Ep. 18 - TELSTRA Ventures: Measuring the value-added to the portfolio companies

I think for an innovation environment to be very successful, I think you really need all the things that we talked about before and government is one piece, you know, so, you know, I think it's an important piece, but it's not the only piece. And I think one of the things that governments, you know, can do very well is to remove as much friction out of the industry as possible. So in order to attract the best entrepreneurs, the best scientists, the best investors, you know, to come to Australia or wherever that environment is. And look, there are other places in the world, you know, Israel has been very successful. You know, Silicon Valley is obviously, you know, in many ways center of the universe, you know, for tech investing. So, you know, in those places I think it's, it's insightful to look at what's worked there and to try and replicate that, you know, in other markets. And I think for Australia, you know, technology is an incredible opportunity and I'm really thrilled at the progress and the amount of, you know, improvement, you know, that there's been over the last 10, 20 years. And as you said, I think the best is still to come.

In depth interviews with the most influential innovation executives of the tech arena. Exclusive data and insights on major and emerging ecosystems all around the world. The hottest news on technology and open innovation at a global level. This and much more in every new episode. Welcome to Open Innovation Talks. Mind the bridge chat with industry leaders. Good afternoon from Sydney. Here we have the opportunity of recording another interesting interview and one of our minded chats today with us, we'll be talking about investments with Matthew Korke, managing director of Tesla Ventures. Hi, Matthew.

Hi. It's great to be here.

Great. So we'll have the pleasure to be together on a panel this week. We are both, I mean, you're local, I'm not, I'm actually pretty far. But south by Southwest Sydney is happening this week. So there's a lot of excitement, a lot of a new content. People that flew in for that is the first edition of what's supposed to be 10 year deal of south by Southwest in Sydney. So very, very excited to be part of that. So Matthew, do you feel that Sydney is a little bit more energized these days or is it always like this?

No, it's definitely got a fantastic buzz. I mean, just sort of walking around, you know, Sydney, I mean, you know, south by Southwest is all over the city. You know, you see lots of people with their tags and you see lots of people, you know, in different, you know, sort of different venues, you know, so it's great to see, you know, the energy and all of the people all over the city. The presentations have been great. You know, the speakers have been really interesting and I think it's been a really great event so far.

Yeah. For the two people that might not know what south by Southwest is, it's a historical conference, probably one of the, if not the top conference of not just innovation, but innovation and creative content as well. So there's a lot of futuristic talks, there's a lot of innovations that happen around here and around the world, but it's also, there's a lot of creative content and more and more is associated with technology and AI and generative AI whatnot. So the city is filled with many venues where you can watch new movies or concerts. So there is a lot going on. So very, very excited to be part of the first edition. All right, we're going to talk about venture capital here to go back to earth and in particular corporate venture capital. So, Matthew, maybe a little bit of your background, how you ended up working for cvc. And as I mispronounce your last name, you sound German of origin, so maybe let's start from there.

Yeah, absolutely. So my background is originally in engineering, so I worked in the industry designing software and hardware systems for a number of years, ended up going to business school. I lived in the US for a bit and then started in the venture industry in the late 90s at Macquarie Bank. It was a very exciting, you know, time to be in that industry because the whole dot com, you know, sort of bubble was changing the world and we had some really, really exciting portfolio companies, you know, some of which are now multi billion dollar companies. So we had some spectacular wins, we had some spectacular failures and you learn as much from the good companies as you do the bad companies. So that, that was a wonderful way to, you know, get introduced into investing. I then worked at Deutsche bank for quite a few years. We had quite a large portfolio as part of the DB Capital Partners portfolio globally. We had billions of dollars, funds under management and over 100 portfolio companies. Everything from airports to infrastructure to private equity and also a venture portfolio. So that was a fantastic opportunity to really learn about the business and to learn about investing and really doing private equity at scale. Deutsche bank then ended up divesting most of its portfolio globally. So we ended up selling and divesting and managing out a bunch of assets. And then in 2011, Telstra started to think about starting a venture business. And the thing that was very exciting to me is that they really wanted to build a venture capital practice from scratch. So that created an incredible opportunity to join a very powerful platform. And there was a lot of capital here at Telstra as well. So we started the journey and literally built Telstra Ventures from a clean sheet of paper.

Yeah, that's an awesome journey. And we're going to go into more the details of the venture, the way that you guys are structured. But let's talk about Telstra first, because for the few participants here that are not familiar with Australia as a market and Telstra as one of the, the main telco companies in the world. So a little bit of background of Telstra, the size, a little bit of history and focus in terms of innovation, maybe?

Yeah, absolutely. Look, Telstra is Australia's largest telecommunications company. It offers a full range of communication services, everything from mobile fixed data. It's a publicly listed company on the Australian Stock Exchange with a market cap of about $45 billion. Telstra has a lot of assets around the globe. It has staff in 35 countries outside of Australia. As an example, Telstra owns the largest wholly owned subsea optical fiber network in the Asia Pacific. So a lot of the traffic, data traffic that goes through the agent region runs on Telstra's networks. So it's a big company, a big footprint, obviously, very big in Australia, but a pretty interesting international business as well.

And they started the venture capital, you said, around, what is it, 12 years ago? A little bit more.

Exactly, yeah. So they decided that they really wanted to start becoming more active with early stage technology and early stage companies. So they recruited myself and Mark Sherman, who's my partner, the other managing partner of Telstra Ventures. And we pretty much had the opportunity, you know, to build, you know, the, the investment strategy, the investment portfolio. And we've grown along a lot since then. So we're now independent, actually from Telstra. So we're an investment capital firm with one and a half billion funds under management. You know, we've been operating, as I mentioned, for 12 years. We've made 95 investments, actually 96. We closed one this morning. We've had 38 liquidity investments so far. Thank you. And we've almost realized a billion dollars in cash which we've distributed back to our limited partners. Our investors include, obviously, Telstra. We have a number of pension funds, you know, some of the superannuation funds here in Australia, institutional investors and also some family offices. We have about 20 people who are based in Australia and the US and our investment focus is predominantly around, you know, AI, digital software companies that are transforming sectors. We focus on series A and B, we sometimes invest a little bit later. And our portfolio has done super well. We've got 15 unicorns in our portfolio, some of which include CrowdStrike, DocuSign, GitLab and Snapchat, which are all now publicly listed companies.

Yeah, that's a fantastic progression here. And I've got a couple of questions here. In the onset, number one is the. We have seen a lot of CVCs connected to telcos just fading away over time, particularly in Silicon Valley where, you know, there are a few, you know, I don't think I'm saying anything wrong here, but the Devotaphon of the world, even the Telefonica, just to talk about the major international and plus the locals that are, you know, the ATT and T Mobile, it seems that most of them now, they've moved away from the experiment of a cvc. What do you think is that and why instead Telstra has had such a notable success?

Look, I think it's a combination of things. I think one of the things that Telstra has done really well is it's married a few people who really had a lot of experience and track record in venture capital with a bunch of people who really understood Telstra, because venture capital is a very complicated and nuanced industry. But telcos are also really big companies and very complicated. So I think one of the success criteria is really having that combination of having successful investing, but also successful, you know, strategic purpose for the company. And I think that's really, really, really hard balance. And I think a lot of corporate venture, you know, sometimes doesn't have very good investment skills, sometimes it has very good investors, but they're not plugged into the company very well. So. So I think having those two things working together in concert is really critical. And I think the foresight that Telstra had is really early on is making sure that they really could balance those two things. And I think that's been successful for us. And I've seen many corporate venture groups have a lot of trouble and it's usually because that balance is not right.

And were you created from the very beginning as an external entity or there was kind of an evolution that happened over time from the, you know, investing of balance sheet and then eventually with the one LP that was Telstra. Now you're managing, you're saying that you have multiple LPs, which is the next evolution of a number of CVCs out there. So what's been the history there?

Absolutely, yeah. Look, we definitely started as employees on the Telstra balance sheet in 2011. And for the first seven years of our existence we were operating in that model. In 2018, we ended up doing a legal restructure which involved Harbourvest, who is a big institutional investor and they've been a magnificent partner with us. And basically at that point, is it.

Private equity, Right, big private equity group?

Yes. Okay. Yes, it's a big institutional private equity investor, very experienced. They've done a number of these transactions before, before. So in 2018 we ended up doing a re restructure where we moved all of the assets from the Telstra balance sheet into a fund and we also brought in some additional institutional investors at that point and a whole lot of new capital so we could continue the business the same way as we had before, but also having, you know, the, the balance of some additional, you know, institutional investors. So that, that ended up, you know, creating a new fund. We've since then raised another fund and, you know, that's been an important evolution over time. And you know, we'll go back to market probably next year sometime, you know, to raise our fund number four. So, you know, Telstra still being a very, very supportive partner, you know, in all of these different funds. But obviously we've now got, you know, capital sources from other investors, which is a benefit for Telstra because it doesn't have to, you know, basically provide all of the capital on its own because capital is always scarce and there's lots of other things that Telstra do with that money.

But you must be seeing the value of the, of, of the branding out there, right? Because otherwise you would have changed the name here. Instead it's still Telstra Ventures. I assume it's still the anchor lp. But again, so the question is, is, is it most of the time an asset coming with the Telstra branding or might, might, might that be at times also, you know, potential issues or burden with some of the scale ups?

It absolutely. Look, it's, it's a look. Some people love Telstra, some people don't. You know, like most big companies, you know, there are people who've got positive and negative experiences and that obviously shapes, you know, the perception of the brand. I think on balance for us, you know, the brand has been very positive and you know, we're still, you know, part of, you know, Telstra's ecosystem and the Telstra office here. And we still have a lot of the capabilities and resources at Telstra, which is very beneficial. One of the things we should talk about is how we engage with the Telstra business units. And that's pretty unique, I think, for us, because we've developed quite an interesting model. So that's something that's been very important to Telstra and to us and also our portfolio companies. So that's another reason why I think that that's worked well. But look, some people definitely are sometimes a little cautious. So at the end of the day, we refer most of our prospective CEOs to talk to our existing portfolio companies to see what we're like to work with and how Telstra can or can't help. And most of the time that's very successful. So I think, on balance, it's been a very good proposition for us.

It looks like it. And what is the. I'm sure, I mean, the typical questions and follow on question here is strategic versus financial returns and focus. And, and I think the, the classical answer is both. I'm reading here from your website or for your LinkedIn profile. The first sentence. The Tesla Ventures offers synergy revenues to its portfolio companies and financial return. So it's limited partner. So it's in the first sentence that you want to be both strategic and, and financially, Financially focused. Is that, is that, is that so?

Absolutely. And look, we would prioritize financial returns first, but at the same time, we also try to be very highly engaged strategically with our portfolio companies where we can be. And that sort of engagement has been very critical from day one for us. So one of the things that differentiates us is that we've actually been very active in helping our portfolio companies generate revenue. And we've been measuring this from the very first day since we started Telstra Ventures. And one of the numbers that we're very excited about is that we've actually generated almost three quarters of a billion dollars of revenue for our portfolio companies across 1,600 enterprise customers, which include many Telstra customers, such as large banks, airlines, retailers, big industrial companies, and even government agencies. And within Telstra Ventures, we have a dedicated team who spend 100% of their time helping our portfolio companies plug into that Telstra ecosystem of customers and sales channels to basically help our portfolio companies generate revenue. We've also got about 20 other channel partners with whom we work very closely, and they help us reach other geographies, other sectors and so forth. The revenue, as I mentioned, is something we've been measuring from day one, and it's grown from a very humble $300,000 in the first year when we started 12 years ago. And we're currently at a run rate of about 150 million. So, you know, we're going to cross the billion dollar mark probably in about 18 months or maybe two years. So we're very excited about that because this is all incremental revenue that goes to our portfolio companies, which is something that entrepreneurs really value and get really excited about.

Yeah, and not very many VCs or CVCs actually are accounting for that. So to be clear, this is incremental revenues that your portfolio companies have associated to you being a partner, not just a financial partners, but also the fact that you can plug them into your vast ecosystem.

Absolutely, yes. So all of these are incremental revenue dollars where we've helped use the Telstra sales organization to plug our portfolio companies into Telstra customers or some of our other channel partners. And these are all deals that usually start as a proof of concept. I mean, first of all there's like an introduction, you know, then there's a proof of concept. That proof of concept then usually turns, you know, into a sale. And then often there's an opportunity to upsell and turn that into larger, you know, revenue opportunities. And a lot of customers are very cautious on buying from early stage companies. And, and one of the things that is beneficial about, you know, the Telstra brand, it's, it's a very big company. So a lot of people, you know, a lot of companies that are already spending, you know, you know, hundreds of millions of dollars with Telstra, it's very easy for them to actually bundle some additional products and buy some additional capability because, you know, it's on Telstra paper and it's, you know, all very, very familiar. So, so one of the things that's been very helpful is that we've been able to, you know, introduce customers, you know, through the Telstra platform that, you know, a lot of other, you know, startup companies probably would have had a pretty difficult time closing.

So let's talk about the process here. You were mentioning before alluding to the engagement with the Tesla business units from the beginning. What is the process and how structured is that? And formalized.

Yeah, so look, sometimes it's quite formal, sometimes it's more informal. So it really depends on the company, on the opportunity. You know, Telstra has a huge number of account managers, you know, that manage different, you know, customer relationships. You know, sometimes, you know, there's, there's a meeting of a whole bunch of different customers and the account managers where we can introduce some of our portfolio companies. We do a lot of roundtable events. Telstra does a lot of big conferences, you know, where we Showcase our portfolio companies. You know, we have reseller agreements with all of our channel partners as well. So some of these are actually quite formal arrangements, but some of them are also much more opportunistic. So it really just depends on the deal, it depends on the customer, it depends what's needed. And some of these opportunities take a long time to come from an initial idea to a sale. So sometimes that can take a while. So it really just depends on the specific situation.

And to be clear, this is to support your already existing portfolio company. So you already made an investment and now to add value both to your major LP but also to your portfolio companies. You're trying to create business development channels, but you never start from the business units to define where to invest or what can be a real clear pain that Telstra as a business has in order to find a solution then eventually to turn it into a portfolio company.

That's right. Although having said that, we do often speak, I mean we speak to the business units all the time. You know, we have very strong relationships, you know, literally with hundreds of people across the organization. And we do regular calls where we talk about, especially for instance, you know, some of the engineering groups, you know, what kind of technologies they're looking at, what kind of solutions they're looking for. And sometimes, you know, we do go out and we look at things together. Sometimes we introduce opportunities to them, sometimes they introduce opportunities to us. So it really depends on, you know, the, what is needed. But we, we don't operate in a way where we look for synergy first and then make an investment after that. So there are a bunch of our portfolio companies where there is no strategic connection. Sometimes it takes a couple of years to actually progress that. So we, we may invest in a very forward looking company where there's no opportunity to do anything today, but maybe in a year or two there will be. So it really depends, and that's why I said earlier the number one priority for us is to make financial returns. And then if we can add some of the strategic benefits on the back of that, then that's fantastic. But we will still make investments that we believe are the best financial outcomes. And that's a really important part of our strategy.

Maybe it could be easier if you can make a couple of examples of entities, your portfolio companies that eventually scale significantly through that channel that you provided.

Yeah, absolutely. So, I mean, look, one investment that was a very successful investment for us is a company called CrowdStrike. CrowdStrike provide, you know, endpoint protection force for cybersecurity Cybersecurity is a really important problem and a really interesting space. You know, obviously for us, it's an area where we spend a lot of, you know, time. One of our investment managers is, you know, an expert in the field, and we typically look at every single company that's been funded, you know, in a particular thematic. You know, we did that also in this particular space, and we decided that CrowdStrike was the most interesting business. We ended up investing in the company. You know, we told them about some of our capabilities, you know, to help them go to market and, you know, to identify customers. And, you know, we basically talked to the CEO, we talked to some of the board members and some of the investors, and they ended up, you know, really liking the story. And then we ended up investing and we really did a very nice job helping them introduce them to a bunch of different Telstra customers. And also, you know, Telstra itself that ended up, you know, closing the company, you know, generated quite a lot of, you know, revenue from the back of that relationship. And the company made some very nice, you know, comments about our working relationship. CrowdStrike ultimately went public and, you know, it's been a very, very successful investment for us, but it's also been a very successful strategic, you know, investment as well, because, you know, it's sort of an example where we were really able to help them get customers, get them revenue and really help them in the Australian market, which is. Which has been very exciting.

Did you any of your portfolio companies end up being acquired by Telstra?

So there's been. So I think that will almost never happened. It did happen once, but that was a long time ago. I think most of our relationships with our portfolio companies will stay at arm's length. And most of the time, I mean, out of the 38 exits that we've had, I think probably they've been over a dozen IPOs, and the majority have been M and A, you know, by other people. So I don't think there's going to be a lot of that, but I guess it's possible in theory.

Right, okay. So we cannot have a conversation in 2023 if we're not mentioning AI. So rather than talking generically, one very practical question is, I wonder, because that's what has happened, for example, to us and I guess to many companies. But did any of your internal process change lately with the use of AI tools? And if. Yes, how.

Yeah, absolutely. So, look, AI is making a massively profound impact on the world, and ChatGPT obviously has really raised global awareness of AI. But we've been investing in AI for many years, so the space is not a new space for us. And we also have been very excited about using machine learning and AI within our own internal process as well. So we established a data science team more than six years ago. And over that time we've built a whole bunch of really interesting tools which help our team source investments, we benchmark companies, and we also do even some of our due diligence process through that AI and machine learning. So we use more than a few dozen data sets which cover more than a million companies. And we've been using that to measure the digital exhaust from all of these companies. And then the AI basically ranks all of these companies and then makes recommendations to our investment team on what companies we should be targeting. So typically we get a few hundred companies every month and then our investment team look through those companies, we find the companies that we're most excited about and then we'll approach those companies. Companies. And what's particularly exciting to me is that three out of our last investments were actually identified from data science. So I don't think data science is ever going to replace our humans. But you know, it's definitely a very powerful tool set and it's something that we're using more and more. And as I mentioned, you know, we've been investing for this for, for quite a while. So this is sort of a journey that we've been progressing for some time and it's a very exciting one. And I think it's still very early.

Days, but it's great to hear that you started kind of early in the game. Right. So six years ago as a vc, to have a data scientist or more than one. You said all those, the people, all the data scientists are within your Tesla Ventures team or is part of.

Okay. So we have a dedicated data science team and they've built all of the tools themselves. So, you know, we, we've been using that, you know, as I mentioned, for, for six years. And the thing that's great is that, you know, they're continually evolving and adding new features and adding new functionality and also we're finding new applications. So we're also using data science now to actually source potential customers for our portfolio companies. So there's a lot of additional things that we can actually do using data science and machine learning, you know, which, which has been super helpful.

Yeah, would love to hear more offline then, because we're also using some of those tools as well. All right, let's talk about Australia and I think the focus of, I think the current fund, if I'm not mistaken, I mean the vast majority of investments, not, not the vast majority, maybe the majority of investment happens in us. Right, but, but obviously Australia is a home country as well. So tell us how you look at the globe internationally and you do have offices in San Francisco, Sydney and Shanghai, I believe. How do you split the world and why those locations?

Absolutely. So we basically try and find the world leading companies in the sectors that we are covering. So typically, you know, we, we tend to look at thematic areas. We will then look at all the companies that have been funded in a particular area and then we will try and find the companies that, that are leading in that field. And if they happen to be in Silicon Valley, that's great. If they happen to be in Israel, that's great. If they happen to be in Australia, that's great. So, so we, we obviously are not trying to, you know, spread ourselves too thinly, but you know, we are absolutely going, you know, where we think that the best opportunities lie. And look, the Australian ecosystem is a really important one. You know, there's definitely, you know, we talked about south by Southwest. You know, there's, there's a huge amount of people, there's a huge amount of energy and I think Australia is a really interesting market. You know, there's a lot of the really critical building blocks are here. You know, there's a very strong education system, you know, leading universities, there's a very strong commercial industry. All the big tech, tech companies are here. You know, Google, Microsoft, Amazon, you know, there's a lot of very strong research and development. You know, the universities, csiro, private industry. You know, I think the Australian people also, you know, are very ambitious, you know, cultural and talented. So I think, you know, a lot of those attributes that are needed are there. It's a very stable legal system and government, you know, and also the capital in Australia has also dramatically improved, especially over the last, you know, decade. And you know, venture capital, institutional investors, such as super funds, you know, angel investors and serial entrepreneurs are now all investing in the ecosystem. And I think all of these factors together have really dramatically grown the industry, but also, you know, have, have really lifted the bar, you know, and, and I think there are some really exciting success stories like Atlassian and Canva, you know, which I think are very inspirational to entrepreneurs and investors, you know, because there's definitely some really amazing technology and companies that have come from Australia. So I think there's a lot of momentum and a lot of opportunity to do more of that.

And the best is still to come yet, right, because those entities have not gone public yet. So the big returns of investment still need to prolificate. But I have to say that here I've been a couple of days, but the excitement that you feel around this ecosystem is palpable. It's not just that, it's the fact that it feels like there is an alignment of the different actors. And one of the main, I don't know if it's the main one, but definitely an important one is also government. When I say government, I'm talking specifically about the local governments here now in Sydney, New South Wales is one of the, also the support of the sponsors of, of the, the south by Southwest as well as one of our partners. So how much do you think that a government agency can help the acceleration of a movement that would happen, but maybe not with the same force. How much do you think is behind policymakers for this acceleration of the ecosystem?

Yeah, look, I think for an innovation environment to be very successful, I think you really need all the things that we talked about before and government is one piece. So I think it's an important piece, but it's not the only piece. And I think one of the things that governments can do very well is to remove as much friction out of the industry as possible. So in order to attract the best entrepreneurs, the best scientists, the best investors to come to Australia or wherever that environment is. And look, there are other places in the world. Israel has been very successful. Silicon Valley is obviously, you know, in many ways center of the universe, you know, for tech investing. So, you know, in, in those places, I think it's, it's insightful to look at what's worked there and to try and replicate that, you know, in other markets. And I think for Australia, you know, technology is an incredible opportunity and, and I'm really thrilled at the progress and the amount of, you know, improvement, you know, that there's been over the last 10, 20 years. And, and as you said, I think the best is still to come.

Is there any particular area or markets that you think that the Australian startups or innovation can have be more advanced than other geographies?

Look, I think it really depends on the entrepreneurs, how knowledgeable they are. There have been a bunch of companies which started from Australia. You know, we listed a couple examples before, you know, Atlassian, Canva, and there are many other examples, you know, where, where they basically ended up, you know, being a very successful global leader. And, you know, I think, you know, the, the best ideas can come from anywhere. And I think Australia has, you know, created a few really interesting companies which are now world leading and you know, I think there'll be more of those, you know, so I think there's definitely a lot of scope and a lot of opportunity to do more of that and it's a pretty broad ranging brush of thematics. So we'll see how that evolves.

Yeah. For more details, we are publishing our reports about the tech scale up ecosystem of Australia tomorrow. So some of those comparative analysis of different ecosystem will be also explicit there. So Matthew, thanks for your time, looking forward to seeing how this evolves. But so far I've been particularly excited about where, where the market is, is headed. So thanks again and talk to you soon.

Yeah, thank you so much. No, look, it's, it's, it's been great to talk to you and you know, I've been working in the venture industry for more than 20 years and I'm humbled every day to work with so many amazing entrepreneurs, you know, who are literally changing the world, you know, through their thought leadership. So it's very exciting to be part of that journey and to help fuel some of these amazing companies.

Keep up.

Good job.

Thank you.

Thank you. Bye bye.

Thank you for being with us today and see you in the next episode of Open Innovation Talks. Mind the bridge chat with industry leaders.