E348 | Meet our in-house CVC expert Jeppe Høier for a deep dive on Corporate Venture Capital in Europe

0:00Welcome back, everyone, to another episode of the European VC podcast. Today, we have Jebe Hoare, my good friend from Denmark and a corporate venturing specialist and former partner at Maers Growth, which is obviously in Denmark, a very large corporate VC partner for everyone in the ecosystem, but also on a European scale. This is the first of a series of episodes on CVC in Europe. And I think it's going to be quite interesting for all of you. We obviously will try and bridge the gap between the VC world and the corporate world. So these episodes should be absolutely something for you, even though you're not a corporate yourself.

0:34So hope you'll just wrap in and enjoy this conversation. Here's a few words from our beloved sponsor. This episode is brought to you by Landscape. A survey done by Andre at Data Driven VC suggests roughly a third of VC funds now source more than half of their investments through modern tools. That's why you should check out Landscape, which helps venture capital firms unlock full market visibility to discover founders earlier than anyone else. Leverage the widest array of alternative data points to discover startups. Find thesis-aligned founders outside your network so you never miss out on the next opportunity.

1:11Build top-of-the-funnel deal flow and seamlessly integrate with your favorite workflow tools. Go to www.landscape.vc to fast track to become a more data driven VC.

1:36United and determined we can serve as a model for other regions of the world. of the world. The nature of a problem requires a European response. Europe is a story of new beginnings. Let's start acting. This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Jeppe, my friend, welcome to the European VC podcast. Thank you for having me. Exciting to go through this with you. So to everyone in the audience, first of all, very sorry that you're going to have to listen through a full podcast episode with two Danish people. So you'll really get accustomed to the Danish beautiful accent today.

2:23Sorry about that. We'll do our very best to sound at least a little bit fluent. Yeah, but we have known each other for a while. We've done a couple of things together. And now I said to you, why don't we bring you on the podcast to give us a bit of more enlightenment on the CVC space? Because this is something I've been holding a bit in stretched arms, so to say. But it's also something that's absolutely growing more and more in importance in European venture, especially as we're seeing deep tech grow in importance and in total money invested and so on. So for that reason, I think it's about high time that we do more about corporate venturing in Europe.

3:05And for that reason, this is the first of a full series on this topic. Jep, tell us a bit about how you got into all of this. Yeah, it's actually an exciting journey, right? So I started my life in venture capital back in 2007. I'm an auditor by education, but got the opportunity to be CFO with Hardcore Capital. and I stayed with them until 2016. So that's where I learned everything about venture capital. Through that upbringing, I also got to hear about these CVCs and there was a lot with these CVCs that seems not to function. But then again, what will it bring in the end? So actually, when I left Hardcore in 2016, it was to try myself out as a CVC investor or an investor in general.

3:57So I was lucky enough to be hired by Merce Growth and started as investment partner and head of finance with them. I stayed on for five years and made 14 investments for Merce. Two unicorns,$80 million invested, returned it 3.6 times. in those years I was quite you know fond of you know what can a big corporate do and and you know my family is from Svenborg where the Maersk brand came from right so I'd been seeing the container vessels in and out of the harbor for so many years with my grandfather right so it was a huge opportunity and so got into it and got to learn what what you really can do when you get these huge ships to move.

4:50It is like a container vessel. Just get them turning, collaborating with startups and seeing the immense value you can create on both sides was just amazing. Yeah. And that's exactly what we're going to dive much more into. But I would love to just because Maersk is, of course, it used to be Denmark's most valuable company. Not right now. Luckily, people have grown fat, so we can also make some money on something else. I'd love to ask you about your time with Maersk. That's always interesting. And as someone in Denmark, obviously seeing Maersk growth be announced and how Maersk changed their program over time was interesting from the outside.

5:38But I'd love to just, you know, to have you tell us a bit about the journey with Maersk growth, what you learned along the way, how things changed. so on as i started with them we were six months into merce world right so it's not there from the beginning as such it was a decision taken by the chairman jim snapper and the ceo certain score at that point of time to start doing something within venture they saw in 2017 that the most business was contingent on the container rates. These large iron assets that they own, they couldn't really make money on. So, you know, going in and looking at, you know, we have all these vessels, we have all this data about our customers.

6:30We kind of know global trade as Maersk had a huge market share. It was around 20%. So the knowledge of just what's inside of those vessels, what is moving around the world was kind of the foundation for creating Merce Growth. It started with more than 40 legacy ideas about what could Merce Growth do and what kind of businesses could be made. One of them was, you know, let's take a container and make it into a bag in a box, right? Just like you know from wine. So put it back inside of it, and then we put something else inside of it. And then when you actually move empty containers around the world, so there's quite an amount of empty containers on the vessels that you didn't make any revenue on.

7:23So here there was a golden opportunity to create extra revenue. So started with ideas like that. Yeah. So it started with this set of pre-held ideas or pre-held ideas inside Maersk, thinking there's something we can do here. Let's build a CVC type thing that can incubate our own ideas. For sure. And then at the same time, we started running accelerators because it was also on the rise of sustainability in those days. So, you know, one idea was that we ran a program together with an accelerator called Rockstar around fighting food waste. The idea was if we could avoid food waste at production, so South America or Africa, there would be more things to move on our containers, so increasing basically what is being moved.

8:21A really, really good idea, and there you started also with the idea of a cultural change inside of Merse, how could you learn to start working with startups? So that was kind of the early days, but we hit a lot of barriers inside of Merck of what we could do. And then slowly we also started hiring external talent, myself included. And then we also started to do direct investments from the balance sheet, more or less with the idea to create new billion dollar revenue streams for Merck. So we started building on all of these what I call corporate venturing possibilities. So framing them, acceleration, incubation, corporate clienting, that is the collaboration with startups, and then the direct investments.

9:15And after going through the accelerator, we kind of came into a 100 % investment mode. So higher talent that just like any other VC that could take care of, you know, mingling in the ecosystem, getting the right deals, working hard and doing all this. And then we started to do a lot of investments. And tell me, Gaber, about that decision to end up really doubling down on pure VC rather than all the incubation and acceleration stuff. What were the maybe abstract learnings here or the obstacles very concretely that you could see this just does not work? You know, from the outside in, you might think it works super well.

10:05But when, you know, the plan of attack actually comes into the battle environment that is startup land and corporate land just doesn't fly. I think in hindsight, when I look at why we ended up there was because we could control it ourselves within the business unit. So the head of Merce Growth at all times could sign$5 million deals without asking for permission. So we were sitting there and trying to do all the collaboration in the beginning, but it was super hard. Also because when we started out, there was another business unit called Maersk Digital. So there was also a lot of discussions about who engages from Maersk with the startup ecosystem.

10:57And that was quite interesting, right, from a strategic point of view, because more than 80 % of CVCs, they invest on the base of strategy. So we were struggling a little bit, finding our way into commerce and how to collaborate with them. And as soon as we found out that during direct investments, we could decide by ourselves how to move forward, that was also where we doubled down. We, of course, had all the other activities still working together with commerce, but they were first solved at a later stage when we changed our managing partner in, I think it was 2019, 2020. Yeah, so when you decided to do more direct investments, at what stage did you go in?

11:49Any learnings about, you know, pre-seed is maybe too early, seed is, and then, you know, what were the... Yeah, maybe I should throw in a couple of case examples, right? So I have also done angel investments on this side, right? And I got to get the responsibility of the Merck Growth engagement in Germany. So I traveled a lot to Berlin and to Munich and also got engaged quite early with climate action and the entity Leaders for Climate Action that was established by a lot of founders in Germany. So I had done a little bit of sustainability investments on the side. Then I had a good dialogue with the Maersk sustainability team.

12:39And they were, of course, looking at how could they analyze scope one, two, and three missions, and especially scope three missions. And how would we do that inside of Maersk? Maersk releases a quite large report every year on sustainability. and we wanted to contribute right there was not a lot they could could find here so through my german network i you know got in contact with a couple of zero entrepreneurs and they were starting up one of these carbon management dashboard companies right and and it was so early that i decided to put in a very low ticket in something that was not even a pre-seal of.

13:26It was an idea. So I got in super, super early, didn't invest a lot of money in that round, but kind of said to Christian and Robin that this is what Maersk needs. Go build. And of course, they were up for that because they got that huge WAI logo. Yeah. And when you say you put in a small ticket, that was from Maersk? That was from Maersk. Very, very early, not really knowing what the product would end up being and then you know fast forwarding we participated in in rides series b2 that we led together with north song right and here we are in in double digit million dollar ticket right plus a huge commercial deal on the side with with merce right where merce would acquire up to 300 electrical vehicles from Enright for their North America setup.

14:26So it was from very early to late, but core was around C Series A. And that's of course the interesting thing about CVCs, that you can really do kind of what you want. But I guess, and we're going to talk much more from a top-down core learnings perspective, But I think there's something important here to tease out around what allowed you to be as flexible as that. Because that's something that is one thing that you don't have a mandate that's tied by LPAs. But still, there is a strategy and an alignment with the executive team that's required to be able to do these investments. For sure. No, I think it follows with the strategy that you set up, right?

15:20And I think the Enride investment we did was approved by the Maersk board. That's a total different setup. It was very, very different from what we normally did, right? Because that was then all of a sudden in collaboration with the Maersk M &A team and the whole process of how that operated. And it took four months for us to do that round. but it was that and and that was very very quick for a cbc going through that that process right but when we did the cogme uh investment right it was something that we could do within 10 days so it's also very very dependent on where your strategy lies because if you get super close to the core strategy of a cbc you could do the most then it's just more a matter of what decision bucket do end up into.

16:10So we've spoken a bit about your journey and everything, but let's go to the top-down perspective of the top reasons why you love CVC, why you think CVC is something that we might actually want to pay a bit more attention to. Yeah. I think so coming in, right, and I mentioned that a little bit before, right, it was, you know, CVCs in the VC world are seen as being slow. They're seeing as going for strategic wins and not financial wins. And there's a lot of bad rep in general from the VC ecosystem towards the CBCs. Then one of the things that I also got early on with hardcore was kind of being an active investor without not really knowing what an active investor was so when when i talk the difference between cvcs and vcs it's it's a lot about the behavior of the individual and how they can contribute to the development of the startup because when you look at a cvc most often what they can bring to the table is access to some some kind of assets right it's access to a huge brand that you can leverage its customer access its access to to data within a certain market and then significant expertise i had a hundred thousand colleagues at maersk and i it was possible for me to get a hold of them so so i think for me seeing CVCs in action, leveraging those different value drivers got me so excited.

18:01I think, and again, pulling a little bit on the Enright story, right? That was a sustainability success for Maersk, and it was a huge customer room for Maersk. Being able to introduce Enright to Maersk customers and engage in commercial dialogue. no vc in europe would be able to do that and i differentiate a little bit here between the the european vcs and the american vcs and and not forgetting asia or anything but but just a comparison between the two because a lot of the european vcs kind of you know when you look at their exit strategy it is you know let's let's bring in an american in the brc realm they will take care of the exit.

18:46Here, I would also, as working for a CBC, be able to be the exit route. So I think the whole excitement about what I could bring to the table for my startups was just, it was so satisfying, I'm going to say. I'd love to ask you about the strategic versus financial motives of a corporate, it. Because that's, you know, you said many think that CBCs tend to be more strategic than financial. What I always, or what I've at least come to think is that whenever I talk to someone who's thinking of joining a CBC or thinking of incubating one is always be super, super clear about what are the motives behind this.

19:34Make sure that you have a mandate that you can actually execute on where you won't go and pursue financial success and then you're being dunked for not bringing strategic value or the opposite way around. You're actually following the strategy of the firm, but then you're being dunked for not having enough financial successes, but that's just not been the lens that you've been viewing it with. What's your take there? What's the thoughts on that dichotomy? Yeah, I think all CBCs, they are created for a strategic reason. anyone saying something else will be lying so so it is for for strategic reasons when you then look into being a successful CVC and you also have to differentiate a little bit about you know are you a balance sheet investor or are you a single LP function like NGP Capital right the former Nokia growth partners i think they are single lp they can do differently but if you are balance sheet investor it is different the lifetime of a cbc nowadays is 3.7 years is kind of the the latest one what is interesting when you go into investing is that you have the j curve and you kind of pick up around year four so when you're working for a cbc you will mostly be judged also by the CFO for financial returns.

21:08And you kind of get these first three years where they will leave you alone. So if you're financially successful after three years, the CFO will let you survive. Then you have until kind of year six, where kind of the strategy division will come back and look at you and say, you know, have you done anything strategically that can be substantial for also the quite large P &L you have in a CBC, right? Are there a strategic reason for keeping this CBC alive? So in other words, just because would you say that after three years, first time you get the gun by your head is by the CFO. That's around year three.

21:58and even if you're a strategic investor, you really need to make it through that stage and that gate is going to be there. It just goes hand in hand. It is, you know, you can say one without the other, right? Because it is a corporation. They look, so when you get a downturn, right? And you just, you know, you look as a CEO of a big company at your different business units and you dive into the CDC, right? They are a cash consuming entity. It's cash, right? It's just flying out. There's no revenue attached to it. So the kicker you get from the uplift or the uptake on your investments, that is on the balance sheet and they hit financial items on the P &L, right?

22:47So it's not connected to the business unit itself. Do you find in general, because you've advised many corporates through your career and seen many different iterations, are they typically well versed enough to be able to judge the performance of the CVC? Or are they like, where's my cash? Well, this is the J curve. This is how it works. What's the level of understanding that you can expect from CVCs? A recent study performed by Professor Ilya Strepulitz, Howard, actually looked at what are the challenges here, right? And he did interviews and in-depth interviews with a lot of CVCs. And actually, 60 % of CVCs do not believe that C-suite understands corporate venture capital as a strategic tool.

23:46right so it's very very clear that that that they're not fully educated uh on this topic and that's also one of the reasons why why i'm super interested in spreading the words about cvcs and what you do right because i'm a huge promoter for these venture programs in general right so for me it is it is a lack of understanding among c-suite what to do with this and then it is a lot of you normal consultancies that go around and promote, they understand venture, and then they create venture programs because they have the normal relationship to corporations. But there are so many boutique consultancies specialized on venturing that you should go for when you start out thinking about, you know, I want to build something within corporate venturing.

24:38Yeah, and maybe let's stay then on the learnings that you've had for corporates that think about establishing a CVC or those that already run one. As you just said a couple of times, average lifetime of a CVC is 3.7 years. So obviously there's many mistakes made. Could you maybe highlight some of the most terrible ones and then take it from there? No, I think the terrible ones are the ones that are just built out of nothing, right? It tends to be somebody within the strategy department of a large corporation that have been at conferences and so forth and think that engaging with startups is interesting.

25:22And then they will take the normal dialogue within that business unit and maybe scratch the surface a little bit on what is corporate venturing. And then they start without having built what I call a venture program. They have not engaged the whole C-suite, the board, the owners. So unless you kind of start from the top and work down, then you will fail. And even though I don't think most growth could have worked even better if it would have been a full engagement by the C-suite and the board. Then we would have been even more successful. Could you tell me a bit about hiring? Because that's also where I'm sometimes seeing that you don't go for the A-grade talent because the A-grade talent in VC is very, very expensive.

26:20They expect something at least that mimics a carry curve or a carry remuneration. Yeah, it's a great question, right? Because I've had dialogue with many corporates around Europe when they are out looking for people to join their CVC teams. A lot of corporates, they have their job levels. And you just move up and down. And that is kind of the ladder that works for corporates. Say, okay, you know, a vice president gets this, and then you move through it. And when you look at venture, it's not a match between the two because a lot of the corporations and CVC units in Europe, they do not have a carry scheme.

27:10So you have to take that into consideration. And also as you build your team, because you're hiring young talent and teaching them venture capital, and it will not take long for the VCs to figure out that there's actually a lot of talent in the CBC pool. And then they will go hunting for them because they can do all kinds of carry promises and so forth. So you actually, in corporate venture capital, have to spend a lot of money on people hiring and getting the right talent. And in the best cases, it needs to be a match between internal and external talent. My recommendation is always that CVC units are led by somebody from inside of the organization so they know how processes work and so forth.

28:03But this differentiated workforce is key to being successful to drive the financial value of the investments. As a VC looking in at a CVC as a potential co-investor or as should I join this team or as an LP that might be invited to participate in a CVC because some of them actually do sometimes take in external capital to leverage what they're building. What would you say are the core things for us all to kind of diligence as quick as we can? I think you always have to diligence your collaboration partners or who you work for. So it is understanding the strategy that they bring. It is the whole, you know, do they do direct investments?

28:52Do they do follow up investments? Are they coming from the balance sheet? whenever I invested for Maersk, I always looked at my co-investors to find out what vintage is this fund, right? Will they be able to protect their parada in upcoming rounds and so forth, right? So for me, it's always the engagement and understanding of who's on the other side. How do you go about doing that? Because as a VC, it's super clear, right? as you said, you'll check the vintage. Then you know if there's more money in that fund. Then you'll check if they're allowed to follow on from another fund. But in a CVC, how do you check that in the co-investment partner?

29:36Just ask the open-ended questions, as you should also as a VC when you do due diligence in a startup right here. You know, you diligence your co-investors. ask them you know what kind of balance sheet investor are you how much money do you have every year to invest do you do follow on investments in non-strategic investments what are your success criteria in general and ask for KPIs I think it's just as sound as when you discuss with VCs to understand all of that The questions are not that different. I think the sole key risk that lies with the CBC is the financial downturn. Because as mentioned before, and some of the other questions, right, that is what kills the CBC.

30:30So when you say financial downturn is when the mother business, so to say, hits a rough patch, the CBC is quite quick together with marketing to be what's caught. Yeah, quite quick. And, you know, all of us, you know, I tried it a couple of times. We got through it, right? But then it's, you know, you need to cut your workforce by 25 % in dollars, right? And then that's just hard to do. But you can also get through that as long as you have the capital from the balance sheet to invest with. And as long as you build a solid portfolio model for your CBC entity, you can easily go about it. I think the even better part is that when you look at the stake that CVC has in later stage round, you get above 25%.

31:22You get all the way up to 40 points of time, right? And that is where they really, really engage. But that is also where you have the Microsofts of the world playing, right? That's where they come into play. And that's a total different business than being early stage CVC investor. At what size corporation would you normally say that CBC becomes relevant? And when should you be a bit like, ah, that can't be sustainable? Is there any rule there? Yes and no. I think I've had recent dialogue with corporations that are looking to do a CBC that comes up with the numbers, you know, you need 40, 50, at least$60 million to get started.

32:09and I'm not any more kind of fond of that approach. I think I'm more considering what is it that they want to do with this CBC entity, right? Because I think doing direct investments is kind of getting into the game and getting yourself dirty, right? Because when there's money on the table, you stand to lose some. So I think for me, it's more, it's breaking the model where you have to own 20 % of a startup, it is okay to own 5 % of a startup because it actually makes a lot of things easier. Also, don't take a board seat. Take an observer seat, right? Because that's a lot easier for you to handle also internally in a corporation.

32:52So I think there's a lot of the legislation that kicks in. But if you want to do a standalone single LP function, you have to hit the 60 to 70 million euro mark. Otherwise, it doesn't make sense, in my opinion, from a financial perspective. Let me just scratch the surface of that one, because the funds that I love the most are 20 million euro funds, right? At least as an LP, there's typically one person running them. That person is an incredible human being who's absolutely tailor made for launching this fund. And that's why I as an LP love them. And I would not want them to have 60 or 70 million.

33:42I'm happy that they have 10 or 20. So why do you say that as a CVC, the sweet spot is probably 60 as the place where you want to start? I think to make reasonable strategic impact, you have to go a little bit later stage. I'm also a huge fan of single GP funds and also the smaller sizes. But for me, that converts to an investment strategy that is quite early stage. And with the lifetime of a startup going well above eight years, you will, as a CVC, not be able to make impact in a strategic way. So I think you need to go larger for a CVC to really make strategic impact. On the financial return side, you might as well be successful on a$20 million fund.