E361 | Gina Domanig, Emerald Technology Ventures: CVC as a service model and how you work with Corporate Investors

0:28Welcome back to the European VC podcast. conversation than you're used to. But Emerald is absolutely one of the front runners in this game. They have 700 million under management and advisory, and they have a team of 60 people. So definitely you want to be tuning in and really listening to everything that Gina is sharing with us today because she has a different mind and a lot of experience when it comes to dealing with corporates both as LPs and partners. So hope you'll enjoy this conversation as much as I did. Here's a few words from our beloved sponsor. Enter the world's largest and most dynamic space for startups, investors and corporate innovators at Expand Northstar.

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1:50Tear down this wall. It's more than just an alive. This is a union of values. United and determined we can serve as a model for other regions 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. Gina, Jeppe, welcome to the podcast, both of you. Thank you. Thank you. So we've had Jeppe on the podcast before, so we're not going to put too much emphasis on Jeppe here, but you know him. He's an expert in CVC investing and has been at MERSC before and so on.

2:43I will not ask Jeppe to introduce himself because he'll run into a big rant about how glorious he is. So instead of giving him that opportunity, I'll go to Gina directly and say, Gina, would you tell us a bit about Emerald? And maybe because I've just done an introduction of you that I am 100 % sure did not do you any justice, because there's a bit of complexity or at least differentiation in your model compared to what we normally have on the podcast. Exactly. Well, thank you very much for having us. So yeah, I've been doing venture capital in the sustainability area for 25 years. So originally it was called sustainability, then people called it clean tech, now people are calling it climate tech.

3:23So that area, regardless of the name. And we really are focusing on industrial technologies. Something that's maybe a couple of characteristics about Emerald that are maybe a little bit different. We have quite a large team. We're about 60 people now. And almost half of them are technical people. So meaning that they've got PhDs and a number of years experience in the industries that we've been working. And the other thing is that almost all of our LPs are corporates. So they're really looking to invest to get a window on technology, either to reduce their environmental footprint or to kind of nudge their core businesses to be more aligned with sustainability trends.

4:08And because corporates are really looking for that, I mean, obviously they want financial returns as well, but they really want strategic returns. We found that it was quite important for them to have the flexibility to stay in the fund for as long as they want to. They actually don't like the process of making fund investments. It seems to be quite painful for them. It usually takes them about two years. And so we've developed what we call a flex term structure. where they can choose to terminate their investment period any time after the initial five years. And if they don't, we just kind of recycle part of the proceeds.

4:48So this is a way for a corporate to engage with us and to not be concerned about whether they're going to be able to get internal approval again when it comes time to re-up. There's that, and then there are the other corporates who choose to actually just outsource the management of their CBC to us. So we can talk about that later, but that's also quite an interesting model. The whole thing is interesting, right? I just have one question because maybe some people, we have a lot of emerging managers listening in, right? I imagine there might be some that think, oh, is there something I could copy there?

5:25Is there something like, should I cut out part of my fund for the corporates that come in and mimic this structure? When would you say it's doable? Is it at all doable for a small team? You know, it wasn't, we started this in 2016, right? So we had been in the business for 16 years running standard structured funds. I think having those years of credibility was really important before we launched something like this. But today, people should be able to launch a similar structured fund. And if you'd like, refer to the fact that we have been running it for so many years, right? We've been running it now for eight years.

6:11So it's quite well tested. And we've actually, for many years, we were kind of secretive about how it worked. And just recently, we actually published a video on how it works, actually encouraging other people to copy it, right? because we think that it would be better, I think, for some investors. It doesn't really change the amount of time that you're invested in a company, right? Because you still need to recycle proceeds. So it's not a way to stay invested in startups forever. It's really just to give the corporates or the investors, I should say, this flexibility. So yeah, I would encourage them to copy it.

6:55Gina, on this question, maybe 30 seconds on how you landed your first corporate LPs could be interesting for some of these. Yeah, you know, it was back in 2000, and I was actually contacted by Hydro-Quebec, who had made an investment in a U.S. fund, and had heard that we were launching, you know, because we were the first kind of independent VC fund in Europe in this space, so they were looking for a European fund that would do the same. And so they were the very first ones. But of course, back then, we weren't very well organized to give corporates the strategic insight that they really wanted.

7:39So it was kind of like lob over a list, an Excel list on a monthly basis of deals that have come in. And you've got kind of the name of the company, the location, and short description of what they do, which is kind of laughable compared to what we do today. That's probably not 2 % of what we did today. But it was a start. Thank you for hearing. So it's correct to say that you started with a pure black VC firm with all the normal LPs, sovereign funds, funder funds, family offices, all that stuff. And then you decided to bring in corporates afterwards. could you share a bit because now not now you you answered the question when and and and kind of that they you know someone was looking for it what were your considerations and what would you say to someone who thinks about servicing corporates so to say as part of their lp base what are the things to really keep in mind here i think you made a good point when you said well it's kind of laughable to only be sharing an overview of the deal flow because that's not Yeah.

8:48And I should also mention before I started up Emerald, I was working for 10 years in corporate M &A. I was head of strategy and M &A at a Swiss industrial technology company. So, you know, I kind of came from the idea of corporates actually are looking for innovation. Startups in these sectors have a very difficult time because, you know, these are existing industries which have very large existing players kind of controlling the channels to market. So that seemed to fit. But I think what, you know, at the beginning we thought, okay, we'll just let them know what these companies are. And it was a little bit of a, hey, this is the interesting part.

9:30We've identified these companies. You guys do the rest. And we, I mean, completely underestimated how difficult it is for corporates to actually start that engagement with the startups, right? So today, we receive almost 3 ,000 business plans a year. We give them two-page write-ups on each company. And I should say, we receive 3 ,000 and we invest in maybe 10 to 20. So there's many companies in there that we know very well we're not going to invest in. What you used to do back in the day when we started, I would like to say we would delete the file, but they actually came in hard copy, so we would actually throw them in the garbage.

10:16You know, we say, oh, we're not going to do this. We'd write back to the entrepreneur, and we'd throw it away. Today, what we do is, even if it's obvious to us because of stage or whatever it might be, that we're not going to invest in the company, we still do a two-page write-up. Non-confidential information, and we have a proprietary, you know, portal with the LP so that they can go in, they can search the 25 ,000 deals that we've reviewed over the years, they can download the two-pager. We've got monthly calls with each one of them individually to discuss companies or sectors or solutions that they're interested in, that we're interested in.

10:59Then we've got webinars with them about trends. We do studies twice a year. We do many different events. And one thing that we probably would say the latest innovation that we had is about two years ago, we realized that, you know, very often our counterpart at the corporate are the CVC guys, right? And they are also, let's say sooner or later, going to get measured on how much impact they have on the corporation. And in order for them to have an impact, very often they need to engage with the startups first in pilots or doing some kind of trials. The CBC guys can almost never decide that on their own.

11:46They need the business unit guys to get involved. And very often we found that our colleagues at the corporates, they couldn't get the attention of the business unit guys, right? And so that's why very little was tangibly coming out of these interactions between the corporate or the CBC and the startup. And so what we realized was that if it would be a very limited program, right, and tell the business unit, look, we're going to have a session on seasonal storage, and it's going to go eight weeks, and every Friday at two o 'clock to four o 'clock, we're going to have these, you know, video calls, and these are the deliverables at the end of each week, and we're going to drive this.

12:34We're going to scout all the companies. You're going to articulate your challenge, and we're going to drive this all to a tangible outcome where you're actually doing a trial. Then all of a sudden the business unit guys go, oh, okay, if that's structured and that time-limited and very clear deliverables, we're in, right? And they certainly don't want the CVC guys to be at this session without them, right? So it was a kind of a hook to get to help our colleagues at the CBC units to get their business unit colleagues on board. And so that has been the kind of the latest. I think that's super interesting, Gina, right?

13:15Because, you know, the corporates need the structure to get the most out of every discussion you have. And then you have the startup people that are changing all the time, right? And that is where you often see that cultural clash there is between the big corporates and the young startups. And then you have the CVCs and also the VCs, your co-investors, right? In that total mix. So very, very nice observation of those challenges. Thanks. Am I right? So when you said a two-page write-up, that made me very quickly think of the power of LLMs to help you do this. Am I right in saying that it's something that has, you know, and could you share a bit about how a big firm like yours leverage LLMs and the sudden rise, so to say, in VZ?

14:11That's, you know, that's a great point because obviously there's, it impacts your cost structure when you're doing two page write ups on 3000 companies, most of which that you're not going to invest in. Almost all of it, you're not going to invest in. So we have just in the past couple of years done trials, and now we've implemented kind of a co-worker, we call it, that will go particularly supporting our sector specialists in gathering public information. We still have to be very careful, right, because we need to ensure that nothing in these write-ups is confidential information. So it's great if we can leverage these learning models and all different kinds of software to gather what is out there in the public domain, include it, scan through the deck as well.

15:09If it's a non-confidential deck, it's easier, if you like. If it's a confidential deck, then we have to make sure that we don't add that to the universe of knowledge, let's say, that's being used. And then we still need to have one of our sector specialists review it and add to it, correct it, change it, and also add what their opinion is, right? What's really important as well is, so now that, you know, if you're the specialist and you've been looking at, you know, these type of electrolyzer deals for the past years and you know everybody is out there, what do you actually think about this one?

15:48And we do rate each company on, let's say, well, nine different criteria, but overall the three different categories are the technology or the innovation itself. So, you know, what is the value proposition? Is it very strong? the market opportunity, and actually then also the transaction? Do we think that this is an attractive transaction that's being proposed? And it's so interesting what you're saying there. And I was just about to ask it before, because VC is notorious for our focus on founders and everything is the team. When you're talking to a corporate, things change a bit. Obviously, if it's a very early stage company that needs to scale, then you need to be on that journey.

16:33but most corporates would look at an investment opportunity with a different set of eyes sometimes at least. It's like acquisition as an example. So maybe talk a bit about how you think about team and how you also straddle that. Is that the right way to say it? In your own investing versus when it's the corporate servicing, so to say. Yeah, so sometimes we look at companies. I think this is an important point, right? We'll look at a company and we'll say, you know, it's nothing for us. Valuation's too high. They're raising too much money. It's too early stage. There's lots of different reasons.

17:15You know, risk is too high. They're, you know, it's kind of a one-trick pony. And our corporate that we're, you know, managing a mandate for might say to us, yeah, that's okay, right? So they're taking the decisions. That's what's important. We're doing, you know, they obviously set the strategy. We scout for all the deals. We do the assessments. We do the exact same process that we do for our own funds, but they are the investment committee, right? And they tell us, you know, kind of at the initial stage where we will send, let's say, a deal to our investment committee, and then we will decide, no, valuation's too high.

17:54We're going to pass, right? They may very well say, we're still interested. And we'll let them know, look, we're passing because we don't think that from an investment point of view, you can ever make money at these terms, right? But if you can capture value in another kind of avenue by working with this startup or if the knowledge that you're going to gain is so valuable to you, okay, that's perfectly fine. We will just make sure you get the best deal possible, right? And so we'll negotiate the deal for them. We'll do the syndication. We'll lead the whole deal. We'll even sit on the board of the company afterwards.

18:36But we have to be cognizant of the fact that they're doing this for other purposes and not for financial returns. because actually the financial returns would be a rounding error. Look at Chevron Ventures. Chevron Ventures can be wildly successful financially. And will that even move any of the numbers in the financials of Chevron at the end of the year? Probably not. But I think it's interesting in the selection process, right? Because having worked for Maersk, There were deals that we would look at that from my VC days, I would never have looked at, right? Yeah. An example is, you know, Merck almost has 20 % market share in some areas, right?

19:21So when there is a startup addressing something in that field, you know, we would know that we would be able to put a lot of products into market and hence we could make a good deal, right? So I think that that is also what comes to mind when you are inside the CBC. Yeah. But the only caveat, I would say, and my investors are used to hearing me preach this to them every six months at our investor forums, is please don't lead deals. It's just, you know, they're just too insensitive about valuations, right? And they're going in at high valuations, very little governance, no participating preferred, all kinds of things.

20:13Let's face it, a lot of times at the corporate VCs, there's quite a bit of turnover. It's often within a corporation just kind of one station that you make in your career. Right. So very few of these guys actually have to live with the financial results of their investments, you know, that you only see five, six years later. But we independent VCs would prefer that either that they get a little bit more strict in their financial terms and conditions or just let us do that and they can follow. Very good point. That's also why you, for CVC, need a mixed team, right? You need professionals in there.

20:55Yeah. I'd love to ask you, just because you said before, and to some it might have been as confusing as it was for me. So you're saying that you'll do everything but the investment committee, so to say, is the corporate. Right. That is not for the funds that you manage on behalf of CVCs. That's when it's corporate clienting or like we call it. Yeah, we call it CBC as a service. So it's a mandate. Right. So we have got our four funds where we control the investment decisions. We've got a flagship fund, energy, water and materials and packaging funds. So those four, we control the investment decisions.

21:36And then we've got four CBC as a service mandates where the corporate obviously they, you know, in the funds, they'll invest, you know, five, ten. maybe 20 million. In these CBC service mandates, we're talking more like 50, 75 million, right? They're much larger commitments from their side. And they are the investment committee. In one of them, we sit on their investment committee, but in most of them, it's just purely the corporate. Yeah, but could you speak a bit to your experience with this type of setup? How much have you seen it in Europe slash the world? So I think it's, you know, it's evolving.

22:13I think a lot of corporates and it's not just the corporates who have no experience we're also seeing corporates who have actually quite a bit of experience and have seen you know let's say the jeppe was saying kind of the more professional investors within the team leaving and they're they're challenged to keep this talent in house right so you've got different you know kind of corporates at different stages there's those that are just starting out saying oh i don't want to have to invest in all you know, hire all these investment people. This is not our core competence. That's not where we're going to capture value anyway.

22:50Let's just outsource it. So it's a make or buy right from the very beginning, right? Then there's those who, you know, kind of look to see what their colleagues are doing and saying, wow, people are having a difficult time here keeping their teams together, keeping the continuity in their teams, or they simply don't like the idea that they're going to have such high headcount dedicated to something that isn't really going to move the needle for them, right? I had to laugh because when I was at a corporate, we always used to talk about headcount. As a VC, you don't really care about headcount. You care about whether at the end of the day, you're making money or not on your investments and as a firm, right?

23:29You've got to still stay alive as a firm. Corporates are very, very headcount sensitive, right? So if they're going, Even if it's a successful VC, we have seen cases where they built up a team of, let's say, look at 3M years ago. I think they had like 20 people in each region or something, right? Or at least that's what they were telling everybody they intended to do. Then there's a change of CEO or CFO. Somebody comes by or there's a bump in the share price evolution and they go, who the hell are all these people and why are they on our payroll, right? And then the CEO wants to announce to the firm that there's going to be either a head count freeze or something.

24:14And then they always want to demonstrate that they are also contributing to this reduction in head count. And guess who's on the list, right? It's the CVC guys. And it's also the CVC guys because that business unit does not have revenue. Yeah. It only has a cost element. Exactly. So I think it's a very dangerous place to live unless you can really demonstrate that you are making a contribution to the core businesses. Yeah, maybe this is the perfect exact way to ask you to really distill some of your core learnings and principles from building Emerald. Because I think that, you know, this is exactly what I think many that are in the CBC space are looking for.

25:01Yeah. Yeah, so I mean, if I think if I were going to start out today or so, I think if you're going to be servicing corporates and you're going to be active in our space, climate tech, which is not the easiest space, right, to make money. If that was my only purpose in life, I probably would have picked a different sector. But I think having technical depth in the team is super important, right? We do not invest in things that we don't understand. I think that's really important. On the other side, we are here to take risks, right? So we have to understand what risks we're taking, and we have to do proper due diligence to uncover that.

25:42I mean, we do have a reputation of being rather thorough, if I say it in a nice way, or kind of slow, very intense in the due diligence process. That's just simply part of the deal of working with us. When we do table a term sheet, though, there's 99 % probability that we're going to make this investment because we've done our very thorough due diligence. And it's unlikely that anything is going to happen between that time and closing. Right. So that's super important. I think being very thorough. The other thing that I would tell people is, you know, this is going to be a bumpy ride. right this is not i mean even our most successful startups that we've had over the years almost went bankrupt at least once right and i think you've got to have a stomach for it you've got to you've got to remain calm you've got to be very solutions oriented and you've got to partner with these with these entrepreneurs as long as i always tell them before we invest look you have to be honest with us.

26:50Shit is going to hit the fan. I can't tell you what exactly it's going to be, but believe me, it will happen. Very often, things that are completely out of your control. The earlier you tell us about it, the more options we have to help you, right? And believe me, we've been through, we've seen, God, over 25 years, you wouldn't believe the crap we've seen, right? Things that, But look at Silicon Valley Bank, where on a Thursday, one of our portfolio companies tells us, by the way, we have all of our money with Silicon Valley Bank, and payroll is due on Tuesday. Over the weekend, me together with one of my co-investors, out of the whole syndicate, we were the only two investors that were able to actually take a decision in that short period of time.

27:40and it was just a absolute plain vanilla we're not going to try to capitalize on the situation right how can we make sure the company has two to three million by Monday morning right now luckily we didn't have to do it Silicon Valley Bank got you know saved on Sunday night but you have to be willing to to be really constructive and and then you know that comes back to people you build a reputation of being very constructive and being supportive and people remember that. But Gina, here is that thoroughness that I really like and appreciate and have come to appreciate at my time at Merck, right?

28:21Is that because you have corporate clients behind you or would you do that anyway because that's the way you do business? Yeah, we would do it anyway. And it's kind of a, you know, we have to have all these sector specialists within our team in order to attract corporates, right? In order to be able to interact with the corporate. I have a finance background. Corporate, they don't want to talk to me. They want to talk to, you know, our hydrogen specialists, right? Or, you know, all the specialists that we have here. So I think by having that type of a company culture of being very technically oriented and being very thorough, things don't get past these guys very easily, right?

29:05So I think it's a little bit of both. How do you manage this conversation with the corporate partners that you have, the ones that you run it as a service with? Do they tend to run by the right principles, so to say? Is it easy for them to understand the startup world and the importance of this? Or how do you go about making sure that they do? I mean, they pretty much trust us to do the investment process the way that we, that's why they actually chose us, because that is how we do our business. When you say it like that, is that because once it's in the portfolio and it's value at work and it's deciding on how to support, as an example, in a bridge round or like this?

30:00Okay, so once, yeah. Yeah, so let's look at prior to investing and after you're invested. I think prior to investing, they know the process. They know how we work. They obviously also have an opinion about the technology typically, right? Because it's something that should be highly relevant to them. Then afterwards, they're... And I'm trying to think, you know, it's kind of funny because we... And I think one example we had where we had three of our corporates co-invested with us. One was a CVC mandate client, and the other one were two LPs in our funds. And everybody just let, they just moved to the side and let us do our thing, right?