Corporate Venture Capital

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I'm Kisan Patel and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Welcome to M and A Science Live. Putting together companies is complicated and taking them apart is even more complicated. In this podcast series, we interview leading M and A practitioners to learn lessons from their experience. Learning proven techniques is key to optimizing your MA practice. If you're interested in keeping up with the latest from Mascience, visit mascience.com and subscribe to our newsletter. I'm your host Kisan Patel, CEO and founder of dealroom. Today I'm here with John Orbee, Associate General Counsel of M and A at Emerson. Today we're going to talk about what the process of a corporate VC deal looks like and how to navigate challenges you may encounter. So since John's a lawyer, I'm going to get a brief disclaimer out of the way. I, Kisan Patel, am an investor in Dealroom. Emerson is a client of Deal Room. This interview is not an endorsement of Deal Room. We will not discuss the thousands of hours saved on administrative task and enhanced ability to execute M and A achieved from Deal Room. We won't discuss Emerson had the option to select any M and A technology in the world and select a Deal Room because it's the best. Finally, all opinions in this podcast are of each individual, not the companies they may be associated with. John, did I miss anything?

Nope, that about covers it. We're not going to talk about how much we love the dealer room, so good legal disclaimer there.

Hey John, if you want to kick off, maybe tell us what you do at Emerson?

Yeah, sure. I'm the Associate General Counsel of M and A. My role here is I am an attorney. I partner with our corporate development team and our other M and A functional lead and really helps drive our M and A process here as far as doing our acquisitions, our divestitures and as well as our venture minority investments that we're going to talk about a little bit about today on the legal side, really help coordinate due diligence efforts. The actual document drafting, contract negotiation, really serving as, along with our corporate development, a quarterback for organizing our M and A efforts and getting us to the goal line, if you will.

All the dirty work at M and A.

That's right, the dirty, but the fun stuff.

What's the most interesting deal you've worked.

On prior to joining Emerson? I was in a law firm for about eight years, so this would be before my Emerson experience. But we're here sitting in St. Louis, Missouri, and as any good St. Louis boy, big Cardinals fan. So I had an opportunity actually at my old law firm to work on an M and A deal when the Cardinals acquired their AAA affiliate, Memphis Redbird. So for a kid who grew up in Bush jdm rooting for the Cardinals to get to combine that with my M and A practice, that was pretty special for me and that was a fun one.

Wow, that's actually really cool.

Yeah.

Let's talk about corporate venture. I guess I specifically want to get the understanding of when do corporations or when should corporations think about investing?

So I guess we're at the top. I should say what I mean by corporate venture, corporate vc. Some people might be familiar with venture capital. Traditional firms that are investing in startups seeking a return on their capital. When we talk about corporate venture capital, what we're really talking about is a strategic or a larger company, larger firm making those minority investments and doing that from a company like Emerson, a big company who their focus isn't necessarily investing in little companies, but they do that as part of their strategy. In terms of when people should think about investing, any company, that's a stage in their growth process when they're considering M and A. If you're considering M and A, I think it should also warrant looking at the VC initiative. There's lots of advantages of getting involved in venture deals, minority investments that really can push your company, especially if it's an older, long established company, by getting involved in the VC process to really get a front seat at innovation. Some of the new startups and some of the new disruptive technologies that are coming out. So by engaging in a VC process, it really puts you at the front seat of the innovation exposure there. Companies are always trying to adapt, evolve. You want to see what the latest and greatest is. The venture process that considering investment puts you there and there's other advantages of getting involved in venture investments. With growing companies. You can look for commercial synergies, partnering, looking at getting into new markets, combining your product with their product and new avenues there you can develop a potential M and a pipeline. By getting involved in a company early one, you could potentially get it at a discount. Down the road you can test your hypothesis and see make sure it is a good company. Maybe get involved earlier, but you're not quite ready to acquire them. You can learn along with them, but hopefully develop that pipeline. You might also block a competitor from acquiring something that could be potentially lucrative down the road. There's lots of reasons to get involved, but really help drive your growth and take a front seat at innovation is two main reasons to consider investing.

That makes a lot of sense and you gave some interesting strategic perspectives on why that makes sense. Can you walk me through what shaping the strategy looks like?

So first of all, I'll say that shaping the strategy, especially for a corporate vc is probably one of the most important things you need to do. You need to have an investment thesis, investment rationale and goals of what your corporate VC department group is looking like, what you want to do, what you want to accomplish. Otherwise you're just throwing money at shiny objects. It can be discombobulated. You need to form your overall investment thesis of why you're doing this. Because I'll get into it. A corporate strategic investment, probably a little different than the traditional vc, but you need to figure out what you're doing it in, what kind of targets you're looking for from your overall strategy. But then for each individual deal as well, I think you need to at the outset decide why you're doing it, what your strategy is and what success would look like and then stick to that strategy. I've seen sometimes strategies will shift midway through a deal or mid negotiation and to avoid that, you should really have everything worked out with your goal that you're pursuing at the get go. But then it comes to actually shaping your strategy. Traditional vc, the main strategy is the return on your capital, right? You are putting money and you want to get out the best return you can. Most things you do in that VC space are with that goal in mind. On the strategic side, a corporate vc, you need to balance your strategical goals and your financial goals. Obviously it'd be great to get a financial return out of this investment. That's generally not the typical goal main goal for a corporate VC deal. Do you want to look at some of the things that I just mentioned? Before, like what kind of commercial partnerships are you hoping to get out of this? Are you just wanting like a board seat, like a seat at the table to learn about this new technology? Are you wanting to get a right of first refusal to potentially acquire this company down the road? Do you really need to sit down and think what kind of strategic goals do you want to get out of this?

What drives that I feel like I would default to? You're primarily looking for access to M and A. Is that often the driver of building a corporate venture function? Because again, the technology you mentioned the other one, hey, can we test the hypothesis around some technology and get access to it? And some of the other ones you mentioned about getting additional entering markets and looking at some of the other synergies. But I'm always curious about that because I always would assume that it's primarily going to be driven through getting access to more M and A. I mean.

I think that's actually secondary goal for most of the deals. Some of these ones you're making investment in might not be suitable full on acquisition. It might be tangential to your space and you just want to be involved and know what's going on. It's why you really need to form your actual goal because it could be other than just potential M and A target. From my law firm experience before I came to Emerson, I had a wide range of VC working for other companies and actually working for just traditional VC funds. I've seen different examples. I've seen industries where they get involved in VC investments. They're just trying to prop up the entire industry and develop whole innovation in the industry. Because with the thought that if the industry rises, their business will rise as well. You could see examples of this technology seems really interesting. Can you commercialize it in this? Partnering with a startup company can really be a way of learning and seeing if it can be commercialized. You can really gain access to innovation and learn what's going on. So there are a lot of end goals other than just potentially acquiring them.

It's interesting because it's almost like you're looking at it where you can just enter a space and there was a proverbial term Fenzu art of war where opportunities multiplies are seized. So there's a little bit of perspective of that. Just hey, can you get into this other space that may be interesting and start off with some of these minority investments and enter that way?

Right. That's a good reason just to consider venture deals and having a minority investment goal or objective. Just if you're learning about these companies. If you're talking to these people, mixing in the space if you will, opportunities will arise.

Have you used that as like a primary goal of maybe Ayers Emerson traditional manufacturing to start getting into more of these digital technologies or other sort of adjacent areas?

I don't want to get too in the weeds of our specific strategy, but that is definitely a goal of companies. Venture deals in general is explore adjacent spaces. If there's something that's maybe not right in your lane, not maybe not ripe for an acquisition, maybe you could look at something in adjacent space and see if there's any good opportunities for growth there.

What other considerations and resources are needed?

First thing you want to do is you want to build your team. It's a different team in my experience than your traditional M and A team. A company like Emerson has a strong M and A history and M and A team. We bring an army to deal. Sometimes when you look at the number of people on our working group list, but for a venture deal I think you need a much smaller. You need your lead development person, your lawyer. Whether you have an in house legal resource like we do and myself, you really need to make sure you have a good outside counsel. Get outside counsel that knows venture deal, that's going to know what market is. Don't just open up a phone book and get a lawyer. You need to get somebody that knows what they're doing and plays in this space. And then you need a couple of specialists. Obviously doing your financial and tax due diligence. You want your legal doing your corporate due diligence. Ip since a lot of this is around innovation and learning about new technologies. You want to have an IP person on the team. You might want an employment person, especially if the target company has options or given certain things like that to their employees. You might want your employment specialist to look at that. You want to craft your specialized team for that. And then what's really important is defining your goals and your strategies. You want to have a playbook like this is what we're going to do and this is how we're going to do it. Develop your company's approach to these. You also want to develop your own due diligence approach. Because due diligence on these deals is a lot different than a full on due diligence for an acquisition. Since you're not actually acquiring the company, your concerns might not be the same thing. You also want to take a lighter touch with these. These are companies that you're not going to control and they need to still function, do their day to day. Especially because they're often pretty small. You want to be conscious about not completely diverting them off their business path. Develop a focus, lighter touch, due diligence approach. Another resource and consideration is how are you going to fund these acquisitions For a big company, sometimes you're meeting quarterly or yearly goals and how is a venture investment usually has five to seven year time horizon? How does that play with any organization that has to meet quarterly and annual targets? Is somebody going to take that on, take on that on their P and L for a while and have to deal with that and potentially hurt them? Or I've seen often that companies will form like a specific fund, a specific subgroup, that this is their full focus. You don't have to worry about meeting quarterly goals because we understand that this is more of a longer term before you see any real return on your investment. I think one other thing you really need to consider and this kind of goes into shaping your goals and everything. But you need to decide how you measure success. It's a little easier for traditional VC where you measure success on your return on capital, how much money you get out of the deal. But if financial goal isn't your primary goal, you need to decide what is going to be the measure of success. You can demonstrate success to the C suite and say that look, we only made 2x our investment, but we achieved this and this. Or maybe we didn't get any X on our investment, but there was a strategic roi, if you will, not just the monetary financial roi. So I think there's a couple of considerations and resources you should really pull together as you start developing your strategy.

It's almost like you're creating a separate team for this corporate VC model. Why is that? Why can't. Especially if you have a small team, how come your M and A folks, you don't want them to lead this.

Effort or no, that's a good question. It depends on every organization. You may have a very lean M and A team to begin with. Your M and A team might be the just what I described a financial person, a business lead, a lawyer, ip. And if that's your entire M and A team, there's nothing wrong with using the same team. If you have a large team, 40 people, I'm turning every rock and identifying every single potential issue. That type of massive working group list I don't think is needed here, just a smaller focus team. And if that's your full M and A team, then run with it. The people on your VC team Will most likely be on M and A team as well. But some on the M and A team might not be on the VC team.

Got it. So getting clarity on who's doing what and why.

Yep. Exactly.

How do you set objectives for the corporate venture organization and how do you measure results?

Well, I mean, how do you set them? Could really be talking to the businesses. Ultimately you don't want to have buy in from a business as to why you're doing this deal. You really need to discuss with them what do you want out of this field. Are you trying to learn something? Is this interesting? You just want a board observer seat to learn what this company is doing and where this technology is going. Are you hoping to get a commercial partnership out of this? Are you hoping to maybe buy this company but you want to maybe see if this is really commercially feasible for a couple of years first? I think that's really driven by the business. I know every company development is different, but the development person really needs to work hand in hand with the actual business and see how this deal is. Great company we found. How do we want it to interplay with our company as far as identifying the goals? It's the same process. I think it's important to outlay at the beginning of the deal what it is that you want to accomplish. So you can say we wanted a board seat to learn about the new technology and in three years you can say because of this deal and this board seat we were able to learn X, Y and Z. Or you can say our goal of bringing around these investments is we want to acquire. Learn about three commercially viable companies and acquire them. Then you can say three, five years later, these are the new companies in our portfolio that we were able to acquire because of our venture practice. And it becomes a way to measure a success outside of just the financial return.

I know every deal is unique, but what can you generalize and describe a garden variety transaction structure?

It's similar to an M and a deal for those familiar with that. But I'll just walk through it. The first step is obviously deal sourcing. And that can come through a variety of ways can come from your business. Maybe they know about new technology, maybe they're in touch with a new company that's coming up. They're like, hey, why don't you go talk to them? This is interesting. We want to learn more about it. You can also come from bankers. Maybe a company has hired a financial advisor to actually go out and fundraise for a round. And because of your development department, you're able to leverage that and get connections. The first thing you do is you actually have the opportunity. Once there's actually a thesis like there might be something here, let's look at this company. You do initial high level due diligence. You want to understand the cap table and the governing documents. You want to understand how would you fit in, what rights you might have, what is the current lay of the land of the company. Once you have a good understanding of that, you move on to either an LOI or a term sheet. Very often venture capital deals, you just go do a term sheet where you came out the high level issues, negotiate those ahead of time. When you go directing documents, not that controversial, you'll go through the things like the main deal points like what are you investing dollar wise or what percentage of a company, what kind of rights you're going to have as an investor. What are you going to have a veto right on? Are you going to have a board seat like an actual director? You're going to be a board observer. If you are very interested in your financial return, what's your liquidation preference? Meaning you get paid out before other investors or, or where you sit in the waterfall, are you going to have a preferred dividend return? Whereas you might get paid X on your investment before other people to lay out those big overarching terms in the LOI or term sheet. And then once that's signed up, you have a deal. Hopefully they get some exclusivity in there as well so you know they're not out shopping and dealing with other people at the same time. Then you go into that due diligence that we discussed earlier. The focus lighter touch due diligence to uncover any problematic areas, anything that needs to be addressed. There's kind of two levels. This is a red flag. We can't close this deal until this is addressed. Or okay, they should probably do this differently. Let's just close the deal and once we're involved, we'll bring our experience as a big corporation and say we can do this X, Y and Z better. You go through the due diligence, you towards the due diligence. Sometimes simultaneously, maybe after due diligence, you begin drafting the actual transaction document. You have your purchase agreement, but then you have to usually revise a lot of their org docs. Like any shareholder agreement certificate of a corporation who incorporates the terms that you had agreed to at the LOI term sheet stage. These days a lot of the negotiation and actual documents has really been taken out by the NBCA form the National Venture Capital Association. They have forms, they're pretty much agreed to standard of how these deal docs and venture capital deals will look. So there's not too much deviation. You set out the main agreed to principles in the term sheet. The negotiation of the actual documents shouldn't be that involved. You go through that phase of negotiating documents and then you sign and you fund, then you run with the company and you try to achieve those goals you set out at the beginning. If you're taking a passive stance, just a board observer, you're sitting back and learning, or is there a real partnership there? Are you involved in this company and helping commercialize it? And that's where a lot of the fun starts. After it leaves, our MA point goes to the business and how they can make the business grow.

That's a pretty good synopsis of the deal process. Was there any steps missing? It sounds like you covered everything from finding the deal, outlining the terms. Oh, one sidebar question. Is there a difference between a letter of intent and term sheet?

There is, in terms of, at least in my experience, the level of detail. And then the term sheet will really detail what the actual main terms are. It'll say like, these are the specific. As you can go different ways. You could say high level in a term sheet, but often it'll say these are the specific veto rights we get. This is the specific preemptive rights. These are the specific provisions that are going to be incorporated in documents. It's often really spelled out in the term sheet. Other times in an OI that might be more general or high level, you still set out like the price and the percentage you're going to acquire because you almost have to have that before you really move forward, make sure there's agreement there. But once that's set out, you say we'll have standard and typical veto rights, preemptive rights, things like that. And then you work on that later. The way I've typically seen it is term sheets are more specific. OI is not as specific, but they both achieve the goal of formalizing that we have an agreement to do a deal. So now let's go forward and make it happen.

Cool. Going back to that question around these steps that we just covered, it sounds like we covered all of them. Was there anything else that was missing out of it?

I guess I glossed over the negotiation saying that those NBCA forms really limit the need for that. I don't want to pretend like there's no negotiation. There's definitely a few trading of drafts and lawyers Earn their keep negotiating for clients. So it's not as simple as just here's the deal docs, we're done. There's definitely going to be some back and forth and discussion of things that were found in due diligence and how to properly address those. And that might be the other thing that if there are certain things that need to happen before closing that are covered in diligence, you can throw that in there as a stage two of potentially going out and getting an IP assignment or you haven't formally documented X, Y and Z. Go get that. Or you maybe need a consent for any kind of investment. So there's some other tangential things like.

That question here from Jeff. You tend to use convertible notes or straight equity. Do you take a board seat? You use options right of first refusal.

Great question. In my experience and not just Emerson, but prior practice more often than not. What I've dealt with is straight equity investment. Certainly have seen the convertible notes often what I've really seen is somebody will initially do equity investment and then the convertible notes are later when more funding is needed. The convertible notes are really come from existing shareholders options. Haven't really seen that. Sometimes you can acquire warrants part of your investment. They're all different strategies of how you get to the end. I think the main thing that I've seen is traded equity investment. So there's so many things you can do you can do with warrants. The convertible notes you can do a safe agreement which is a newer instrument. I wouldn't recommend it for a corporate vc but there's different ways to get involved in these and getting money to these startup companies. What's a face agreement, faith agreement, simple agreement for future equity. It's very basic, forgive me. I think it's from Y Combinator where it originated. I could be wrong on that. And it's just essentially we'll give you this money and you agree to what equity that's going to give you down the road. It is a little open ended. That's why I don't necessarily would agree to it For a strategic that I was advising. It is a popular route to raise money, especially for really early stage companies where it's hard to really put a value on what the equity's worth.

Okay, I've read about that as an alternative to convertible notes.

Yeah, exactly.

And then are you using options or right of first refusal?

Sometimes right the first refusal. They're often desired by the company, by the corporate vc. They're often resisted by the startup because the thought that if the investor had the right of first refusal, it could cool interest from other potential buyers because they're not going to approach you if they're not going to do the work, if somebody else could just usurp them and jump in the process. The startups, the target companies, often resist those. But obviously if a company, a corporate VC can get a right of first refusal, and that's great, that's one of the great addition, a great thing for venture capital to have right of first refusal. If somebody wants to buy this company and you've grown with it and you like it, now you have an option to buy it as well.

Can you explain to me the difference between traditional VC deals and corporate venture deals?

The number one difference is a traditional VC deal is all about the financial return. They're there to make money. Each one is different. They might have slightly strategic rationale, but their rationale is to deploy capital, get a multiple on their investment and make money for their fund, for their investors, for their partners. And whereas corporate deal, there's a lot more strategy, there's a lot more to it than just getting a multiple on your investment. I've talked about a couple of different strategy things today. I won't belabor it again, but it's much more strategic on a traditional venture capital where a highly negotiated thing might be where your multiple is going to be in an exit scenario. That might not be as important for a corporate deal where they have more strategic goals. Another thing is I think traditional VC deals, they might do more deals. I think corporate VC by their nature are a little bit more cautious. Would they make a little bit more safer Best, if you will, Whereas traditional VC can be a little bit more aggressive and take more risks in hope of getting that high exit. A VC will usually always try to have at least one board seat because they want to have a say in what the company is doing. Whereas corporate VC might not necessarily take the board seat. There's another difference is a VC often takes a good large chunk, 15, 20%, maybe more. Corporate VC could get up to that high, but often you'll see very, very low. So with a low amount you might not have a board seat, whereas the traditional VC usually takes a board seat. Which reminds me, that was actually on the last question. I didn't touch on it. Board seat versus server. Often in a corporate VC role, there's just a big debate. Do we want a board seat? Do we not want a board seat? And because you won't have to send somebody to serve on this board fiduciary duties attached to that. It's something that sometimes corporations don't want the actual board seat if they have an observer so they can know everything that's going on, get inside in the financials and everything and have protection through the veto rights that are otherwise in the deal in the organizational documents. Sometimes a board seat isn't needed. Of course, if you do have a board seat, you always have a little bit more control. So maybe it's something you want, you take on the extra responsibility for a little extra control. I think that generally covers the differences. The main thing is the financial or strategic.

What are the considerations for both types of deals?

What do you mean by that?

I guess in terms of. You covered a lot of it in terms of, hey, if you got traditional vc, they're more focused on what their net gains are and their exit opportunities.

That's exactly it. It's just a suction of pure financial and I shouldn't say just financial because a lot of times VC will also bring expertise to a startup, especially if it's like a niche VC that they only invest in certain types of companies. But at the end of the day they're really concerned with their exit. They're not buying this company for the next 40 years. They're in for five to seven, eight years and they want to make sure the exit rights are strong for them and the multiples are right. They're very, very concerned on the financial side, whereas the corporate considerations are a lot different. It's all the strategic rationale, how it can help your business. I haven't touched on this so far, but I kept talking about why you might get involved in what these companies can do for you as corporate venture capital. But you also a big sophisticated company also offers a lot to these venture companies, these startups. For some of these startups to get a Fortune 500 company involved, one, it gives them credibility. Look, we have a Fortune 500 company has invested in us, they believe in us. That lends credibility with customers, potential, other fundraising. There's a lot of good benefit for them there with their Fortune 500 company. You have people that are experts in their field and they know how to drive this business, how to grow a business. And you can bring some of your own expertise to this startup smaller company who's just maybe making their way in the world. These guys probably have great ideas. But to combine your business expertise with a great innovation, there's really a two way street before we've decided to benefit in the relationship.

What are some of the challenges of Doing a VC deal with startups, I'd.

Say one of the biggest challenges is the nature of a startup company versus a large big public Fortune 500 is they can be unsophisticated. They might be in full out growth mode that they're just churning and burning. They're not really paying attention to some of the corporate formalities the lawyers might obsess over. They might not have checked their cap table, they might not have dotted every I across every T, things like that. They might have given away things in their documents that they just didn't care about or think about. One reason the due diligence is so important, you wouldn't do a targeted lighter touch, but you still need to do it. You need to dig in and make sure everything's on the open up and if it's not, figure out a way to solve it. There can be some complications with unsophisticated people there. I've also seen that they might be brilliant engineers or have brilliant ideas, but they're not M and A people. They don't know how to do a venture deal. So these terms and things that are being negotiated, they might not understand them. So it can be a challenge there. There's also different cultures. Startup culture can be very different than a big company. Especially where you're trying to do a partnership and work together and maybe even embed in each other. There can be a clashing of cultures. That's something to consider. And then often a startup is a smaller company, it might only be a couple people, a couple employees. At this point they may not have the resources to fully devote their attention to your venture capital deal. Whereas in Klipper VC you have a deal team, you have that small team I talked about who their job is to do this deal. Well, the startup, their job is to grow their business and go out and win customers and develop their technology. Sometimes to take them away from that and to try to negotiate a deal and to have them answer your due diligence questions in a timely manner, that can be a challenge. You need to balance out getting a deal done in a quick and effective manner with the right amount of diligence, but not overwhelming these guys, taking them off their business plan and you inadvertently interrupt this business for four or five months and set it back a year or two. There need to be a real balance there.

Playing devil's advocate as a startup looking at options between traditional VC and a corporate vc I one would see the traditional VC of maybe having more of established playbook in terms of hey, here's our strategy for helping startups grow the sales playbook, marketing playbook, et cetera. But the thing that's a turn off is they are planning the exit as soon as they invest. It's got to be some real 2x3x annual growth for it to really make sense. Where on the corporate VC side, I'm particularly interested in getting access to that capital because my perception is that it's essentially capital coming in off the balance sheet and it's not going to be contingent on these provisions. That's going to really force an exit sometime in the near future.

I've played as a lawyer for both sides of it. I'm biased to think that a corporate VC makes it a very attractive partner other than just having the financial backing. And there is that playbook. If you partner with the right corporate partner who has a well developed investment thesis that isn't just making throwing money around willy nilly, a good partner can really help drive your business to the next level. And like I mentioned before, add that credibility to your young company. I think there's a lot of value having a corporate investor.

It does. I'm just wondering on the other side, is it going to limit my exit opportunities down the road that maybe one of your competitors would be put off by the fact that you're an investor?

Yes. But one thing is on the traditional VC side, they're a little bit more aggressive. They might be willing to get in bed with a earlier company earlier in the process than a corporate. They might provide access to capital at a certain stage for a company that you're not going to get from a corporate yet you might not be at that stage, they might be willing to give you more money. They might have had a history of you do that initial investment when you need more money a year or two down the line they have a demonstrated history of putting in the additional capital and really knowing and having commitment to startups in the VC because they're driving for that exit in a few years. Whereas maybe corporate they might do their initial investment and if you go south, they're going to walk away. That's something that needs to be evaluated on a case by case basis. But while I think there's a great advantage for a corporate partner, there's clearly scenarios where a regular traditional VC is the right avenue for a company to pursue and partner with.

Let's get into some of these questions. Yeah, like a minute to answer each one. So I got this one from Gilbert. Do you invest in SEG entities that will be direct to Consumer using influencers or marketing leads issue seal of approval after internal audit of SEG activities of vendors. I have no idea what SCG stands for, by the way.

I don't know seg. I know there's esg, but I don't know if it's the same thing in terms of influencers and that it's not something that really get involved with here at Emerson. Or maybe we do outside of my role as M and A and maybe we left for our marketing, but it doesn't feel the type of thing that really goes with our industrial company. It was actually one interesting thing that came up in due diligence on some of the old VCs I worked with is looking at the kind of the endorsement deals. A lot of those early stage startup companies really do rely on influencers. A lot of athletes, celebrities, and they'll have deals in place. Sometimes they've given away equity to these people as payments. That's something to definitely look at. I've seen it on both sides. Doesn't play. And it is a part of the company's growth strategy.

All right, how do you value these early stage companies?

It all comes down to a forecast, what their sales case is. They need to demonstrate to you what they think their company is worth and why they're going to do it, why they're going to hit these numbers. How are sales going to grow? Pretty much every one of them says sales are going to grow exponentially. They need to demonstrate why that is the case. You need to look at their burn, their burn rate and figure out where you think, where you take what they've given you as their forecast and kind of grounded reality in your own experience in what your financial team thinks. And that's really a place where he has good financial diligence, good financial team, a good development team to really crunch those numbers. Something they don't always trust the lawyers with. We were promised no math. But if you're involved in this world though as a lawyer, you fully need to be aware of all that and how to handle all that. But having a good financial team to crunch those numbers.

What is your internal deal approval process? Is there an executive committee, committee tasks.

To review and approve these without going into Emerson specifically? That's usually the case. It depends on maybe sometimes there's investment thresholds like investment under X dollars. The head of the venture group can do it. If it's over X dollars, it needs to go up the chain, probably all the way up to the CEO. It's really case by case different Companies, different approaches do it differently. Typically it'll probably run up to an high up executive, but sometimes a well developed venture group will have authority to just do deals under X$.

What is your view on the employee option pool? How hard you push for a high percentage before you make your investment?

If it's just a straightforward cap table without employee options, they're much easier to deal with than if you've given away a large percentage of the company already or reserved a large percentage of equity for options. That said, dealing with options is pretty standard when you're looking at startups because that's often how they incentivize retain talent when they don't have the cash. So it's obviously easier if it's not there. But it's something you just have to learn to figure out how you're going to deal with.

How do you go about ROI and IRR calculations? Factoring revenue from partnerships, you make a.

Forecast on the information you have and what you think that you're going to be able to bring to the partnership and where you set goals. Almost like any M and A deal, you say your IRR based on your forecast and what you think this company can do and you ground that. Try to ground that in reality and you have different business cases and doing it with a startup is no different. It might be a little wider delta on the different cases and it might be more of an educated guess than anything without a strong track record. But that is something that you need to do when you're deciding your investment. There's different strategic reasons, but at the end of the day there is a certain IRR that you're aiming for and if it's not there, there better be a day in good strategic rationale to do it without achieving a certain irr.

Sure. Brought one of the analysts from the Corp dev team for this interview.

Yeah, I'm a lawyer by the way.

Hey, so John, here's another one from Jeff. Do you tend to couple the equity investment with a commercial agreement or other strategic collaboration, a distribution agreement or joint development?

I can break it down a percentage of deals that do that or don't, but that is very often component and present in a corporate venture deal. Often there'll be a commercial synergies, a real commercial reason to do this deal, a distribution agreement, buy agreement, some kind of commercial arrangement will also be part of the deal. So aside from the straight M and a venture investment transaction, at the same time you'll also be negotiating a commercial agreement that is very, very common.

Does investment go directly into the operation?

Typically, yes. It's one of the things you set up is with the use of proceeds. And one thing you don't want them to do is take your proceeds and dividend them out to themselves right away. You often want to set the parameters of this is our investment and it's going to be used for X, Y and Z and future growth corporate purposes. Or you might even include veto rights on what they can do with dividends and things like that. But it should generally go into helping the operation and hoping to grow.

How does the exit strategy match our acquisition strategy?

Not to get a typical lawyer answer, but it depends. It's a case by case scenario. Are they looking to do an exit in five to seven years? Often they are and they may weigh in on what they're willing to give away as far as preferred dividends and things like that. But like I said, often that's not as much of a concern to a corporate vc. There's some wiggle room there, but it's hard to give a straight answer because it depends deal to deal on which what each party's goals are.

Hey John, so I heard you guys got a new CEO. I think that's like the recent news with Emerson.

Yep, last week.

Okay, really recent. I was curious to know, and this is what's always intriguing is different CEOs have different appetite for M and A. When does that sort of get communicated? When you get a new CEO that hey, M and A is activity, we're going to disband the team or we're going to be ramping up. What does that look like?

Yeah, good question. We just got our new CEO Law Carson buying last week and hasn't communicated that yet. Somebody asked him a question about our portfolio during the earnings call last week and he said just got in the role. Use some time to digest and get back to you. Talk about it at the investor conference coming up. But a company like Emerson, we've really been built on M and A acquisitions. If you go back to our founding from 1890 and you look at our company over history, M and A has really been how we brought and pieced together different businesses. We have so and law is internal. Been here for at least 30 years. Just looking at the fabric of Emerson, there's a full expectation that M and A will need to be a large part of our business and our company. I love M and A, so this is a good place to be.

All right, John, what's the craziest thing you've seen in M and A?

Oh, man, that's tough. I could probably tell you about some closing dinners that I've attended or I've heard of, but it's probably not the best forum for that. So maybe another time. Some of the things that come up in due diligence or I've seen deals where like, for consideration, the sellers are asking for like season tickets to whatever team and like, you're about to get paid millions of dollars and you want season tickets. Or some of the things that come up in due diligence where the entertainment budget for, you know, a yacht here and hunting trips to there and the private jet here. It's interesting to see things like that sometimes. I've been in deals with something on the movie where everybody walks into the big boardroom, every student at the board. I think there's a reason for a price adjustment. The other side just got up and walked out. Both sides had flown across the country and just got up and walked out. It was like something out of a movie that was pretty crazy. I mean, honestly, I think the craziest thing, and if everybody is M and A professionals, probably relate to it. But the craziest thing in M and A is the hours. Especially being formerly on the law firm side, outside counsel, you're really married to the job. And I've seen people just working around the clock, missing kids, graduation, never really fully on vacation because you're always checking your phone and things like that and probably not really looking for the craziest thing. But the hours that an M and A professional needs to dedicate to the craft can get pretty crazy. But at the same time, it's fun. That's why we do it. It's a highly rewarding field to be in when the deal comes together, when it's finalized, especially those last couple of days in this little rush to get it all done. It's a really fun industry to be in.

The lawyers really do that. They really tense up. They feel like they're always laid back and half the battle is getting the different law firms to talk to each other.

Oh, yeah, they tense up. I mean, they work. Part of the deal is need to come off this cool, common collective right. They put in amazing hours. And now that I'm in house counsel, I can really appreciate what some of the outside people go through and try to respect their time at the end of the day. For the outside, it's a client service business, so you're always at demand of your clients. I've seen some pretty extraordinary thing responding to those clients.

Those are great Stories to wrap things up. I know one of the other side projects you're working on is doing an academy course with us. The goal is you're going to teach deal terms in an upcoming course. For those of you not familiar with M and A Science Academy, it's an initiative we started last, I think at the end of summer. Feedback we got from our events was people want to know the practical how to's of M& A. So we looked around and thought M and A training isn't that great. Why not disrupt it? Come up with some modern ways of having real deal practitioners like John that actively do M and A teach M and A. Not the person that hasn't done deals for a long time or those long workshops with outdated curriculums are really short, straight to the point.

I wish for something like that when I started my career, if anybody else listening is a lawyer, that you would know that law school does not teach you how to do M and A deals. It's just something you learn by getting thrown into the fire, making mistakes, learning from your mistakes. So I wish there was something like this back when I started we talk about deal terms. I think at least this first one may be more, but I'm talking about typically indemnification terms. The areas that get negotiated with the buy side ones, sell side ones, go through the category of those and hopefully it'll be informative and then we can get something out of it.

Look forward to it. Hopefully we time it right. Our next summit's March 25. I think the page is coming up in a day or two. I'll see if I can get John on board to commit to that date.

Okay, sounds good.

Hey John, thank you. Thanks for your time today. Appreciate you walking me through, teaching me a lot about corporate ventures. Here's to the deal.

Yeah, absolutely. Thanks for having me. And here's to the deal.

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