access to technical talent that have the budget, why would you leave all that in go start on your own?
Nicolas Sauvage: Now I want to close on the past with just one more question, which is, what do you think is the biggest learning that we haven't discussed already from the past as we move into the modern CVCs?
Gary Dushnitsky: I think that the discipline of having a continued presence in the market is probably that venture capital is not a short term game it's a long-term game. And as I tell my my students, the people I work with, and otherwise, it's not how well you do in this portfolio company. It's how do you do on the next portfolio you are aiming to do and there's relationship and knowledge that's embedded in the community and they need to be mindful of that and manage that, I think is one of the key learnings, which in a way leads us toward the modern CVC might look like.
Nicolas Sauvage: Very nice. Would you say that most of the CVCs today have a clear understanding about their why and what was a pitfall you've seen on them defining their why and matching their design?
Gary Dushnitsky: I think one of the reasons I enjoy having this conversation with you in particular is that rather than selling my way of CVC, you actually embrace an advocate. The fact that there might be different way Frank Sinatra used to say, I did it my way. And your way might be different than my way. I literally remember a consulting job when when the team came to me and they had done a great, they would get an a plus on a case study on what used to be a very prominent CVC at the time.
Nicolas Sauvage: So the compensation, I'm assuming would be different whether you are trying to enable an ecosystem and you have much more certainty and insight, knowledge and ability to influence the outcome of the startup versus those who are much more long-term bet. How do you see these differences?
Gary Dushnitsky: I think that you are completely on the right track, but what you've just articulated is the need to have thoughtful design going into that high power incentives might be relevant under certain whys and might actually be less relevant under different wise. And so I think that's exactly the point of consideration where I would argue that there's been some challenges is that when we look at how do, I can never from my own experience the companies I studies or the companies I worked with, how do they actually approach the design of the Corporate VC in one of two ways. The first one is what I call mima isomorphism, which is a very loaded academic terms to say copy paste. There's been a certain CVC in the news or a certain CVC that my business school body is running, and I copy paste what they've done, I mimic them that's one way. And so I tend to build a CVC that I have a template for irrespectively of whether it's appropriate for my organization. The second element that affects a lot of efforts to build CVC has to do with stakeholder management. I don't need to tell you and anyone here is attempted structuring a CVC, that there are many stakeholders within the organization you need to manage. And everybody wants the wellbeing of the overall corporation, or at least one with hopeful. But they have very different views on what that entails. And in the process of going through approval at a various level, and ultimately the border level, you might end up with a structure that satisfy those different demand, but doesn't necessarily achieve that alignment that that you are advocating. And so these are red flags or these are the realities that many Corporate VCs go through and what you need to do is you need to have the presence of mind and the moral support. Sometimes for me as an academic, having objective data does that. So having studies such as the one I've talked to you earlier gives me that comfort to say, I see where you're coming from, I understand what you're saying, but if you subscribe the same as I do from the why, we need to break from corporate convention and actually make a change over here.
Nicolas Sauvage: And that is, for me, a golden nugget, which is, if you're clear about the why and you propose a design, you need to stick to your guns and make sure that what's linked to that why doesn't change. And if not, you might actually cripple the CVC even before it gets started. And it's not once you get started with a wrong track, it's going to be easy to fix afterwards, if anything, it's much, much harder. What's your view about managing the stakeholders in a way where you can be soft in some places, but firm on the ones that matter? You have any guidance from what you observe? Let's start with maybe what could be the red flags and then we'll talk about all the goodness, including what you talked about the positive impact entrepreneurs that can even scale. But let's start with the red flags, what would you say you see for the future?
Gary Dushnitsky: Not be me drinking the Kool-Aid, but this would be me doubling down on not to throw the baby with the bathwater. Will we have with us a hundred percent of the Corporate VCs that have been launch over the two, the last two years? Probably not. But will we have a hundred percent of the emerging managers that have started over the last two years? Probably not. And that statement is true to will we have a hundred percent of the marketing strategies that have been innovated during Covid with us? Probably not. What you don't want to do is you don't want to say that corporate venture capital is not legit or doesn't have a room to play and I think historically, given the boom and bust, and given that it was a little bit more of a foreign experience, that was the takeaway where I'm quite hopeful is that we understand now that engaging the ecosystem of entrepreneurial venture is important for multiple reasons. And so to completely eliminate that is probably not gonna happen. Where one is could be hopeful what that tells you is that rather than make it a switch on, switch off, you need to take a hard look at how do I structure it? And one of the things that we've seen and we've seen along the long lasting Corporate VCs is that they change, they evolve the morph, they'll move the objectives, the structure, the way they play, has not necessarily been what it has been 21 years ago, 27 years ago. The context change, the corporate change and the Corporate VC changes with it. And this is if you allow me I say that whenever I engage in corporate in a conversation, they're usually two points in time. It is either that six to three months before launching the Corporate VC as one try to think about what would be the structure. And it's three to five years after launching the CVC as one thing about, okay, what do life look like as 2.0 as 3.0? And each one of them involves an existential crisis of sort. And this is where you you need to manage. What I'm hopeful for is that people will take this advice where the red flags are ignoring it thinking that just because I've been underwritten for last for the first two years, I'll be continued to be underwritten for the next three years just because venture was successful in 2020 or popular in 2020, it'll continue to be so in 2023 I think that's where some of the red flags come from.
Nicolas Sauvage: Okay, I'm going to ask for more red flags.
Gary Dushnitsky: More red flags. I think the first one is when I talked about earlier I talked about how you want to think about structure for, say investment committee, or you want to think about people who are the people there, or you want to think about compensation, how do you compensate them? Oftentimes I see decks that really do sample best practices along each one of these dimensions, but unfortunately they're not aligned along the dimensions. By analogy, you can have the best sports issues on, but if you are then dressed in a tux, you are probably not gonna win that race. Okay?
Nicolas Sauvage: Even though you look great!
Gary Dushnitsky: You look well let's put that on the side . But you need to have that alignment. What can look like best practice or any single dimension doesn't guarantee that as a whole you align. And I engage with many thoughtful people that can understand why certain dimensions are important sometimes they say, I was able to pitch my point on investment committee structure and the team I need, I'm gonna have to seed on compensation. I'll let that one go. It doesn't work that way. If you wanna think about it from kind of basic combinatorics, you need three things to work, and the first one you have structured, so you have 90% fighting chance and the second one you structured so that you have 90% fighting chance, but then the last one you've sited on, so when you only have 10% fighting chance, your fighting chance is a function of the 90 times, 90 part times 10%. You are diluting yourself from the get-go and it's very easy to if you just have a little bit of insight to go in and say guides, let's just think that through let's see what that does to us. So this is not just each component by itself, but the alignment is another one.
Nicolas Sauvage: It's a golden nugget, because it's actually hundred of design decisions for each CVC. And what matters is not trying to maximize each, but that alignment that becomes harmonious and from experience this is really hard and this is where you always have to go back to the why, to explain why it makes sense.
Gary Dushnitsky: And you're saying it with a smile on your face, but I know the amount of that yourself and many others have had code is for you to, to making it stick. And then if I go back to the, we are talking a lot from a point of view of designing from scratch as if you have table and you're designing it. The same challenge comes to you in year three or four, where let's say you are not being terminated, but people actually suggest that why won't you take on this, and that? And sometimes it's great, but other times it can actually lead to dilution of what you're trying to do. And you need to be very clear about it. Should it all live under a single structure? Maybe it actually needs to follow different structures? You need to have the presence of mind and perseverance to again understand how you best align yourself to win on everyone in. KPIs that might be relevant for ecosystem building might not be relevant for wind on technology. But if you try to now put both objectives, because you've been asked to in year three, you try to now make up, you already know from the get-go that you're gonna dilute your traction any single KPI.
Nicolas Sauvage: Now, I want to ask about this positive impact to startups, because that's also a place where we should be so hopeful and even ambitious.
Gary Dushnitsky: So I think the first and foremost is that it's incumbent upon us to understand what is the impact on startup. And, let me be very sincere, some of my earlier work on CVC was informed by the fact that our challenges. One of the first quotes I had from a founder told me it's very difficult for me to open the kimono to a team that that has all the technical stuff where they have 10 times the technical stuff that I do and share those insights with me. And I think this is where working with CVCs that have longevity, that have proven their ability to manage this relationship in a meaningful way, not just with one startup, but with multiple is quite important. They build their rapport, reputation that we talked about earlier. So there are challenges, but there are also opportunities if nothing else we know or we've been told that capital is a commodity. Corporate investors have been a type of investors that bring more than just capital, they bring many other things. And so this has been lost maybe in the argument. Those that receive corporate backing are more likely to be innovative. So at the time of investment, they're more likely to have more patents and more publication, scientific publication compared to the age group. Maybe more interestingly, when we look at what happened from the moment they got the investment four years out, what we find is that those that have been backed only by VCs, about 14% of them are likely to turn from innovation laggards. So they lag on patenting in publication to innovation leaders. Those backed by corporates, they have 27% chance.
Nicolas Sauvage: That's a big jump!
Gary Dushnitsky: That's a big jump. And when we talk to people, one of the things that we see is simple stuff. I don't know if it's simple or not. Where do I buy a spectrometer? Where do I buy a spectrometer? When you have the team in a corporate that can get you there, maybe can get it faster to you, maybe can get you the right one, that advice can be very helpful.
Nicolas Sauvage: Wow Gary, this was a fantastic interview. Thank you for sharing not a practitioner view, but actually an observer that actually can articulate and dissect all of this for us. Thank you very much, Gary.
Gary Dushnitsky: Thank you very much Nicolas it's been a pleasure and I'm glad you found it useful!
Gary Dushnitsky: Good. So this is a great question and it made me reflect back on my childhood. I have a confession. It's between you, me, and maybe our viewers. And that is that I was a geek as a child 11 year old, I would sit at home and write machine code and assembly code. I would write all kind of programs and softwares and I would enjoy it a great deal. I would write software to write software and So on, so forth. And fast forward, I found myself in New York in the late nineties during the height of the.com bubble. This was a really exciting time. There's lots of money um, in going around lots of exciting innovation. There were all these venture capitalists, but equally it was a very important moment for Corporate VCs. There were an influx of Corporate VCs going on there. And I was thinking about how can these corporate investors help geeks such as myself maybe have a better go-to market strategy or better one, maybe align their technology with the corporate technology, and that's how I got interested in it. I um, got my degree in the us. I then moved on to become a faculty member at the Wharton School university of Pennsylvania, where I'm still a senior fellow at the MAC Center for Technological Innovation. And over the last just over a decade, I've been a faculty member here at London Business School which actually allows me to open my eyes and look at venturing, not just in the US but globally, and that might be something that will get to in a second. A lot of my academic work is around entrepreneurial finance and corporate venturing, I also do consulting and teaching within this space.
Nicolas Sauvage: Very nice. Can you walk us through the past and what we should be learning from that past?
Gary Dushnitsky: Sure. And this is actually an excellent question and it's always good to start at the beginning. depending on the resources that you are looking at many people place the starting point of corporate venture capital in the 1960s. At that point in time, those of you who are history buffs might remember in terms of corporate America, there was this big wave of conglomerate building these empires, it was partly fueled by the fact that companies started having a lot of cash flow, it was also partly driven by the fact that at that point in time, technological innovation and venture capital became more and more celebrated in the ARD, which is one of the first institutional VCs started in the late forties and some of its offsprings have really proven the venture capital model. And you started having corporations from Exxon and others investing in entrepreneurial Ventures. By the way, some of them were internals, other were externals. This party went on up until the fuel crisis, the collapse of the market in the early seventies. At that point many corporations rationalizing their activities, corporate venture capital being the casualty so that was arguably the first wave. Fast forward to the eighties what we see is again, another new wave of corporate venture capital. This was partly driven by various innovations, we've had digital equipment and other companies coming to fruition, we also seen a growth of the venture capital market. Those of you who followed the venture capital industry, there's what's called the prudent man rule in 1979 that allowed pension funds to allocate a larger share of their asset, AUM to risky projects, which unleashed money into our VCs, corporates followed suit, and again 1987. Was not a good year for the market and have seen many corporates seize operations. So we have these excitement by the corporates, and soon there's a truncation. And most recently, relatively recently the period where I lived in was the 1990s you had the.com, but you also had some really exciting innovation on the hardware side with the telecommunication fiber optics and so on, so forth. And you've seen entrance by VCs, end corporations, and when the.com in bubble has burst, we've seen many corporate exited. These are the waves. I would like to maybe leave you with is two observations in one observation is that often time these waves of Corporate VCs have paralleled waves of technological innovation. We've seen a growth in certain technologies. In the 1990s, it was the telecommunication routers and so on, so forth. Cisco was a big investor of the time, Intel capital in others. And there are studies, including studies that I've conducted basically showing that companies that engage in corporate venture capital have a higher patenting output than the industry peers. And the more corporate venture capital you engage in the more, and the higher quality patenting you have. And this is, I think, an insight that has stayed with people. There is one element that I want to flag here, and that is it created this notion that CVC is a tool to gain a window on technology. and I think it is but what I'd like to leave you with is that maybe the other ways of using CVC. So that might be one observation. The second observation is the fact that CVS will soon to exit and we will probably talk about red flags at some point in time. It is true to understand that VCs who were at times left with some of the syndicate members out of their picture have developed some concerns about corporate investors and one has to approach these heads on. Now it doesn't mean that we need to throw the baby with the bathwater. Just because something didn't work out once doesn't mean that it'll never work or that it's not fit for purpose in other situations.
Nicolas Sauvage: Yeah. Especially when the context is different. I like to always try to stress test what looks like correlation and causation. And let me ask a question, maybe cheeky, because I do like the idea of CVCs will drive more innovation in corporations, but is there an argument to say that corporations that have CVCs already have the right mindset to create more innovations? And it may not be the CVC itself, but the CVC plus all the other corporate venturing tool set coming from that DNA of we want to explore and learn?
Gary Dushnitsky: So this is an excellent question and in fact this is what kept my PhD not just two months, but two years because you need to tackle this issue of endogeneity. Could it be that there's this latent variable they're just more innovative and they both do more patents and they also do more CVC, but it's not a CVC that is driving the innovation activity? And this is where you do any number of things in order to do that from actually talking to people and understanding how visibility into the startup ecosystem helps with driving innovation. And it can be because the startup you engage in are working on projects that allow you to become better, it can be because walking around those startups actually makes you aware of other where you as a corporate have the capacity to push this forward, and it can be that walking around startups can actually show you what doesn't work and so you are more effective at relining your internal R&D so that you have a better punch for the buck. And so talking to people, you get a sense of what the underlying mechanism and then as a good academic and in atrician you also engage in various strategies in order to attempt to address what we call an endogeneity concern is.
Nicolas Sauvage: I used to say that my ROI, what I'm expecting from our first one was 50 million. I used to say my financial performance on that fund is 10 billion revenue increase for TDK and this is really what you're getting at now. One thing that strike me from the past, so I want to also continue asking a few questions about the past, is when you are in crisis, you have two mechanism: one is to shrink and one is to look for opportunities. And in the past the CVCs have shrunk or stopped but in the last two years and a half with covid and lockdowns and geopolitical issues and supply chain issues, we ended up with half of the active CS investing during this period, being new CVCs. Can you speak to that contrast from the past where corporation would shrink versus now, whereas it seems to be reacting to crisis in the positive way?
Gary Dushnitsky: Yeah. I dunno if it's in a positive way, but it's spurring more Corporate VCs. I think that a number of things are happening I think that we need to take it in a context. I think the first one is that what this crisis did, and especially the last two years with Covid and everything else as you've mentioned, have just made it so visible how digital disruption is upon us. And the fact that you need to engage with the dig digital disruption, the fact that many, some of these startups that were not on your radar screen on a day-to-day basis, actually clients are going to these startups it's not just that annoying strategy head or CVC wannabe are telling the board that we need to do that but you have your business line telling you we are losing business to companies that were not on our radar screen before those are startups, some of them. We see that in higher education, by the way that gave a sense of urgency to many corporations due to Cs in consumer goods, digital disruption and empowerment in FinTech and otherwise these have been very important. And then at the same time what is you see an overall excitement rejuvenation within the world of venture. We've seen bigger funds, but also what we've seen are emerging managers. And I'm sure that you've seen, it's not just that you have lots of new time, CVCs, you actually have a lot of new time VCs. More than ever before. I think I've seen some stats that the last two years have seen more emerging managers, more new VCs than maybe the decade or two before that. And you have very bright people working within these corporations so not with the VCs, but within corporations saying, actually my friend or a person I know is setting up a venture fund I think I can do so too. And so both that kind of urgency that you feel in the product market as well as the benchmarking of individuals and the fact that, I dunno if to call them mid-level managers are, but people who might not be at the board level, but people who drive strategy innovation, see that emerging managers can build new VCs maybe we can also build a CVC and taken together that explains some of the resurgence of CVCs
Nicolas Sauvage: I have to double click on this one, but do you see this massive number of emerging managers, VCs and CVCs being a good thing and it's actually, if we think about supply and demand getting to an equilibrium, or do you think we're overshooting and then we are going to see a return to a fewer number? What would you expect?
Gary Dushnitsky: If you ask me whether a hundred percent of the emerging managers will be with us in five years time, I think the answer is no. How do I calibrate it? It's difficult to say. What I would like to think is that one of the things that these emerging managers have done there are a new path to introduce diversity along multiple dimensions. And so many times very successful people within a corporate setting saying, I had enough, I'm gonna start my own venture. And when I ask them, can you explain to me why would you leave a corporation that I put aside all the personal kind of benefits, but that has a footprint of clients across the world that has the capacity to give you access to technical talent that have the budget, why would you leave all that in go start on your own?
Nicolas Sauvage: Now I want to close on the past with just one more question, which is, what do you think is the biggest learning that we haven't discussed already from the past as we move into the modern CVCs?
Gary Dushnitsky: I think that the discipline of having a continued presence in the market is probably that venture capital is not a short term game it's a long-term game. And as I tell my my students, the people I work with, and otherwise, it's not how well you do in this portfolio company. It's how do you do on the next portfolio you are aiming to do and there's relationship and knowledge that's embedded in the community and they need to be mindful of that and manage that, I think is one of the key learnings, which in a way leads us toward the modern CVC might look like.
Nicolas Sauvage: Very nice. Would you say that most of the CVCs today have a clear understanding about their why and what was a pitfall you've seen on them defining their why and matching their design?
Gary Dushnitsky: I think one of the reasons I enjoy having this conversation with you in particular is that rather than selling my way of CVC, you actually embrace an advocate. The fact that there might be different way Frank Sinatra used to say, I did it my way. And your way might be different than my way. I literally remember a consulting job when when the team came to me and they had done a great, they would get an a plus on a case study on what used to be a very prominent CVC at the time.
Nicolas Sauvage: So the compensation, I'm assuming would be different whether you are trying to enable an ecosystem and you have much more certainty and insight, knowledge and ability to influence the outcome of the startup versus those who are much more long-term bet. How do you see these differences?
Gary Dushnitsky: I think that you are completely on the right track, but what you've just articulated is the need to have thoughtful design going into that high power incentives might be relevant under certain whys and might actually be less relevant under different wise. And so I think that's exactly the point of consideration where I would argue that there's been some challenges is that when we look at how do, I can never from my own experience the companies I studies or the companies I worked with, how do they actually approach the design of the Corporate VC in one of two ways. The first one is what I call mima isomorphism, which is a very loaded academic terms to say copy paste. There's been a certain CVC in the news or a certain CVC that my business school body is running, and I copy paste what they've done, I mimic them that's one way. And so I tend to build a CVC that I have a template for irrespectively of whether it's appropriate for my organization. The second element that affects a lot of efforts to build CVC has to do with stakeholder management. I don't need to tell you and anyone here is attempted structuring a CVC, that there are many stakeholders within the organization you need to manage. And everybody wants the wellbeing of the overall corporation, or at least one with hopeful. But they have very different views on what that entails. And in the process of going through approval at a various level, and ultimately the border level, you might end up with a structure that satisfy those different demand, but doesn't necessarily achieve that alignment that that you are advocating. And so these are red flags or these are the realities that many Corporate VCs go through and what you need to do is you need to have the presence of mind and the moral support. Sometimes for me as an academic, having objective data does that. So having studies such as the one I've talked to you earlier gives me that comfort to say, I see where you're coming from, I understand what you're saying, but if you subscribe the same as I do from the why, we need to break from corporate convention and actually make a change over here.
Nicolas Sauvage: And that is, for me, a golden nugget, which is, if you're clear about the why and you propose a design, you need to stick to your guns and make sure that what's linked to that why doesn't change. And if not, you might actually cripple the CVC even before it gets started. And it's not once you get started with a wrong track, it's going to be easy to fix afterwards, if anything, it's much, much harder. What's your view about managing the stakeholders in a way where you can be soft in some places, but firm on the ones that matter? You have any guidance from what you observe? Let's start with maybe what could be the red flags and then we'll talk about all the goodness, including what you talked about the positive impact entrepreneurs that can even scale. But let's start with the red flags, what would you say you see for the future?
Gary Dushnitsky: Not be me drinking the Kool-Aid, but this would be me doubling down on not to throw the baby with the bathwater. Will we have with us a hundred percent of the Corporate VCs that have been launch over the two, the last two years? Probably not. But will we have a hundred percent of the emerging managers that have started over the last two years? Probably not. And that statement is true to will we have a hundred percent of the marketing strategies that have been innovated during Covid with us? Probably not. What you don't want to do is you don't want to say that corporate venture capital is not legit or doesn't have a room to play and I think historically, given the boom and bust, and given that it was a little bit more of a foreign experience, that was the takeaway where I'm quite hopeful is that we understand now that engaging the ecosystem of entrepreneurial venture is important for multiple reasons. And so to completely eliminate that is probably not gonna happen. Where one is could be hopeful what that tells you is that rather than make it a switch on, switch off, you need to take a hard look at how do I structure it? And one of the things that we've seen and we've seen along the long lasting Corporate VCs is that they change, they evolve the morph, they'll move the objectives, the structure, the way they play, has not necessarily been what it has been 21 years ago, 27 years ago. The context change, the corporate change and the Corporate VC changes with it. And this is if you allow me I say that whenever I engage in corporate in a conversation, they're usually two points in time. It is either that six to three months before launching the Corporate VC as one try to think about what would be the structure. And it's three to five years after launching the CVC as one thing about, okay, what do life look like as 2.0 as 3.0? And each one of them involves an existential crisis of sort. And this is where you you need to manage. What I'm hopeful for is that people will take this advice where the red flags are ignoring it thinking that just because I've been underwritten for last for the first two years, I'll be continued to be underwritten for the next three years just because venture was successful in 2020 or popular in 2020, it'll continue to be so in 2023 I think that's where some of the red flags come from.
Nicolas Sauvage: Okay, I'm going to ask for more red flags.
Gary Dushnitsky: More red flags. I think the first one is when I talked about earlier I talked about how you want to think about structure for, say investment committee, or you want to think about people who are the people there, or you want to think about compensation, how do you compensate them? Oftentimes I see decks that really do sample best practices along each one of these dimensions, but unfortunately they're not aligned along the dimensions. By analogy, you can have the best sports issues on, but if you are then dressed in a tux, you are probably not gonna win that race. Okay?
Nicolas Sauvage: Even though you look great!
Gary Dushnitsky: You look well let's put that on the side . But you need to have that alignment. What can look like best practice or any single dimension doesn't guarantee that as a whole you align. And I engage with many thoughtful people that can understand why certain dimensions are important sometimes they say, I was able to pitch my point on investment committee structure and the team I need, I'm gonna have to seed on compensation. I'll let that one go. It doesn't work that way. If you wanna think about it from kind of basic combinatorics, you need three things to work, and the first one you have structured, so you have 90% fighting chance and the second one you structured so that you have 90% fighting chance, but then the last one you've sited on, so when you only have 10% fighting chance, your fighting chance is a function of the 90 times, 90 part times 10%. You are diluting yourself from the get-go and it's very easy to if you just have a little bit of insight to go in and say guides, let's just think that through let's see what that does to us. So this is not just each component by itself, but the alignment is another one.
Nicolas Sauvage: It's a golden nugget, because it's actually hundred of design decisions for each CVC. And what matters is not trying to maximize each, but that alignment that becomes harmonious and from experience this is really hard and this is where you always have to go back to the why, to explain why it makes sense.
Gary Dushnitsky: And you're saying it with a smile on your face, but I know the amount of that yourself and many others have had code is for you to, to making it stick. And then if I go back to the, we are talking a lot from a point of view of designing from scratch as if you have table and you're designing it. The same challenge comes to you in year three or four, where let's say you are not being terminated, but people actually suggest that why won't you take on this, and that? And sometimes it's great, but other times it can actually lead to dilution of what you're trying to do. And you need to be very clear about it. Should it all live under a single structure? Maybe it actually needs to follow different structures? You need to have the presence of mind and perseverance to again understand how you best align yourself to win on everyone in. KPIs that might be relevant for ecosystem building might not be relevant for wind on technology. But if you try to now put both objectives, because you've been asked to in year three, you try to now make up, you already know from the get-go that you're gonna dilute your traction any single KPI.
Nicolas Sauvage: Now, I want to ask about this positive impact to startups, because that's also a place where we should be so hopeful and even ambitious.
Gary Dushnitsky: So I think the first and foremost is that it's incumbent upon us to understand what is the impact on startup. And, let me be very sincere, some of my earlier work on CVC was informed by the fact that our challenges. One of the first quotes I had from a founder told me it's very difficult for me to open the kimono to a team that that has all the technical stuff where they have 10 times the technical stuff that I do and share those insights with me. And I think this is where working with CVCs that have longevity, that have proven their ability to manage this relationship in a meaningful way, not just with one startup, but with multiple is quite important. They build their rapport, reputation that we talked about earlier. So there are challenges, but there are also opportunities if nothing else we know or we've been told that capital is a commodity. Corporate investors have been a type of investors that bring more than just capital, they bring many other things. And so this has been lost maybe in the argument. Those that receive corporate backing are more likely to be innovative. So at the time of investment, they're more likely to have more patents and more publication, scientific publication compared to the age group. Maybe more interestingly, when we look at what happened from the moment they got the investment four years out, what we find is that those that have been backed only by VCs, about 14% of them are likely to turn from innovation laggards. So they lag on patenting in publication to innovation leaders. Those backed by corporates, they have 27% chance.
Nicolas Sauvage: That's a big jump!
Gary Dushnitsky: That's a big jump. And when we talk to people, one of the things that we see is simple stuff. I don't know if it's simple or not. Where do I buy a spectrometer? Where do I buy a spectrometer? When you have the team in a corporate that can get you there, maybe can get it faster to you, maybe can get you the right one, that advice can be very helpful.
Nicolas Sauvage: Wow Gary, this was a fantastic interview. Thank you for sharing not a practitioner view, but actually an observer that actually can articulate and dissect all of this for us. Thank you very much, Gary.
Gary Dushnitsky: Thank you very much Nicolas it's been a pleasure and I'm glad you found it useful!
