Dietmar: Dear Alex, one year after Corona - looking back and looking forward, how did you experience this time from the perspective of a corporate venture capitalist (CVC) concerning the development of startups but also from the perspective of the VC industry?
Alexander: I do not have a robust statistical view on this. But what was to be expected, has happened: Startups that had a fixed development budget and were not relying on sales prior to the pandemic were able to handle the crisis better. The reason is that the budgets from previous investments are often designed for two years. Obviously, these startups nevertheless faced difficulties, e.g. in their supply chain. Startups that were already selling products or services and relied on these revenues to support the working capital in the company got into trouble faster.
It is somewhat similar in the corporate venture capital (CVC) space. CVCs that had a dedicated fund assigned to them were relatively safe. Of course, you must consider how long the crisis lasts and when the fund runs out. CVCs that invested in a more ad hoc manner were more likely to be required to cut back their investment activities in the face of the crisis. This, because the corporate’s management is likely to decide that venture capital is not the central thing for these companies. Although innovation is an important priority, keeping the company afloat and its employees employed is even more important. This is especially true for SMEs, and potentially somewhat different for large corporations, as they have more liquidity reserves and a bit more room to maneuver. Of course, this also depends on what kind of corporation we are talking about and how badly the corporation itself is affected by the crisis.
Dietmar: So, what would you say at what company size does CVC make sense at all?
Alexander: It’s difficult to generalize. In my opinion, every company should keep an eye on the startup scene. The focus should be on technological innovations and improvements in the company’s own business area. Whether a separate CVC department with a dedicated fund volume is created (which is the most advanced solution), or whether, for example, the corporate finance department focuses a bit more on startup investments , or whether startup relations are managed as an innovation task by the management of even smaller companies, or whether, as the smallest solution, one person in the management team deals with this topic, that must be assessed and decided individually by the companies themselves. It does not always have to be a CVC with a dedicated fund. There are also various other possibilities, e.g., to work systematically with incubators, with accelerators, or with universities. The important thing is that in modern and long-term thinking companies, attention must be paid to innovation and new technologies, irrespective of how well the business of the mothership is going in different years. This, to see where there is development potential and new opportunities for one’s own company.
Dietmar: How do you, as Philip Morris International (PMI), approach startups? Is it an advantage as a large corporate or a disadvantage compared to the private VCs?
Alexander: We do not try to compete with the private VCs because we work very differently. In addition, we have different goals that we want to achieve with the startup. Private VCs can take decisions in very short periods, thanks to only a few people with decision-making authority. In portfolio management, they have a more intensive initial phase and then tend to pull back and monitor. There is not much collaboration between VCs and startups because a private VC cannot leverage other business assets (besides expertise) for the benefit of the startup. And the main focus of a private VC is to maximize Return on Investment, because only a good RoI will allow the VC to raise the next fund successfully.
This is different with CVCs. CVCs need more time to take investment decisions, because most CVCs will also try to figure out what their mothership could potentially bring to the startup and vice versa. This requires an intense exchange and close collaboration between the startup and the CVC. The goal is to setup something together with the startup that will enable both sides to benefit on an ongoing basis. So, the approach is different.
Generally, the CVC gets a lot of generic deal flow because of the visibility of its mothership in the market. Startups know well that PMI likes to invest in startups in certain market categories. PMI today trys to take a more hypothesis-driven approach. There is a lively exchange between my team and the division heads at PMI to identify their challenges, suggestions, and problems and innovation requirements, and to find suitable solutions potentially provided by startups. The CVC team then looks for startups that develop or already market solutions in those areas.
This is where PMI differs from many VCs. A private VC has a clear investment focus, e.g. biotech, and can be relatively flexible within that focus area with regards to the companies he/she invests in. As the CVC of PMI, we have more and sometimes very broad areas of interest, but we tend to be less flexible within those areas, because we are looking for companies that have potentially the best fit with whatever challenge we are trying to solve for. In other words, we are not looking for companies that “play in this field”, but for companies that are directly related to the challenge we are facing. So far, our hypothesis-driven approach has produced very good results for us.
Dietmar: Finally, what motivated you personally to move from a partner position at a VC to the CVC sector?
Alexander: Basically, I was looking for a new professional challenge. As a private VC, you often invest within your region because you want to be close to your target companies, and because that’s where you get most deals from, and where you can provide the best support to portfolio companies. However, I was always attracted to working with founders from other regions, i.e., international founders. This is where corporate venture capital is very different, of course. PMI is active in 190 markets. Another reason was that I wanted to break out of my structures. As a VC, you easily become complacent. For me, the timing was right for the change.
Dietmar: Dear Alexander, thank you for these exciting insights.
Alexander: Thank you, too, for inviting me to this pleasant interview. Of course, I am also looking forward to supporting you in the new CAS-HSG “Entrepreneurial Excellence” and provide the participants with further insights into the field of VC and CVC. With my 14 years in venture capital - 12 of which I was a partner for a private Swiss-based venture capital firm and the last two years I have been leading the corporate venture capital division at Philip Morris International - I have accumulated quite a bit of knowledge that I am very happy to share. I am sure that we will have interesting discussions together during the course.
The interview was conducted by Prof. Dr. Dietmar Grichnik, Director Institute of Technology Management, University of St.Gallen.