E534 | Nacho Tovar, IAG: Reinventing Aviation: CVC Strategy at 30,000 Feet

0:00What if every job on the aviation ramp had an AI co-pilot making workers better at what they do? So my personal vision, and this is maybe not so, is like we will have synthetic intelligence sitting next to us trying to make you better at your job. But here's the problem most founders face when trying to innovate with massive corporations. You need to understand and to manage complexity and uncertainty of corporates. I think that's extremely important. For your portfolio, for your founders, you need to be that umbrella, that protector inside the corporations trying to speak the same language as entrepreneurs.

0:35Ignacio Nacho, Ovar of EIG, has cracked the code with a disciplined approach. Like, we renew our investment thesis and criteria. So we have like six basic priorities to invest in. For Nacho, it's not just about financial returns, it's about transformation. It is super good if, as an investment manager, I put two million somewhere and you get, I don't know, 10 or 20 in two years time, three years time, which is a good money on money, so a good deal. I imagine that you can be part of the delivery of an asset that is going to change the way we do aviation in terms of, I don't know, revenue generation, customer experience change or cost.

1:11The stakes? Nothing less than the future of an entire industry. We want to reshape the future of aviation. And they're backing it up with serious capital and infrastructure. We just launched like the new umbrella for innovation at the group. We call that IEGI. We have now the IEGI Accelerator and then IEGI Corporate Inventure. As you said, we committed to a funding of 200 million euros in five years. How does a synthetic intelligence vision become a$200 million reality? Join us for this deep dive into corporate venture capital done right, where the future of aviation is being built today. This is the EUVC podcast.

1:49This will definitely be down. Tear down this wall. It's more than just an alliance. This is a union of values. 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. Welcome back everyone to another episode of the EUVC podcast. We always try and connect and champion the voices that shape European venture. And today we're diving into the intersection of corporate innovation and venture capital. As always with our very good friend, Jape Hoyer from Denmark, just as myself. And today we're bringing on Ignacio, or also as we will call him in this conversation, Nacho.

2:34And Nacho is quite the expert on anything aviation. So I'm looking forward to this. Ignacio Tova brings a wealth of experience from engineering at Airbus to strategic roles in consulting and venture capital. And he's now, of course, a key figure at IAG, driving their innovation initiatives and corporate venture capital. Yeah, but tell everyone, why did you think that Nacho was such a great guy to bring on the podcast? First and foremost, he's a clever guy. I stalked him, I've hunted him, and now I have him on the show. So I am super excited to have him here. Second, first Spanish-speaking guy on the show.

3:14For me, that's awesome to have that. And then aviation. Aviation, as a kid, who doesn't want to fly? So here, Nacho, tell us your story. How did you end up in corporate venture capital? Thank you so much, Seppa. I think that's a super good introduction. A couple of lies over there. So I'm a Spanish. Let's see if I'm smart. Let's see if I'm smart enough to be here. Now, it's an honor to be here. Thank you so much. You know, corporate venture capital. I studied, as you said, like engineer and became part of Airbus. So, you know, that aircraft from flying has been like magic for me since I was a little boy.

3:57I used to be a consultant. I've been jumping to the Venture Capital Fund. And when I had the opportunity of putting together like VCs, like my drones around flying at Iberia the very first time and then IAG, that was the perfect solution. So, yeah. and also being like the bridge between what is happening inside like a super big company and group of airlines outside AG with entrepreneurs, those guys in both Spain, Europe and globally doing amazing stuff. So I think that was pretty much a no-brainer for me. So my background is from Merce Growth. That is container ships. Your background is with everything flying.

4:38So, I have no idea about what you source for when you source for investments. Could you tell us a little bit about the scope of what you look for when you look for startups? We're investing in every stage. So, we take it between 500k to 5 million. We want to reach global talent, so agnostic on geography. It is true that IED has got different hubs. So UK is a super important market for us. Also Spain, also the United States. But our ambition is a global one. We want to reshape the future of aviation. And so the good thing about being part of such a big group is that we have a lot of airlines, different natures.

5:26So we have like low-cost airlines like Bueling in Barcelona, also a super premium brand like British Airways in London or Iberia Madrid. different geographies so natural markets like Latin America North Atlantic and we do cargo so we that's our link you know we also have like a cargo business inside and even a loyalty business so we have IG loyalty so I cannot imagine like any process that is not part of what we do so if you are like a B2B company B2C we sell you know massively to customers we have a lot of employees for sure and people in our teams we work in airports, we work inside a cabin.

6:07So, and we are like, we renew our investment thesis and criteria. So we have like six basic priorities to invest in, trying to go super quickly. Call me crazy, it's not going to be the first time you hear about this is AI. So we are obsessed about AI as everyone, meaning not like for sure investing in foundational models, but in the app layer. So everyone in the world that is thinking or exploring, doing something around aviation in AI. So pretty vertical. Things like, I don't know, revenue management, improvements in operations. We are willing to listen to them and to pack them if there's fit.

6:48Then automation, those things that are happening in a ramp. When you look outside a window in an aircraft and you see like, I don't know, the fuel over there, some bags, caters and lots of things and people moving around. I think that there's an enormous opportunity of putting robotics and industrial automation over there and even humanoids. Sustainability is part of our strategy. So the things that we are doing around sustainable aviation fuel, what we call SAF, is the future of the biofuels and synthetic fuels for aviation. That is extremely important. And there's a lot of innovation required to go from the first generation of shaft, which is coming from oil and so, to the third generation of shafts, which is like synthetic fuel.

7:36Things that you can do when you put together CO2 and green hydrogen to just get a jet that is exactly the same that we are using today. So there is not a kind of any change required in an aircraft, which is like super fast. And then the last three pieces, we are investing and exploring a lot around what we call experiential platforms. So everything that is related to the way airlines and travelers selling tickets or is managing the customer experience. In my case, I'm personally obsessed about digital identity and this dream of managing your documentation at home, just going to the airport, being able to go through security filters with your face, self-backdrop, boarding in a gate without going with a passport in one hand, boarding gates in the mouth, the bag in another one, then another, your trolley.

8:27That is something that is not acceptable so far. Technology is over there, so we need to work on that. And then the last two things, connectivity. I think we cannot have a blackout of a 13-hour flight, Even if some people is willing to keep that way because it's the only place in the world where you have no connectivity and want to risk and watch a movie. Now, that is super interesting for us, the way that connectivity is going to be evolving inside an aircraft. And the last one is around what we call the evolution of technology, which is quantum, cloud, and cybersecurity. We consider quantum as not a Horizon 3 stuff, but there are some interesting use cases when you mix quantum plus AI.

9:09So this quantum ML thing, and we are actually exploring a lot of that and cybersecurity for short, which is something that we are all discussing about because of the potential risk. And Natia, when you describe all of this, do you then look purely as a financial investor or do you look at a strategic? Because as you said yourself, we are this huge group. We have arms and legs, so to say, in everything aviation almost. The startups you invested, do you invest with an acquisition goal? Do you invest with a strategic goal of being able to leverage them inside as customers and partners and so on? Or do you invest more purely just as a financial investor and you do it as a bit as an exploratory thing?

9:51That's a super good question. I think we have to say that the ambition is being a hybrid approach, meaning that for us it's more important than strategic value. So we are a multi-billion company in terms of incomes and profits. And it is super good if, as an investment manager, I put$2 million somewhere and you get, I don't know,$10 or$20 in two years' time, three years' time, which is a good money on money, so a good deal. But imagine that you can be part of the delivery of an asset that is going to change the way we do aviation in terms of, I don't know, revenue generation, customer experience change, or costs.

10:27So that is a value super relevant for us. And those examples that I mentioned around SAF in sustainability is a good example. The fuel is one-third of the cost of an airline at an industry level. So imagine that you can just get to have sooner, more available SAF with the right price. I think that's a good example of strategic value that we are chasing. Can I follow up on this one, Nacho? So you're a new 200 million euro fund, right? Is that a balance sheet fund or is it structured as a single LP fund? What is the structure? Today, it is not a vehicle. So we are investing through the balance sheets.

11:04That's a good summary. So the good thing about that is that sometimes we are kind of flexible. So it is investments are subject to capital allocation. And you know, in the aviation industry, it is not an easy one. So no matter what happens in the world, it's impacting us in a way. And that's a good way of looking at it. But then I know we are exploring like potential next steps around like having this kind of vehicles. For me, Natrum, now I have a I have part of of the equation, right? So normally when I when I work, I talk about all the strategic parts that is the outside, the hypothesis and all that.

11:47You have described that nicely with your areas of focus, right? So we have that. Now we had a bit and piece of how you actually do it. You've talked about the invest part, the corporate venture capital. But when we look at additional elements of what you can do in corporate venturing, you have incubation, you have partnership, you have investment, and then you have buy, which is M &A, right? Could you share a little bit about what of these elements do you touch at IAG? And this is the perfect timing because we are super excited that we just launched the new umbrella for innovation at the group.

12:26We call that IGI, I standing for innovation, as you can imagine. And that's the way to call the two main external vehicles that we have. So we have now the IGI Accelerator and then IGI Corporate Inventor. As you said, inventory in space, we committed to a funding of 200 million euros in five years. So that's like investing 40 million a year. But we also do have the accelerator. And it is something that is not new for us. The previous name was called Hangar 51. Some of you could know. Some of you won't. It is true that it was not that well related with the AGS group and the airlines. I think that some people believe there was, I don't know, maybe on a startup capability, but not an accelerator.

13:13And it was exactly that. And we started this in 2016. So I was not even in the group or Iberia. So it's almost a decade. And now the portfolio of companies going through the accelerator plus venture capital investment is over 100. So I have to say that is one of the biggest portfolio in not just aviation, but travel industry, I could say. We are talking about incubation, as you said. So traditionally, this accelerator was oriented to a typical window of 12 weeks collaborating with the startups to do something real. So to deliver a product that could be part of our operations, part of our customer experience, the way we sell.

13:55That is one of the tracks that we keep. We call that delivery. And we have another track that it could be a concept around in Kubica that we call this discovery track. And it's going to be a little longer. longer. So it's going to be a six-month incubator. So those startups where we could clearly see as learning in the past that 12 weeks weren't enough. So it's just, I don't know, we were struggling to get to somewhere and it made no sense because it is suddenly, I don't know, a lower level of technical readiness. It was something in a way related more with science than beats. It was in the field of sustainability, for example.

14:34So we are also having that. So the accelerator is being a super testing field also for the ventures. So it's a super good way to engage with those talents that could be backed from a venture capital perspective after that. And it is actually what we are doing today. We have an open window where we are in the pitch week for our startups in the accelerator and working super closely with the venture capital fund. and all the airlines, which is extremely unique as far as I see it from an IAG perspective. So we have, as we mentioned, airlines, loyalty business, caravillage. Everything in the accelerator is starting with a challenge from the airlines.

15:18That is why we are focusing that much with the value. Nacho, for the accelerator, how early do you engage with startups? It depends. It is true that we do not put money up front. So it is not an equity approach. I saw that in the past in my previous experience in VC where it didn't work, at least in the Spanish market. So it was like corporations putting 20K somewhere and then killing the founder and being a startup. And in one week's time, it was like, come on. So this is more an approach around collaborations. And it is true that it depends. So we are mainly focusing in seed products where we can add a lot of things.

15:57So it is not just advisory from a corporate perspective, but above all, it is assets. So I think that startups want customers and customers that pay, which is actually the most important stuff. And we have these millions of customers, hundreds of destinations, a lot of aircraft, airports, and so. So we usually invest in C, the States. But it is true that we have sometimes tested deep tech technology that we're more mature. So suddenly, CUSB, CUSC, but maybe more with the ambition of generating value together and supporting the scale-up and the growth, rather than being part of the future of the venture capital fund.

16:36So a little bit agnostic, main focus on building something together in six states, but also supporting the scale-up of a kind of more mature companies. So one thing that is super interesting to me when I talk to corporate venturing people like yourself is always when you look at the team, the composition of your own team, right? You explained to us, you run the accelerator, you also have the investment side. Is it the same people doing accelerator and invest or how have you structured your team today? It is a team that work together, but definitely not the same team. I mean, skills are sometimes different.

17:14VC world is a kind of specific. So you need some tracks to be a top-notch VC. I mean, that is my opinion. So they are collaborating together. They are different teams. So what do we look for when recruiting or chasing for talent for the VC? The corporate world has got something you need to understand. So it is not easy to have this VC background jumping directly to read something in airlines and then suddenly get frustrated the first day because some things are not happening or you do not understand why you invest from balance sheet or this kind of all things, right? And that's the trade-off and that's the challenge.

17:57How you put together. We are starting having more like a strategic oriented team at the very beginning. Now we find out the way to also attract VC world into the team. So now there's a mix of, I know, some people coming from West Coast, having nothing to do with the airlines before this. So being able to learn about the industry and the other way around. So more professionalism, not saying it was not in the past that way, but getting more professionals around BC for those who are closer to the industry. But I think that's the trade-off. That's the challenge. And above all, you need to understand and to manage complexity and uncertainty of corporates.

18:37I think that's extremely important. for your portfolio, for your founders. You need to be that umbrella, that protector inside the corporations trying to speak the same language as entrepreneurs because sometimes you know about that. So I also supported my previous VC in something that they call enterprise dynamics or something like that. And it's trying to manage and navigate like the complexity of corporates even more if you are a B2B company where you just knock the procurement door and maybe that is not the first door you need to knock. I'd love to ask you, Nacho, because to frame the context here, a lot of the audience and really the people we want to reach with this podcast is very much the corporate leaders that are deciding how to design their corporate venture arm.

19:29That might be people inside the corporate or might be people that have been just hired in to build it. I'd love to ask you to reflect a bit Because when I looked at your CV, I thought, this guy's probably almost like destined to be at IAG. Because I saw a couple of years as an engineer in the field doing actual stuff with aviation. Then you go and do a pretty long stint at Accenture. And then you go with Sam Aypada, who we've had on the podcast as well, and learn the VC craft. And then you go and do what you do today. I kind of thought that's probably the ideal profile because you've got to understand the consulting mindset and really going to corporates.

20:13This is how I see consulting, that what Accenture gives you is a big respect for what is your task and what does the corporate need and what are you plugging into, keeping that in mind all the time. And then, of course, you have the tech experience, so to say, from being directly in the airlines or in the aviation industry. And then, of course, venture, which gives you, and you call it a specific set of rules or whatever you call it, very special expertise and skill set as a VC. I think what many people don't get with VC is that there are very hard red lines you cannot cross. You just have to play by this book.

20:53And if you don't, you're dead in the water. And you only learn five years later. So if you haven't learned them before you start on the job, you're going to be in trouble. So I can really see that this career of yours almost leads you perfectly into the role you're in today. Could you reflect a bit on that? So glad to hear that. Imagine that I'm fired in two months' time. Hopefully the corporation. That would also be the very natural progression of many corporate CVCs. I will call you for a job, Andreas. I will call you for a job. But no, you're totally right. And I also do believe in what you said.

21:29So there was like a, so you need to, if you invest in technology, you need to have, in a way, like a tech profile. You need to kind of be interested in that for sure and know about that. Then if you jump into certain sectors like aviation and aircraft and these kind of things. So having collaborated with those kind of companies and knowing a little bit, because I'm not an aerospace engineer I'm an industrial engineer so I was not a super expert in aircraft but being in a hangar so the very first time you go for example to Iberia maintenance hangar in Madrid next to the airports and you go where we are doing the testing of engines and you see that for the very first time so this is something that I usually tell my family and my friends so if you take a 10 year old boy or girl there if they can they will become an engineer because that is absolutely amazing so the kind of things that you see over there so having this sensitivity and being in China and hunger is also important and then VC I just jumped into a VC because of one of my best friends Samay Pata's general partner now Jose del Barrio that's the guy we had on the podcast as well I mean this was like 2015 and at that time in Spain being still like a small market in terms of VC they did an exit of 100 million which was like top at that time it was like the guru in the whole country you could clearly see that even more investing in marketplaces because you know they were doing like the red fritz la nevera roja in Spanish it's a kind of I don't know delivery or just it for Spain and that deal was absolutely amazing so I mean he recruited me because, I don't know, we have friendships.

23:22I think he also considered I was a kind of smart, but I had no background around VC. And when you jump into this kind of dynamics and business, it's, as you said, extremely difficult because of many things, but also extremely interesting because, you know, the talent that you can see in the markets that I've been able to collaborate with, it is extremely high. So you can clearly feel smart people all around you. It's like a sphere, right, from LP. So your investors are sometimes smarter than you. Your colleagues and peers, the entrepreneurs and founders that you are committing with and trusted are also extremely talented.

24:05So it's just super good. But as you said, you need to understand the principles and you need to understand how you can co-invest, how you can collaborate, how if you are like an early stage investor, can support like feeding other funds for the following rounds. So this kind of collaboration and even more if you're starting a market that is not as mature as I don't know, the UK or the United States. For the Spanish market, Jose was doing an extremely amazing job and he still does with Samaypata. So yeah, you need to understand that. And then as we said, jump into having deep knowledge of your industry.

24:47And I spent like almost seven years at Iberia. Meaning Iberia with one of the best stories around transformation in corporations that I've seen so far. So Iberia, this is public, was losing a million EBIT a day in 2012. And in 2019 was the best year in history. And last year, it's also public. There was over 1 billion profit, which was like a dream five years ago when I started collaborating there at Iberia. So I've been through almost everything, I have to say, even a pandemic. So COVID, imagine that you have over 100 aircrafts and you need to just keep them in the ground from one day to another.

25:26So that was extremely hard. So yeah, again, another personal and professional experience. So, yeah, so that mix, I think, makes you add more value to what you're doing if you're working in corporate events. I think for me, you know, a call out to all our listeners here and viewers, right? This is where corporate venturing is extremely hard. It is the culture part. It's the people performing within corporate venturing. because as data shows, 60 % of the people in corporate venturing claim that C-suite and board does not understand what they do and what they need to perform their work, right? So here, dear listener, it is also about culture.

26:13So the culture of the mothership is very much going to dictate how you're going to run your corporate venturing activities. So there is no kind of like, you know, one size fits all. Nacho, maybe a little bit more from your team. How many is coming from the mothership and how many is coming from the outside? Do you have a percentage on that? It is close to 50-50. The thing is that we're still small. So there's like a principle that I was discussing before of this 100 million fans has to be managing from a corporate perspective with 8 to 10 people. So we're still setting the team. You know, it was like almost three months ago.

26:56So we're still, you know, scaling that up. But it is 50-50. It depends also in, you know, the situation of your corporate. I was having a discussion this morning that they were saying, come on, it is easier for you to just, you know, promise a funding of 200 million euros with the situation of IAG. And it is true. So IED, it is in the best position ever in terms of profitability, operations, customer experience, metrics, and so. So it's always easy to try and set this up when the context is, or your corporate is supporting, and you are part of one of the most profitable airline groups in the world.

27:40So, but again, if you are then in not such a good position, it is also perfect timing for innovation. So it's maybe because you want to invest when it is sunny, although the rain could be coming. It is easy for you. Or if you are really in a bad situation, it is, again, the perfect timing to try to do these new things around having access to technology and being able to deliver the assets that are going to be material for you in the present time and in the future. But yeah, going back to your question, sometimes I get too long. Today, it is a 50-50. I think actually to use the way you framed it, a lot of corporates, when the rain is there and the challenges times are there, they start thinking about, we are in trouble, we need to do something.

28:31And then when the clouds are still there, the rain is gone, and you start to see a little bit of the sun. In venture world, right? Valuations are up. Then CVCs go in, right? That's when they go in and they go in in high valuations, right? So that's also part of the challenge. And maybe that leads us to another interesting part of what you do. So when you do investments, do you lead investments? Do you co-lead? Do you take board seats? What do you do? How do you operate? So, so far, we are not leading a lot. So we are following a super good network of co-investors that we are actually having, that I found when I got here.