E416 | Nicolas Sauvage, TDK Ventures: Building a founder-friendly CVC and investing in DeepTech for long-term impact

0:00One of the advice maybe to the audience, especially if you're the CEO of a company and you're thinking about doing a CVCVCVC, this is back of this patience and impatience. you need to be thinking about it for 10 years. If you think I'll try for three years and see if it works out, maybe you should not even start it. You're going to distract your management team. You're going to probably never get the fruits of the CVC because you're not giving them enough chance to get to the point where you have success stories, which then helps the business group get excited. Here's a few words from our beloved sponsor.

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1:24This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Welcome to the European VZ Podcast. Thank you. Thank you for having me. Thank you for holding us again. We've just crossed the New Year's. I'm happy that we're continuing to co-host the CVC podcast together. It's nice. It's nice. Nicholas, let me ask you a question here right off the bat. Everyone who listens into the podcast often will know that I usually do the intros myself. But because it's a little bit complex and the wording is sometimes important when it comes to CVCs, I don't want to do that.

2:00I'd much rather ask you to say, how do we best understand Nicholas Sauvage and TDK Ventures? Well, so my name is Nicolas Sauvage. I'm the president of TDK Ventures, which is a corporate VC of TDK, the global electronics company from Japan. I think some of your audience will remember about the TDK cassette. Needless to say, we have moved on and we are now involved with really advanced technology contributing to every mobile devices you can think about, automotives and advanced technology. And as a corporate VC, we're looking at investing where TDK wants to go in the future. Can you just share a bit of light on the sizes of your investments, the number of investments, also the verticals?

2:49So we have three funds so far. So$350 million asset under management, which we put to work to invest in entrepreneurs who are building the future. And we want that future to be sustainable and good for society and for decarbonization funding in particular, good for our planet. And so our investment thesis is to invest in the hard tech entrepreneurs, especially at early stage. So the majority of our investments are in seed and series A. And once you include series B, it's more than 90 % of our investments. And so we look for entrepreneurs who invest in areas where TDK is thinking about investing in the future, what we call the megatrends.

3:35And the check sizes vary from? It can be as low as$250 ,000 all the way to$5 million for our fund number two or up to$10 million for our fund EX1. So EX stands for Energy Transformation. And that's our decarbonization fund. And so our fund, too, is a global fund that can invest anywhere in the world. And we've invested all the way to Australia, Singapore, India, Canada, of course, Europe. And fund EXY, this one is specific for Europe and North America for decarbonization topic like energy generation, energy storage. So now with the basics out of the way, let's talk founding principles. Because first of all, if anyone doesn't know listening in, you are quite a recognized speaker and figure in the CVC space.

4:31So everyone be excited to hear what you have to say here, Nicolas. But the foundational principles on which you've built TDK Ventures, can you tell us about that? Typically, I'm the one asking questions. So it's interesting to be asked the questions. It's interesting because we started the team and we're starting to act without thinking about our core values. And I wrote a Medium article about how we actually backtracked what was our real core values from what we were doing. And so I want to share that, which we call them the code, EODE, which is a code of conduct. And the C stands for contribution to society, which is really in resonance with the TDK mission.

5:13This is what TDK has started in 1935, and it's all about doing the right things. or is one team reaching for the sky, which is really the essence for our team, which is how do we bring our curiosity and our diversity of sorts to bear, to raise about, not just for ourselves, not just for TDK, but even for the full ecosystem. The D stands for delivering deep insights, which is really our raison d 'etre. This is why we started TDK Ventures, which is to learn about things which are not obvious, maybe contrarian, and really share this inside TDK, but even going sometimes beyond that, sharing to the world through Medium Articles, LinkedIn and others, because we feel like sometimes what we learn is really useful for that contribution to society.

6:02So for example, you would see us sharing why we invested in nuclear fusion, because we think it's important for other investors to know about it and even entrepreneurs. And the E is last but not least. and I have to say that I tried to find a word that started with E and I couldn't, but that's entrepreneurs first. We see them as the heroes of our story and our customer. And so this really drives everything we do every day. Now you're talking about the foundational principles. I think I want to talk about the conflict or the complementary between being patient and impatient. So patience is really about this sense of purpose, this patient capital, this ability to invest for the long term.

6:51But then we also need this impatience, this sense of urgency. For example, nuclear fusion, you could say, this is a good example where we need to be patient. It will take time, but we got to start now. We can't wait forever to get started. I think this patience and impatience is something that we struggle every day. and knowing when to be one or the other is part of what I think is driving us to be better investors. For sure, but it's an interesting topic, right? How you collaborate between a large corporation as TDK and then your portfolio companies, right? Because that is even more patience, right?

7:31Because you have to do it at the exact right time. I think we're very lucky is that TDK is a patient company. It's got the best of what you can think of a Japanese company, which is being very thoughtful, especially with our charter about contribution to society, working with our customers like partners. And so there is a passion that's inherent to TDK. But the sense of urgency is also extremely important. And sometimes you want to make sure that when you invest in the portfolio company, you find ways to help them very quickly with very meaningful engagements. Yeah, I think it's the impatience of being a venture capitalist, right?

8:13It is you need to drive the change and make sure that this company you have invested into, they leapfrog all elements of building a company. Nicholas, why the focus on impact? And I want to ask you this first, or I want to test some thesis or probe the way you answer by saying Japan is very recognized all over the world for having incredibly durable enterprises. The oldest companies in the world are family-owned enterprises from Japan. So I'd love to ask you a bit about that Japanese heritage and whether that plays into this sustainability or long-term orientation of how you add to the world. Because most enterprises, to be honest, have not lived long enough to know the importance of being sustainable.

9:05But in Japan, that's a very different situation. And even with TDK specifically, TDK has been around long enough to really have seen the impact that technology has had on society and also the technology they have brought to bear. I really like your question. And I think you're touching on both meaning of the word sustainability. And so I'll talk first about the longevity that comes with making sure that you invest in the right places and you're capable to pivot, which is something we also look for entrepreneurs. And if you think of TDK, and I can think of Nokia, but I don't think there are many other examples of companies that were B2B, then B2C, then back to B2B.

9:50and TDK is one of these companies that if you look at their revenue over time, it looks like it keeps growing. But on the inside, you have many pivots. And I like to share this vision or this view to our entrepreneurs because I want to tell them we understand the struggle of building from scratch and then being challenged. And so when we think about sustainability and TDK, It's also an amazing story where even though it's a Japanese company, 90 % of our revenue and 90 % of our team members are outside Japan. So this is one of these transformations, and that's happening even more so in the last five, six years where we started TDK Ventures.

10:35And we have many initiatives in TDK that are quite fundamental to understand the market, the future, and so on, which gives me really high confidence that TDK can then address the next disruptions, handle it well, and address the next transformation that we want to totally capture. capture. And that's what makes my job and the team at TDK Ventures excited because we're trying to understand what the future will look like and then help TDK in a way that's very strategic. I think you used the word earlier. And strategy, the way I define it is what it is that you want to do and what it is that you don't want to do.

11:14Speaking of don't want to do and want to do, you mentioned nuclear and we should talk primarily about TDK, but I just would love to ask you a bit about nuclear because it's something that everyone is thinking a lot about. We just had in Europe a very large series. I believe it was 100 million or so in a nuclear startup. We have a lot of movement in the U.S. when it comes to nuclear. We have Germany that has said absolutely no in Europe. And then we have more and more discussions in every single member state, I think, in the union about where do we want to be on this axis? And then, of course, you have Japan that has a very rich nuclear history with the two reactors that we, of course, didn't go so well, but still, or you had a terrible crisis there, but still Japan is very pro-nuclear.

12:09So I'd love to ask you both about the historical context of nuclear and existing debates and so on, because I think any big investment in nuclear will have to factor in the trends on a political level, but also where you see the technology and TDK factor in. Let me start by saying that if we think about society 100 years from now, so you asked me about historical, but I feel like we need to start from the future. 100 years from now, they will be looking back at us, wondering why we did not start nuclear fusion earlier. They will really wonder, with everything we know, why did we not start earlier?

12:51Why did we not build that technology that is a fail-safe technology, which is very different from nuclear fission. Actually, nuclear fission is not that hard to do. And that's why we could do it 40, 50 years ago. But it's very difficult to start. There's no fail safe. Well, nuclear fusion is the opposite. It's very, very hard, very complex technology. You need to keep that energy more powerful than the sun in one place. And if at some point something goes wrong, then you lose the energy. It's a fail safe inherent to the technology. It's very interesting. So we had our investment director, Tina, really researching first nuclear fission.

13:35And she ended up concluding she didn't want to invest in nuclear fission. Then she conducted a deep exploration on nuclear fusion. And she ended up with very strong conviction that this is where we should invest, especially with an approach called the Stellarator approach, which is basically a magnet that is shaped in a way that the energy would flow logically and naturally. And this is a bet she made. And when she went to the investment committee, and this is back to your question about Japan, nuclear fission and fusion use the same characters. So it's very loaded words in Japan for obvious reasons.

14:17but when we came to present it, it was really tough for investment committee. That's probably the first investment committee where we have three investment committee members and it's basically the CTO, the CFO and the equivalent of the CSO and they really struggled because it was such a loaded topic but they appreciated the value of the technology for the future of society for our planet, but they also saw some responsibility, and this is back to this contribution to society. They saw the opportunity for TDK and TDK Ventures by investing in nuclear fusion, and we did it with Type 1 Energy in the US, to actually signal and educate about the difference between nuclear fission and fusion.

15:07And if you look at our press release when we announced the investment, it's not your typical press release because we spent some time to explain the difference between nuclear fission and fusion. We felt like because indeed we are a Japanese company as a mothership, we had this opportunity and responsibility to educate on that difference. Interesting for me here to know a little bit about the process you went through internally in Nibuos, right? Because you must have done a lot of groundwork to get that investment to go through. So is that because you have a clear definition of code or that in attached to clear defined investment verticals?

15:54So actually, it's interesting. I think you're making an assumption here. I'm going to dispel it quickly. We do not do pre-approvals or pre-warming of our investment committee. Typically, we go to our investment committee where we share the investment deck 48 hours to 72 hours in advance. They don't know in advance that we're going to present a particular investment proposal. The intention is for our investment committee to approve an investment based on, is this investment helping us build a long-term strategy and execute on that long-term strategy? So that investment committee is really the proxy of matching our exploration mission to that TDK long-term strategy.

16:43And so we do not have all this pre-warming. But, and you're right, and maybe we'll come to the investment process we follow, but our deep exploration is going very deep. We try to build from first principle. So we go extremely deep. We surface some insights, sometimes non-obvious, hopefully contrarian. So it's not obvious, but also most people would not agree with it. We surface it to the team and try to challenge it. And if it survives project presentations and also a diverse advocate process, which is extremely disciplined, and I would want to explain that a bit later in more details. Then at that point, if the investment director still wants to proceed with investment, even as president of TDK Ventures, no one in the team can veto it.

17:34So one investment director can go to the investment committee. And at which point it's about, is it part of the TDK long-term strategy? And so maybe I can explain the diverse advocate process, because this is one of the things which I think we have improved over time to the point where it's so simple and so powerful. and it touched on psychology of an investor. So first, from this deep exploration, typically our investment director and their team would come back with a few startups they like. And so they would have what we call a project presentation where they present some of the startups and everyone in the team can say what they like or what they don't like, what it is that they think is promising and what it is that we should do diligence.

18:17At some point, the investment director may end up with there is nothing I like to invest, so they move on, which was the case for nuclear fission. All they might come back with is this is a space which is really good. It would be venture-type returns, contribution to society, very good engagement with TDK. But I haven't found the king of the heap, the company we believe would be market leader in five to seven years. So in fact, we park the deep exploration, and then we move to another deep exploration, but we are ready to invest when we see portfolio companies that fits our KPIs. But the best case is when they find these companies that are so sure is the king of the deal.

18:56At that point, we have a diverse advocate session, which is one of our mandatory steps for our investors process, where they present why they're convinced this is a startup they want to invest. And at that point, our team can only follow one rule, really, which is they can only say why they would not invest in the company. So they would typically say, I would not invest in this company because of A, B, and C. And there's no starting like, oh, I like this market or I think these entrepreneurs are great or whatever it is. And the reason is everyone, if you give some good and some bad and you really believe in the project, you're going to latch on the positive and minimize whatever negative.

19:38But if you only hear the negative, there is no way you can miss on what is being said to you. Whether it's yellow flag, red flags, maybe blind spots, And what's interesting is that for one hour to two hours, you only hear from all the team why they would not invest. And of course, we try to avoid repeating someone else's points. After that, I give them the night to think about it. And the following day, typically, they would have to write down a response to all the diverse advocate points. So it's not just hearing it. It's also internalizing it and then responding to it. Sometimes the response could be about, indeed, I don't know that.

20:14indeed this is a yellow flag indeed i haven't looked enough on this and then they may decide to continue the due diligence they may decide to drop it because they realize actually now i've realized i should not invest which is about 50 of the time which is where i'm really happy with my team when they do that because it's very courageous you spend so much time looking into an investment to decide eventually not to invest. But of course, sometimes we proceed with the investment. And at that point, I know that they've done everything very deeply because they have the reason why to invest, and they are very clear on the reasons not to invest, which prepares them so well for once we invest, we already have a plan to mitigate all the risks we identified as a full team.

21:03And that's why I touch back to this one team reaching for the sky. During this diverse advocate session, We have a team of 34 people. We have 33 brands helping our investment director to really think through all those things that could go wrong. That's an impressive amount of people that you have around the table. Nivelles, can I ask, you know, so you're betting on the future and then you have TDK that is present, right? How do you bridge that gap, right? Because what I learned at my time in corporate venturing was that And sometimes it was quite hard to convince my colleagues at the core company that what I was betting on, for example, you know, fulfillment robotics, you know, would that be something for my corporate?

21:54And, you know, that gap, I had a hard time fitting in. So how does that work for you? It's probably very similar to you. Sometimes we invest when it's really not obvious. But what we try to do is to really work very closely with the TDK teams. As I've explained the process, something that probably is of use to you is we don't need championships from the business group. But I always like to tell the team that even though we don't need the championship or the sponsorship, we should act like we do. So we should really try to work very closely with every team and try to get their feedback. And by the way, the feedback many times is negative.

22:37They don't believe the market is going to be big enough. They don't believe the technology could work. They are not sure what would be the synergies with TDK. And what's interesting, and maybe this is a tip I would want to give to other CVCs or people who are thinking about building a CVC, is that when we make the investment proposal to our investment committee, we don't make it like a sales pitch where we only say the good things. we actually have every feedback, whether negative or positive, from the TDK teams. We don't want to hide any feedback because for the same reasons as I want our investment director to get all the reasons why not to invest, I also want our investment committee to have the full view of the bad, the good, the ugly, but also what the TDK teams have said.

23:27And by the way, I think if we didn't do that, at some point, they would do it themselves, which is not really a good use of the time for corporate officers to do that. And so I think having this beautiful, neutral view about an investment and being very open about all the things that can go wrong, but also how big the opportunity could be is key. And I think over time, and of course, we are only six years, so there are a number of times where we invested and we couldn't prove this was going to be important. Actually, we had the corporate officer, Ludger, who came to visit us on Friday with Taro Ikushima-san, who was another corporate officer who helped us start DK Ventures.

24:14And in early 2020, I reminded him that we invested in a company called Autoflight in Shanghai, China. And they do vertical takeoff and landing electric vehicles, so EVTOL. And at the time, I remember Ludger in charge of sales for our electronics company saying, Nikola, this is never going to be a market. Come on, why are you investing in this? And then about two years ago, he says, my sales team started pinging me about this EVTOL. Can we talk? And so we start sharing what we learned and everything, which is really interesting because on Friday, what he told us is now this is becoming a market.

24:54And it's a very attractive market because you need redundancy. You need to replace the components on a regular basis because of regulations. You need a number of technologies from TDK across the full company. And so something that in 2020, flying cars, if I'm being provocative, sounded like it's never going to be important. Now it's right in the core of what we can provide to that industry, which is going to be a trillion dollar industry. So this is really interesting to have this kind of examples. You also want to have examples where you can show it was not of use at the time and it starts to become very, very relevant for the business group today.

25:39This is also, I think, we talked about offline about the corporate VC don't have a lot of longevity. I think that's also because if you only have 3.7 years to prove yourself, you don't actually have enough time to show that some of these learnings bear fruit. And so one of the advice maybe to the audience, especially if you're the CEO of a company and you're thinking about doing a CVC, this is back of this patience and impatience. You need to be thinking about it for 10 years. If you think I'll try for three years and see if it works out, maybe you should not even start it. You're going to distract your management team.

26:17You're going to probably never get the fruits of the CVC because you're not giving them enough chance to get to the point where you have success stories, which then helps the business group get excited. No, and I think that it's an excellent story of, you know, how success looks like, right, in the CVC world. What impressed me a lot and what you also said during that was kind of like how you at TDK embrace the risk because a lot of big corporates, they can't embrace risk, right? Because it's like if you fail, you will ruin your career in a corporate. Yeah, I want to touch on that. And I think first, we have an amazing CFO, Yamane Shisan.

27:02I highly appreciate him because, I mean, if you think about CFO of a major company, you think about someone who would be very risk adverse. And if it's only millions of dollars, why would he spend time? And Yamane Shisan has this ability to understand that venture capital, like business, is all about risk adjusted valuation. Everything you do should relate to the level of risk you're taking. And what's interesting is that our CFO is capable to see that, okay, it's super risky, but it's seed stage and the valuation is attractive. Yamanishi Sun has been in our investment committee from the very beginning.

27:41So that financial discipline of risk-adjusted pricing has been here from the beginning and has been so helpful. because there are times where we show maybe a Series B when you already have a go-to-market, you already have marquee customers. Then at that point, you understand that we have to pay higher. But you also appreciate that we could invest like peak energy. We invested at inception of the company. It's a sodium-ion battery for storage solution for grids. And you understood that at inception, it's only about the team and the idea, and the idea might pivot and change over time. But he understood that the team was really amazing.

28:23And therefore, it was worth investing and, of course, at the right valuation. They've done so well since. So it's a good story. But the point is, many, many companies are risk adverse regardless of the risk. And what I'm hoping and conveying to your audience is venture capital, like private equity, like business grew, is about risk-adjusted decision making. And I think it's super interesting, right? Because also when you get, and going back to a little bit more about the investments, right? A lot of CVCs, they would say, well, let us not lead around because we don't have the skills to put the valuation of the company, right?

29:08Could you, you know, do you lead rounds and do you have built those capabilities? Yeah, and I think it's a capability. You're correct. On our fund one, 15 portfolio companies, I think we led maybe, I can't be sure, but maybe three to five times. On our fund two, the majority of the investments we have led or co-led. And this is something I would definitively recommend CVCs not to try to do at the beginning. Build the capability. Make sure that you have good mentors or good consultants or people who can advise you from the VC world. And here, one more tip, which is it's not because someone was in a VC that they are going to be good at advising you.