The Corporate Venture Strategy

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Thank you. I'm glad to be back.

Can you kick things off with a little bit about your background?

Used to be a venture capitalist many many years ago. Enjoyed it. Switched over to the operating side and it had a chance to take over one of our portfolio companies. That needed basically a turnaround. So I was on both sides of the table. I started out as a board member and ended up being the operating guy. Learned a lot about how venture funds work and how venture capitalists think about the market. Roll forward many years and I end up handling the venture capital investments for Deloitte. Experience from many years ago got basically retreaded and reapplied. So I know a little bit about the venture community from having worked in it, having been a VC, having worked with a number of VCs that were on my board when I was a venture funded company and now I'm handling venture investments at Deloitte, which is tricky, is, yes, the largest consulting firm in the world, but it's also a large auditing firm. And so we have to live within the compliance requirements of an audit firm as we make our investments either in venture funds or in anything else for that matter. So there's a fair amount of additional compliance work that I need to deal with, sometimes known as independence work and conflict checking that goes into each and every venture investment we make and then we continuously monitor those investments to make sure we remain in compliance. And so far, cross your fingers we have. It's an interesting situation at Deloitte. It's not quite the same for more corporate environments. More commercial environments, they won't have the compliance that we have, but they still follow the same kind of reasons and rationales for perhaps doing corporate venturing.

When you think of Deloitte, you don't think of venturing in general. Maybe we can kick things off with defining what is corporate venturing? How's it different than Veteran Capital?

Yeah, when I use the term corporate venturing, what I mean is an organization like ourselves, that we're a corporation partnership, we behave like a corporation having some kind of relationship with either a single or multiple venture funds. When I say some kind of relationship, there's different ways to do it. You could simply have an arm's length agreement or even just a handshake agreement with a venture fund saying, look, we have a way to help monetize some of the companies you've invested in and we should work together to better understand the opportunities within what's called your portfolio, the companies you've invested in. And you can simply have it that way. Where you me for example, at Deloitte, working with the business development people within the larger venture funds, sit down and describe the appetite we have for certain kinds of companies to work with. They offer up those companies from their portfolio. We go through a process whereby they introduce us to the companies themselves. First, just a desk introduction. Here's what the company does and here's why it does it and why it's distinct in the market, why we invested, and so on. And then if that resonates with one of our particular needs in terms of areas that we have an interest in, practice areas of the firm, then we will start with meeting the principles of the venture capital fund portfolio company, in other words, the company they invested in, and have an introductory session. We may or may not bring in our practice leaders at that point. We might screen them first and then if we think there's an opportunity there and they're interested because you want to, you got to have both sides to be to work. Then we'll bring in our practice leaders and their subject matter experts and start a whole socialization process that could lead to forming an ecosystem relationship or an alliance, or it could just turn out to be good market information for us and they get a chance to understand how Deloitte works. So that's one way to do it. That's purely an arm's length approach. You could have some money changing hands in the form of a sponsorship, where you could be a corporate sponsor of a venture fund. You're not an equity investor, but you've made a financial commitment to sponsor the fund or to work with the fund, and you've put aside monies to develop the relationship. You'd still go through the same socialization process as you look into their portfolio of companies. But in this case, if you're putting up sponsorship money, generally they're dedicating resources to you so that you get more attention than you might if you just simply had an arm's length understanding or agreement. Another way to do it is to actually make an investment in a venture fund. At Deloitte, we've done all three of those modes. We've done investments in select venture funds and I'll explain why in a minute. We've done sponsorships and we also have just some good arm's length working relationships where there's mutuality of interest between us and the venture funds. So those are the ways we do it. Another alternative would be to actually set up a venture capital fund within the firm. We've chosen not to do that. Some of our competitors do that, so they want to play venture capitalists. I would argue that if you're going to have a venture capital fund, you're going to have to manage it. Just like the venture capitalists manage their own separate funds. Which means staffing it with professionals that know how to do venture capital investing. Work with portfolio companies, work with investors, find investors. First of all, you got to raise money in order to do this and then find the right companies to invest in and then help grow and scale those companies. That's a special skill set. That's not a skill set. That's common at a large consulting or accounting firm and we've chosen not to develop our own dedicated fund. So those are the different modes that you generally see. If you do start up a venture fund, then you're going to be looking for investments in early stage companies and you need a lot of deal flow for that. I'd rather piggyback the deal flow of multiple venture funds that I work with than have to go find my own deals themselves. Because for us, the return on investment is probably the least important reason to involve ourselves in the venture funds if we're an investor. Whereas if you're a venture capitalist, that's pretty important to you and your co investors.

So I want to clarify real quick. We have essentially investing directly into the company partnerships. You also fit into this model and then create an actual structured fund and be a vc.

And there's probably some other creative variations on the theme, but those are the major ones.

I wanted to clarify capital allocation thinking through that. Most of the time, corporations wouldn't necessarily. If they create a structured fund, they're creating a structured fund. Otherwise all these investments essentially are off the balance sheet.

We're basically using our balance sheet to make investments. But there's not a dedicated pool of money that says this is only earmarked for venture fund investing. We have enough cash flow that we can afford to do it more on an ad hoc basis. As we see particular funds that we think we should invest in, we were very selective because if you think about why would a corporation or an organization like Deloitte invest? It's really because of the strategic alignment with the venture fund. In other words, if we have certain areas of our organization that we deem high growth and high investment areas, and there's a venture fund that's focused in those same areas, those same market segments, then we have an alignment and it makes sense for us to consider a relationship with the fund, not necessarily an investment in all cases, but in some cases we do that. For example, we have a very large cybersecurity practice and we have made an investment, a series of investments actually in a cybersecurity fund. That's pretty much their focus. It aligns with our focus and it gives us a number of advantages.

Let's break down the why and then get into the advantages. Why should companies consider getting into the venture game?

I'll tell you why we do it. One is market sensing. And what I mean by that is just going out and looking at the market through the eyes of the venture capitalists, because they're seeing things earlier on, maybe more advanced technology than we might see in the normal commercial market, particularly in the public market. They're generally looking at early stage disruptive or novel technologies, in some cases even before the products themselves have even been built. That's not the kind of things we would normally see in the market. So they've got a way of sensing the market that basically augments our sensing because we have a whole team of people that do market sensing in our US innovation practice. But they're not going to see everything. And by aligning with some of the venture funds, we'll see some things we wouldn't see otherwise. Another reason we might do investing in venture funds or align ourselves with venture funds is because it gives us an opportunity to build some eminence, perhaps do some joint research with the venture capital funds, affiliate ourselves with some of the cool kids, some of the new and advanced technologies and get a chance to be associated with them. So there's some brand and eminence building there. There's also, and this is probably a major reason we do it, is the opportunity to build relationships with the portfolio companies, the companies in which the venture funds have invested to the extent that those companies offer up technologies that we think can help us build offerings or build solutions that solve big problems for our clients in a novel or disruptive way. So it's a way for us to bring a new and different approach to social media of the problem solving that we get asked to do every day. Another value to us doing corporate venturing is some of those portfolio companies, potential M and A targets, something near and dear to your activity set gison. So we're looking at these companies to build a relationship, but at the same time, we're also considering them for potential acquisition if it fits our M and A criteria, our M and A strategy. And then finally, the least important thing to us, because the other reasons are higher on the list of priorities, is the potential roi. We're not looking at venture funds and saying the most important thing is the potential roi. It's we don't want to lose money. But at the same time, ROI is less important than the other strategic things that I mentioned. That's our thinking on corporate venturing.

I think you got it. I got intel, presence, relationships, M and a roi.

And the relationships is really what we call ecosystem or alliance type relationships. Let me expand on that a little bit. So if you think about it, a firm like Deloitte is known as a professional services firm. So we have a lot of practitioners that run multiple practices in almost every business area. You can think of every market segment you can think of in terms of whether it's financial or in the life science area or cyber, you name it. We're solving big complex problems for enterprise corporations. As part of our way of delivering those solutions. We're marrying technology, other forms of intellectual property, which could include data, with the professional services to solve these problems. And a good source of some of the technologies that we might want to deploy come out of the venture community. Our goal is to see things early on realize the potential that they have, build them into some of our offerings. They could be gap fillers or they could be the basis of a whole new platform for us. But at the end of the day, the goal is to bring something to our clients that help them solve their problem in a novel and efficient way. So that's why we think about those kind of relationships. We're going to take them to market, we're going to build services around it and provide a more complete solution than the technology might avail itself of in and of itself.

You take data technology plus professional services, and now you're creating some new compelling capabilities.

Yep, we do a lot of work in the area of digital transformation. And if you think about digital transformation, it lends itself to a fair amount of technology to create a better approach to doing what you traditionally did before, or maybe a completely disruptive approach. And the technologies that we're seeing coming out of the venture community are ones that in many cases fit that particular criterion. So we're excited to see these things early on, recognize their potential value, and then start to build out offerings around certain one of these companies, not all of them. We might look at 50 and choose two or three. There's still some pretty exciting things that we're seeing very early in the market. If we wait until they become public companies, then we're in there with everybody else at the same time. This way we get a jumpstart on it.

That's a clear advantage. Are there any other advantages of corporate venturing?

We end up building kind of interesting ecosystems. In other words, some of these companies that we start to work with also have other relationships when we leverage those relationships. So instead of just having a one to one relationship with one of the portfolio companies, we may end up doing something that's a three way or four way activity. So it could involve with one of the hyperscalers, for example, Google Cloud or AWS or something like that could be leveraged for cloud migration. But in addition, there are certain enabling technologies that we want to use to do that work. So the Relationship could be between one of the hyperscalers and one or more of these cloud technology companies that we might be working with to provide a better solution for our clients. More cost effective, better management, faster capabilities. So it depends on what kind of problem we're trying to solve. It could be a security issue. In terms of encryption technology. We're not going to put all the money that's necessary to build the world's best encryption technology. We might be able to leverage it in the form of a portfolio company relationship. So why build it if you can align with it and go to market much more quickly?

Creating new capabilities to enhancing current capabilities.

Think about it. There's three levers that any big company can pull. One lever is they build something from scratch. One lever is they buy it. And the third lever, there's probably more, would be to align with IT and build relationships and leverage the technology that somebody else has built. One, because it gets you to market quickly. Two, they're maniacally, monomaniacally focused on that technology. So they're going to try to be the best at it. Why should we reinvent the wheel if they've already invented it? Let's just leverage it and move faster. So we try to avoid a not invented here mentality. Some things we have to build ourselves, some things are better through acquisition. But in many cases, aligning with these kinds of companies is, is the smartest, fastest way to go.

Don't you find those hard to do?

You've got to have a meeting in the mind, man.

I'm terrible at doing partnerships. I haven't had the great success. I think there's also like a maturity. If an organization actually has a mature model for doing it, you hit a keyword maturity.

One of the things when we talk to our venture capital compatriots about is making sure that the portfolio companies we're working with are mature enough, not just in terms of their product, but in terms of their organization. To be able to work with an organization as large and complex as Deloitte, it's not as facile as some people would like to think. Sometimes people think of Deloitte as just a large channel and in some cases we do. We obviously bring a lot of things to the market, but we're not designed to just find early stage technology companies and resell their stuff. That's not our business. Our business is to solve complex problems for our clients. And if their technology happens to be applicable, then they get brought into the equation. But yeah, if you're dealing with a deloitte or another Big four or any of the big consulting firms for that matter. There's probably a fair number of people that are going to have to weigh in on the technology before it gets any kind of adoption. It's a somewhat painful process to the smaller companies because they're going to have to meet a lot of people and give a lot of presentations and answer a lot of technical questions. And we're going to take a conservative approach in the sense that we're going to walk before we run. So we're going to look at the technology, we're going to evaluate it, compare with other technology that we're familiar with. We're going to probably do something more as demo for our clients. If we get them excited enough, we may do a proof of concept or a proof of value. And in the process of showing that there's real value here, get the client comfortable with the technology and then we'll start to really take it to market. So it takes a few good successful proofs of concept before the partners will get really excited about doing something. They want to have it succeed somewhere with a real client or two or three before they start talking to their clients about it. It's not a quick process, unfortunately, and the companies that we're working with need to be able to handle that and take the time and be patient when we do that.

In terms of the characteristics of maturity, I like that you referenced that they have some examples of some similar relationships that worked well. Anything else? That would be other characteristics that you look for in terms of assessing companies maturity if they're ready to partner with a larger organization.

Yeah, the maturity is both the management team and also the technology itself. We're not in a position to take something that's version 1.0 to market. We're more conservative than that. We're looking for something that has had some adoption in the market. So we're looking for some relatively well known clients. Doesn't have to be a lot of them, but a couple that we know somebody's actually using the technology and getting benefit from it. We want to make sure that their responsiveness is up to the level that we require because our clients are pretty, as you can expect. Being big enterprises expect very quick responses when there's an issue and we want to make sure that they're able. They the portfolio company that we're partnering with is able to respond as quickly as we need them to respond in order to satisfy our client needs. So there's maturity in a number of different ways that we look at, it's not just the technology works and it's been in the market X number of months or has X number of clients. It's the whole company. We want to make sure that when we bring them to our clients that our clients are going to be pleased and it's not going to be embarrassing to us and it's not going to be frustrating to our clients.

That's a fair point there. Can't have anybody catch you off guard or embarrass you. That's not a good career thing.

We try to avoid that. We try to do our homework. We test it out.

Do you have any big flops like that did turn you a little red or green?

Not on my watch. Maybe I'm just lucky. But we tend to be pretty careful about the technology that we're working with. Sometimes we could have a misunderstanding about how to go to market and where, what role their technology plays. But if our clients beat it up, it's being done as a proof of concept, not as a final license or anything of that sort.

When we think about these different approaches for corporate venturing, how would you choose the structure that's best for your company?

In terms of the investment side or either relationship side or in terms of how to build the ecosystem? Which question do you want me to address first?

I would say looking for the investment side. How would you know what's ideal for your company?

First of all, I would start with having a clear idea of the strategy. In other words, what kind of venture funds might you consider investing in and why? So in our case, we're looking at venture funds that are aligned with the strategic growth areas of our firm. So in some cases that could involve cloud and cloud migration, artificial intelligence, the metaverse, and unlimited reality, or even augmented reality. It could involve cyber, it could involve esg, blockchain and digital assets. It all depends upon what the thrust is of the firm. Because we're generally looking at venture funds more in our newer areas than in our traditional areas. In our traditional areas, we're always looking for something new and different to augment it. But in the growth areas where the market's much newer, the venture community seems to be a good place to start. So we focus on those particular broad brush areas and then we look at the best of breed, who are the best funds in those particular segments that we could potentially partner with or invest in. That requires a fair amount of research to validate that. But there's some good sources for that kind of information and then we'll decide which ones we want to invest in? And do we have a meeting of the mind? Do they want to work with us as much as we want to work with them? And if they do, then we figure out a way to do it. Some of the more established funds, as I mentioned before, have their own business development team. And those are the people that we will generally work with because it's their mission to help their portfolio companies gain traction in the market. And so they represent those companies and help us work with them. Because sometimes there's a bit of loss in translation between what Deloitte is saying and what they want to do and what the entrepreneur wants to do. And it's helpful to have the venture capital fund involved in kind of brokering the relationship and supporting the relationship, because sometimes we'll ask for things that the portfolio company just doesn't understand, and then the venture capital fund will say, now you have to understand how this really works for enterprise type clients and why Deloitte's asking for what they're asking. Because it could be something as simple as what's the ownership of the company? Because that matters with respect to our conflict checking. And they may not want to provide that kind of information, or we may have to ask questions that require a fair amount of technical due diligence. And they may be sensitive about disclosing that because their fear is that anybody who sees their technology might try to somehow steal it. Not anything we would consider doing. But that doesn't mean that the portfolio company isn't concerned about those kinds of things. Sometimes the venture fund acts as a bit of a translator and also helps rationalize some of the things that need to be done for us to build that relationship with the portfolio company, just to get them to the table. Sometimes they don't even want to talk to us because they don't see any reason that Deloitte would be beneficial to them. And I could tick off six or seven reasons quickly why we could be beneficial to them. But if all they think of us is an auditing firm, they're not going to get it. Unless they think we're just trying to get their audit business, which we might, but that's counterproductive for the business relationships that my team's trying to do. So we're either going to audit them or we're going to try to build a business relationship, but we can't do both. We got to keep those two things separate.

With the venture funds, is the capital being deployed to the venture fund or through the venture fund and to the company?

Technically, we are passive investors in the venture fund that we invest in. So the general partners, the people that manage the fund, sometimes they're called managing directors. Directors are the ones that are running the fund and they have an investment committee and they're making the investment decisions. We're not. They could come to us and ask our opinion on a company if they want to, and sometimes they do. Or they might ask our opinion on the dynamics of the marketplace because we have lots of practitioners in the market every day and we'll compare notes and sometimes that informs an investment decision. But we do not make investment decisions for the fund. They make their own. And a lot of times they're making those decisions and we're not hearing about what companies they invest in until after they've made the investment. Sometimes we get a chance to see it before they do it, but we are passive investors in the fund.

Then you're still leveraging that relationship to get some access into those companies.

Yeah, usually we have enough of an investment that they know who we are. And when we enter into the investment, we usually ask for a certain amount of information on a regular basis so that we can benefit them, benefit them and their portfolio companies. Because we'll have a running dialogue with some of the venture funds about what are you seeing in the market? Here's what we're seeing and comparing notes and that's useful to both sides. And then obviously they want us to grow their portfolio company investments, so they want us to work with them and get them a lot of sales. So in order to do that, we got to dig in and really understand the technology and the company and build an offering around that.

I guess to recap on making these different structures successful, it's alignment on the strategy, really flushing that out, find the best opportunities and then meeting of the minds seems like the three big components. But yeah, I'd love to hear why the venture funds on the other side of the table would want to partner.

On the portfolio company side. Affiliating with a large professional services firm, if we're representing them or talking about them to our clients actually does provide some brand benefit or some validation in the market. It's not them professing how good they are, but it's us professing how good they are. So that certainly adds to their credibility in the market with some of the bigger companies that may not know about them otherwise. As I mentioned, there's some opportunities for us to bring their technology in one form or fashion to our large enterprise clients. And we have a goodly number of Global 2000 clients that we can talk to. And we can talk to those clients at very high levels, at the decision making levels, executive level, board level, in some cases. So there's a way to get them quickly exposed to the right decision makers at the right level in a big organization that they probably have a hard time finding on their own. Another thing is since we have practitioners in the space and we see other companies that are competitors of theirs, we can share with them, give them feedback on their products and on their strategy. So there's some, call it free advice, if you will, that they get just by interacting with us and understanding why we ask the questions we ask, and when we do comparisons with other players in the market, it helps them understand how we, as a representative of the enterprise world, think about their particular technology. In some cases, we're completing the solution. They have a really cool technology, what I'll call the nice shiny object, but they may not have a total solution. So. So the combination of their technology, our market knowledge and our professional services may be what wins the day. If you think about it, there's a bit of a disconnect. Corporations are trying to solve different kinds of problems. Technology companies are providing different kinds of technology. Somewhere there has to be a bridge, and we often represent that bridge. We can help them get their technology into big clients by presenting it in the right way as a solution to something that's maybe even larger than what they were thinking. So those are some of the reasons that the portfolio companies want to work with us. The VCs on the other hand, they want us to take their portfolio companies to market. So there's an economic driver there. But they also enjoy the dialogue that we have in terms of again, what we see in the market versus what they see in the market. And also there can be a dialogue at the deal flow level where they're starting to look at a company and they'd like to get a little more background on it from a different perspective. And we can offer that different perspective because we have practice leaders in most segments of the market and we have a lot of subject matter expertise that we can bring to the table. So sometimes the dialogue can be very strategic and sometimes the dialogue can be highly technical. Depends upon what they want to talk about. And then sometimes it's just if we see the same thing they see, they hear it enough, they go, that probably informs their investment thesis. Even though we're not telling them to invest in by any means, it does give them some insights. And they go, if that's what the enterprise clients are saying they need, and this is the kind of practice you have, then maybe we should find something that aids and abets that particular segment. So it's a win win.

Cool. So for the portfolio company, they benefit because of the access to leadership with the relationship with the corporate that allows them to accomplish their goals faster, get feedback from that larger corporation that could be helpful for them to grow in terms of how they look at developing solutions and so forth. And then also for them to combine the capabilities to build a better solution. They may have some gaps that work in larger companies. Allows them to go to market with something bigger, better.

There's another area. It's kind of an interesting corollary. We have a very large federal practice and state government practice. If you've ever tried to sell anything to state or federal government, it's a different process than the commercial side of the house. And we have people that have been doing that for years and have relationships with most of the major agencies and most governments and we have the same relationship globally. But I'm just thinking here in the US and so it's daunting for an early stage technology company to try to go sell directly to any federal agency. We know how to do that. We can help them through the process. So whether they're getting Fedramp, which is a way of getting validated in the federal space, or whether they're going through HIPAA compliance, which is obviously the regulatory issues they have to deal with in the medical space. We have people that do that kind of work every day and they can help them understand what's going to be required of them and get them through the compliance process. And that's not something that they would necessarily know on their own without spending a lot of money or having experts already in house. And most companies don't have those experts at early stage, maybe when they get to be much larger they will, but not as they're starting out. So we can help them in that regard and then sometimes we can just provide some good old fashioned consulting tool. It could be consulting in terms of strategic consulting, it could be tax advice, it could be product advice. Some of these services obviously we're charging for, but some of it they get gratis by just working with us. It just depends. But we're always looking for a kind of a two way relationship. So why not take them to market and drive revenue for them, but at the same time, if there's services we can provide them, not shy about doing it. The only thing we would avoid if we have a business relationship is to avoid the audit side. Because if we're doing an audit, then we have to be obviously totally independent. So we can't have a business relationship per se. We can have a vendor relationship where we can buy their products at an arm's length basis, but we can't do anything that either creates a conflict of interest or the appearance of a conflict of interest if with their auditor. So the audit side of the house is separate from the rest of the house, so to speak.

That was a lot. Larry. You're giving me all too many ideas here. I'm going to be following up, pitching you all kinds of stuff after this call. So be prepared for that. Back on the venture side, for them, it's to grow their portfolio company, their investment. But seems like there's a variety of different intel that they get that in the long run help shape their investment thesis as well.

There is just by talking to us about a particular client, for example, or let's say we're in the healthcare field and we're explaining to the portfolio company that we think a use case for their particular technology is X. And we describe that use case to them. It may be one they're aware of, it may be one they're not aware of to the extent they're not aware of it. And we figured out a way to apply their technology in a new way that expands their horizon. Because if we can do it with one of our healthcare clients, perhaps we can do it with 25 of our healthcare clients. They work hard to get the first relationship with us, and after that it tends to accelerate pretty quickly. There's a good amount of information sharing that does take place. We often start with, what's the use case for your technology? The sophisticated companies know how to answer that question. The lesser, more naive companies, they're struggling with that. This is really cool technology. Yeah, but how should we be applying this for the benefit of our clients? Now, generally we know the answer to that question, but in some cases we don't know all the ways that can be applied. And that's part of the discovery process of working together. And we'll go to them and say, we're trying to solve this problem. We think what you have is applicable. How would you approach it? And sometimes that requires just applying what they have, and other times it requires extending what they have. It's benefiting both sides. We're getting a better product and they're getting more product knowledge or more marketplace knowledge about what their products should be. Now, obviously, Oracle doesn't come to us for that kind of knowledge. But although I'm sure from time to time we explain to our colleagues at Oracle something that a client wants that they hadn't really focused on before. So it's not just applying what they have, but also helping them with kind of the future for the company.

What's the difference between getting capital from a structured venture capital fund and getting venture capital from a corporation off their balance sheet?

We're not doing the investing directly in corporations or emerging technology companies, but having seen that other places have you done it other places? Yeah.

You're qualified to answer this question?

Okay, I was trying to be less qualified, but I'll answer it. Venture funds are really good at a lot of things, one of which is they understand the technology generally better than you would think and they have great connections in their marketplaces. So if you're taking money from a venture fund, you might think it's expensive money. And I'm not trying to be a commercial for venture capitalism, but I'll tell you where I think they really earn their keep. So if they put money in, they're also going to generally provide a fair amount of guidance, strategic guidance, board level guidance. They might help you with filling out your management suite. In other words, you might have a great engineering team, but you may not have the right CFO or CEO or chief marketing officer. So they're very well connected in knowing people that can come into an early stage company and help scale that company. So that's a great investment. That's good reason for taking their money because it's not cheap money. On the other hand, they also have syndicates where there's a second or third or fourth round needed. They already have co investors, other venture funds that they work with on a regular basis. So they're not only good for and the initial round, but they're good for multiple follow on rounds. Especially if the company's doing reasonably well, it's following its plan. Now if you think about a corporation making an investment in an early stage company, they're what we call strategic investors. They're generally putting money in because not just for the return, but they think they can utilize the technology. So I've seen some very large industrial companies make investments in some early stage technology companies because they know that they can be a very large client for that particular company. So they're putting money in, they're knowing that the company is going to be successful and then if they use them, some of their peers will use them as well. So they represent an endorsement for a particular kind of technology in their market space. And so now they're getting a return on their investment from the investment itself. But they're also getting the value of working with that kind of technology and doing it early on. Strategic investors generally are less price sensitive than the VCs. The VCs will push for a better price. The strategic investors have other reasons to be investing besides just roi.

As a founder, the big element I consider is around the exit considerations that I feel if I take capital from a structured venture fund, I'd have to fit into their timeline of their fund obligations. Whereas a corporation that invests off their balance sheet gives me a little more flexibility that there may not be as defined of an exit strategy. Is that fair assessment there?

There's some truth to that. The timelines for most of the venture funds, this is a gross generalization, take it with a grain of salt. But most venture funds are usually investing in the first five to six years of their life and trying to liquidate by the time they get to year 10. And then when I say liquidate, that's liquidate everything in their portfol. So yeah, there's a 10 year horizon. Typically in the venture community, strategic investors may not have any particular time clock, although tying up money for a long time generally gets the attention of the CFO and the board. It's not money for life. But at the same time, they may get more value out of getting used to the technology than just getting a return on the investment itself.

As founder of a company, would I be limiting my exit options down the road, taking the money from the corporation? Because for them, probably an incentive is not only access to the technology, but be in first position to acquire the company when the time's right.

It can be if the corporate investor says I want certain exclusivity. If you grant them the exclusivity, then you may have limited options than you would have if you just have a venture fund investing the money. So it depends upon what the terms are for the money itself. But a lot of times you can structure the investment in a way that no one investor controls everything. And therefore there's not a disadvantage of taking money from the corporate side. But be careful when you take their money. If you take certain exclusivities, you may be limiting who your potential buyers are. Probably won't limit you at all for a public offering. But as you probably well know, most early stage companies, as they grow and get larger, liquidated, they're generally more sold than they are going public. Or else our public markets would be flooded with lots and lots of companies. You might limit your degrees of freedom, if you will, if you take corporate funding with strings attached. But if you take corporate funding without strings attached, it's probably better money in some ways than taking it from the VCs as you go into later rounds, the BCD rounds and the growth rounds. Because at that point you really need the money. You probably don't need the venture capital expertise as much as you get more mature. And you might actually benefit from board members, from corporations on your board, rather than just VCs on your board. Interesting, because they're dealing with the real world every day.

They're dealing with larger sums of capital in those latter rounds, hopefully. Interesting. What's your strategy to companies? Who's going to do this for the first time?

If you're going to take venture capital money, choose your venture capitalist. Make sure that the terms are not too terribly restrictive in terms of your ability to operate the business. I would say if you can get it from well established venture funds, that's probably the best way to go. Because they have the ones that have a track record, have a track record for a reason. They know what they're doing, they have the right talent working for them. They also have a reputation where they attract interesting opportunities. Then the corporations pay attention to some of the bigger, more developed funds, more established funds. We work with a couple of industrial corporations that have venture funds and they've been doing this for 20, 30 years. They know their stuff. They're not just investing strictly for companies that benefit them. They're also looking at it from an ROI point of view too. So they can be a bit of a hybrid. Some dedicated venture funds are really only looking for companies that, that they can utilize the technology. Others take more of a general. Just like any other venture fund, they're looking to make a good roi. At the same time, if it happens to benefit the mothership, why not? That's checking two boxes instead of just one. So it depends upon why they invest.

Got a lot of variables for me there.

Yeah, if they have a dedicated fund, it could be relatively autonomous and not be directed at all by what the corporate, the parent wants or needs. And in other cases, it's very much affected by what's good for the parent, what technologies they need. And that's where the venture fund focuses. It's investing different styles for different investors.

How about advice for corporations doing their first venture investment?

I'd say invest in a venture fund. Don't try to be a Venture capitalist. Unless you're going to hire a team of VCs to run the fund for you or you may be disappointed. It's not easy to be a venture capitalist. It sounds simple. It's not. They look at a lot of companies before they make an investment decision and they have a lot of experience on how to grow a company, how to stand up a company. We work with one venture fund that they're almost like a pre venture fund. They go out and they find an engineering team that has developed a novel technology and they build a whole corporation around them. So they're really starting with a nucleus of engineers and building out the whole business. A lot of times the venture capital funds are investing in whole companies. They have a management team and they have the engineers, they have the salespeople and so on, and they're just helping them accelerate that. But in this one case that we've invested in, the company is looking at pretty much engineering teams. It's seed round investing and they're looking for novel technologies that can be highly disruptive in the market. So we find them pretty attractive, pretty hard.

Disclaimer there don't be a venture capital, but it's good. It's good. It makes a lot more sense. It's a good way to get your foot in the door.

And then I wouldn't open a restaurant if I didn't know something about cooking. I think that would be a mistake. But you could get away with it. If you had a really good chef and really good front staff and so on, then you're just the financier. So it depends upon how you operate. Some people want to really understand what they're doing, be hands on, and others can hire the best talent. But I would say that you get a good venture fund, they know what they're doing.

I heard you could hire Deloitte to come build a venture arm for you.

I'm sure we could provide some good advice in that area if we were asked. We certainly provide a lot of advice in the M and A space, so why not? We work with a lot of technology companies and some of them do very well with us. They do very well. They win some big deals with our help. We both win in that case. So it's a good relationship.

Seems fitting. Thinking of the talk around capabilities. Larry, what's the craziest thing you've seen in M and A?

An M and A? Oh, I've seen people evaporate a lot of money by making a wrong investment decision. Their investment thesis was good, but what they bought didn't really fit it and they didn't do enough due diligence to really understand what they were buying. And as a result there was a big disappointment at the end of the day and a lot of value destruction that took place.

You can't like give me an anonymous example without dropping the name.

I've seen it happen in the technology world where a very large technology company buys a smaller technology company thinking that they had some really unique technology that they didn't have. It was like overrepresented and they didn't do enough work to figure out that it needed a lot. It was maybe a great idea, but it wasn't completely developed. And I'm not talking fraud, I'm just talking. It just wasn't finished, it wasn't baked. And they thought it was because the people that were selling it could sell exactly where they were going. They just didn't let you know exactly where they were at the time. So you thought it was ready for prime time and unfortunately it wasn't. A lot of disappointment there. And sometimes you just get unlucky, the market changes and you just happen to hit it at a pivot point and what you just bought turns out to be not the state of the art. So playing catch up. And sometimes you're buying stuff that's old in the tooth and no one asks the question, excuse me, where is this on the product development life cycle? Is this a relatively new and recently invested technology or has this been around a while and does it require a significant amount of additional investment to get it to state of the art or at least highly competitive? Again, poor due diligence can lead to poor results. And sometimes you just have a cultural misfit.

Our next interview right here. We got the diligence, the culture.

You learn a lot by making mistakes. And I've made a few, I admit. So I'm happy to help other people avoid the mistakes I made or at least minimize them. Because you're going to make them. I guarantee if you do enough investing or you do enough M and A work, you're going to make some mistakes.

We just got to work on the AI immersion or the augmented reaction. So you cop up with advice as soon as they put that right. Search, string and diligence.

I'll tell you what, Kisan, I'm each in the metaverse. We'll talk about it there. How's that sound?

Bring the whole team, bring the delay team, we'll talk this through, come up with a good game plan, we'll even.

Do some blockchain work with you and some NFTs and some unlimited reality stuff.

Not a lot of blockchain. M and A. We got to work on that. I think we can make that.

Happy to talk about it.

Deal Coins. Let's do it. Larry, thank you so much. I enjoyed this conversation. I learned a lot. Thank you for helping me become a better M and A scientist. Until next time everybody. Here's to the deal. Foreign thank you for taking the time to explore the world of M and A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M and A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email kisan k I-s o n a science.com or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com here's to the deal. Views and opinions expressed on M and A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.