Why Henkel Ventures believes CVCs can outperform VCs

0:00Everything you have, you need to utilize it. If you utilize the things you are having, it's much more than every VC is having. VCs cannot do this. They need to ask other companies to have reference calls, to evaluate, give me the results of the POG, do this, do this and this. Also for M &A, if you want to sell your startup, we have an M &A team. It's fantastic at Henkel. So you can even utilize our network to sell it to other companies. Hey, I understand. Startups don't want to have crappy CVCs on their cap table. Yeah, I agree. So work with the good ones. And there are some of them. Looking into the top 25 quartiles of the financial performance, and if you see this, European, US, by Carter, and so on, the TVPIs, the net TVPIs coming in, I can directly name you four, five, six EVCs who are much better than most of the EVCs, which are making a lot of marketing outside.

0:39So the consolidation, you know, maybe it's too many EVCs in the world. I would make the bet, if you do your things right, if you have a professional team, you know what you want, you know what you don't want. And if you know what you do, if you find it, why should you be worse in the performance like EVC? I don't find any excuses. For me, it is super relevant that we stay focused to what we understand and what we know and not go abroad in every opportunity because then you get lost and it's a big threat for your financial discipline at the end as well. So dig to what you really understand and the role needs to be to fulfill the gaps of the company.

1:07Andreas Munk Holm:Welcome back to the podcast, everyone. Most VCs think CVCs are slower, more conflicted and structurally inferior to financial VCs. Today's guest runs a CVC that just delivered a net TVPI in the top quartile of European venture and argues that professionally managed CVCs will outperform most VCs. They will not just match, they will outperform. Mark Tome heads Henkel Ventures right off of the EUVC Summit and Awards, where he won the CVC of the Year Award. So what a guy. Joining me to pressure test that claim is, of course, Yabba Hoyer, who runs our EUCVC corporate joint venture and has spent more time inside corporate venture programs than anyone I know.

1:53welcome both what a great start what a great start i never started like this amazing yeah

2:01Andreas Munk Holm:give everyone a bit of context to henkel and yourself and your journey into this wonderful world adventure thanks a lot and so yeah my name is mark i'm half dutch half german working since 2022 for Henkel, heading up the venture capital arm here, the corporate venture capital arm, which is a wonderful, beautiful name of Henkel Ventures. And we have 300 million assets under management in two funds. And the activities at Henkel in corporate venture capital started in 2017. And after the first fund ended in 2021, at the end, the board decided to have a second corporate venture capital period. And this is currently the fund number two, which I'm leading.

2:40And I came on board for the fund number two. and we are investing globally in startups. We are investing as well into venture capital funds. We are investing between half a million up to five million but we are concentrating on the Northern Hemisphere, US, Europe, India, China, Japan and so on but not so much right now in the Southern Hemisphere. We are investing into 17, no it's today, it's 18 search fields which is very broad but you can bring them down into digitalization and sustainability but if you go deeper and you look deeper into this, it is about sustainable packaging, it is about new materials, it's about humanoid robotics, AI and so on.

3:19So it's a lot what is core to our business. We are investing into things which are important for our company today, the next three to five years or ten years down the road and we are doing this since now, I think we have around more than 80 investments but also have set up more than 100 partnerships which is the much better way because sometimes and many times it's better to make a collaboration between a startup and a corporate. It's also tricky to do it and to set it up, but it's very, very good and can also play out in a good way. And we invested already very actively. And that's in a nutshell what we're doing.

3:55Andreas Munk Holm:I'm super curious to understand how you came to this structure because as you just described, you have, well, I know this, you have more than 90 use cases across the company. Then you have the 18 verticals that you just kind of described. And then you, of course, also talk about three pillars that separates each of your arms, such as a product innovation process and then business model in your framework. How do you do this? How have you come to this setup? And maybe you can expand on it even further. Okay. So, yeah, it's a very relevant question because, of course, we could theoretically invest everywhere, you know, where the opportunities are, but we are very data-driven.

4:28So what we have started with is to understand what's, you know, the different goals and the different ambitions of the business units, where they want to go to and what is it on this journey, what they can do by themselves, what is it what existing partners and suppliers can deliver and where are the gaps which we should and could fill with external innovation by the startups. We have millions of startups out there. Not all of them are relevant for us, but some of them are and some of them are very relevant. So what are we doing? So we are building the outside-in view, what we can see from outside.

4:59Our business is building the inside-out view. And, of course, if you're matching this into certain search fields, you will get a pretty good 360 degree perspective on everything that you can say, okay, this is what we see outside, this is what we see inside, and maybe these are the things we should focus on. Then we are mapping all of this and looking into where are we going to partner, where are we going to invest in. So you need to define a clear investment hypothesis and a clear partnership hypothesis. And on the fields we are aligned and collaborating with the business units and the functions on, we know exactly what we are looking for and why.

5:31Because in the best case, as you pointed out, there are use cases and search fields. Every search field has plenty of use cases and a huge case might be, you know, plastic avoidance or it could be plastic, bio-based plastic or something like this. Of course, this is important. Then, you know, from the business units, it needs to be quality, it needs to be quantity, you know, it needs to be availability and so on. And this is what we need it for. And then, of course, you can target and look into the companies outside who can provide this, because maybe the existing suppliers are not ready by regulation or whatever, you know, taking some more time, but you would like to make this impact.

6:05And then you can, of course, find a lot of sources. And then it's clear you want a partner, you have a trans-transactional relationship, or there's anything where you would like to or need to invest in, because a few years down the road, this is becoming very relevant, but you don't have a project team right now, and you need to bridge the time onto that. And then, of course, to make the company survive and grow where you want the company to grow to.

6:28Andreas Munk Holm:Yeah, but I'd love to ask you, just to clarify a bit to the audience, how do you see VCs and CVCs, rather, think about when to do corporate venturing and when to do corporate clienting and when to do investing? What I preach a lot and also from the readings that I've done, right, is that it's a lot about corporate culture. It might seem a little bit of a weak answer, but when you look at different corporates, they have a different behavior and where you can find the success. I think Alex Manson from Standard Chartered Ventures writes a lot about this. There are the three pillars of corporate venturing, build, partner, and invest.

7:18You never know where you're going to be successful. What is also really nice today is that Mark knows everything about partnering and investing. So here we go, right? And then I think to be very concrete, it's also a lot about what liquidity is available. Can you actually participate in a Series B round where there is something really to partner with in a startup, right? Or do you need to go earlier stage and then wait for a period of time before the startup is ready to partner with? So there are different tracks depending on where you want to go. But there's no doubt that the holy grail for startups and corporates are the partnerships.

8:02So if you get that right, you get very far. So as they took over, the first nine months we just spent by building very boring documents. It's not really boring, but it seems to be. It's huge word documents where you go in and you're defining an investment proposal statement. How are we investing? Where are we investing in? Why are we investing? What is the definition of success? How much money? Where? And so on. You build a second document called the investment committee carta where you're describing in 20 pages or even more how you make decisions. Who is going to make a decision? And how can I get the buy-in for a strategic investment?

8:37And so on that you can really go through. what is it what the investment committee gets to see, what are the decision criteria, how do we build the quorum. And there's a certain command, which is usually the biggest one. What Yepa pointed out is the partnership proposal statement. It's a huge one because who is doing the partnership? What's the ambition? What's the target? What are the expectations? Who's handling this? Is it the business unit? Is it the corporate venture capital team? Whoever is doing this. Basically, you're looking into all the different perspectives. And there's one thing clear.

9:04This is also humans who are doing all of this. and you have always great people in some areas and you have people who are new to this, how to partner and make a project management with a startup in other departments. Henkel is 150 years old and thanks God we have a lot of fantastic colleagues who know how to work also with smaller colleagues or startups, not smaller colleagues, smaller startups. And there are, of course, people who are not so used to do it but over the time it's super relevant. So getting external innovation in and out is super relevant And Jeper pointed out something very relevant.

9:37There are companies which are pretty quick profitable and they don't need so many rounds until they go big. And there are companies like in a deep tech space which need 10 to 15 years. So what they need in every round and every cycle is different. So corporate can help building up supply chains, can help building a facility, can help with regulations, can help with everything, things which we usually forget about what a company and a corporate can really deliver as a value, you can call everyone or the people here, and they're experts in the different fields. So also for marketing, sales, get an idea about the correct pricing and so on.

10:14So corporates can do a lot of things. And at the end, it's a cultural thing, like you said, and this will never change. And if the culture is great and people are open, and Henkel has a pretty open environment for external innovation, then things can go and pretty, pretty good. and then I think for people listening in here what is really important about what Mark is saying is that planning of how to do partnerships is really really important and when you hear Mark talking elsewhere also about these documents he has built we had the great pleasure of entertaining some global corporates last week in London and you can see it on corporate faces when Mark talks about this the holy bible of partnerships they really listen and this is important and I think if you should take anything away from this right now do the ground work first before you get started and spend some quality time on that with your corporate colleagues.

11:14Andreas Munk Holm:Maybe a great place to go now is make it super crystal clear what is the use case briefing that we spoke about before you've called it this front door and it is what what's required to be done before any startup sourcing is started, the business unit has to answer six questions. Those are problem descriptions or the pain point. You have to be super clear about why it hasn't been solved yet. Then you've got to be clear about what's the desired solution you want. And then the business impact as the third one must have features as the fourth. And then as the fifth known solutions and why they're insufficient.

11:53Andreas Munk Holm:And then the sixth success measurements and KPIs. described in more detail the use case briefing. Now I just shared high level the six steps to it and the six questions that need to be answered by the business units. So I think the most important thing, without going too much into the details, is that you understand why are we looking into this and what happens with the startup if we find it and what are the criteria we are looking for. So if you are sure that behind every use case, there is a human being, a human being at Henkel who said, this is what I need, is filling out this kind of questionnaire and saying I need exactly this to reach this.

12:30And then, of course, you need to understand, is this really the right perspective your colleague is bringing on or is it you need later stage, you need maybe earlier stage and so on. It's all about expectation management as well to discuss with these companies and to be clear where this goes to. But of course, the problem needs to be big. We should not do the single small things which helps one individual person. We also need to make sure that the things they're looking for are aligned with their highest community. So it needs to be a top management buy-in film. And of course, they see everything that's coming in.

13:00And of course, also when it comes to partnerships, which might turn someday into an investment or so, it's also relevant because we're reporting on this and looking onto this. Because there's also one thing which is pretty much dangerous is if you're starting 20 collaborations and 19 of them ending in a chaos, it really is not helping you for building this muscle. So we need to accompany a few of them until to a certain point. But we also need to make sure that what we are doing and that what we are enabling is really something which is tangible. Otherwise, it doesn't make sense. And this is from corporate to corporate difference.

13:33So sometimes it's organic growth. Sometimes it's utilizing digital solutions to start somewhere to have new clients and customers. I'll give you a very simple example. We have partnered with a startup called Anami AI, which builds virtual humans. And virtual humans looks like us. You know, maybe it's... You usually look younger and better, but not maybe like you, Adrian, but you're like me, yeah? But at the end, this virtual human starts then to train our hairdressers on products from us. On the other side, we can all imagine that virtual humans, the more real they are becoming, there will be the point where they can also upsell.

14:13So you need to start somewhere, and startups build this ground, and then, of course, if you understand what are the use cases, you can then help them to expand it, what we can also see outside.

14:22Andreas Munk Holm:Mark, how does a use case go from being a use case and a partnership to an actual investment hypothesis and an investment being done? That's something which I'm very happy about, that Anchor has this DNA. We're working with a lot of startups also in purchasing and sourcing, you know, solutions which are there. Many of these solutions which we are using here are startups, you know, because famous investors have invested them. So we're testing some of them and working with them because we also can bring startups into the selection process. It doesn't need to be always SAP or something else, but in many cases, SAP is a great source.

14:57But it can also be that they don't have these features, what you really need. So you bring the startups in and they survive. You know, the selection rounds, they also are applicable for the use cases and the company starts working with them. And after some time, we identify why there are so much better than the rest. And then some of these companies are pretty strong, understanding our industry, chemistry, and whatever we in our business can make. But then maybe they want to develop into something else. And then they need some kind of funding. And then the strategic investments which are coming into might play a big role because the understanding what they learned from us to bring it to the next level could be another CVC as well.

15:36So we see this. On the other side, we're partly using the proof of concepts then to make a further technical due diligence because we all know most of the solutions are theoretically. Then solutions go into the market. Is there a perfect market or not? I think we can evaluate it by ourselves by using it. And if it's convincing and it can start and work in an environment like a 50 ,000 people company in more than 100 offices, then it might be that it also can survive somewhere else and can make there some impact.

16:11Andreas Munk Holm:Mark, you shared with us in confidence your investment memo. I'm not going to share everything here, but you have a section in there that financial VCs don't have, which I was super curious to understand better. And you have a section that's called Role of Henkel. I'd love to ask you about what are you putting in there? What does it contain? Commitments, optionality? Is it just a narrative? How do you use that section? Well, that's important. So, you know, if you get the potential chance to get on a cap table of a promising company, there is something they are expecting from us. And they are expecting something from us in a seed round, maybe expecting something from us in Series A, Series B, Series C.

16:53For me, it's super important that we can fulfill the expectations and that we are clear that our role, the startup has towards us, is exactly something we can fulfill. On the other side, what's the role of us? is that if we are too dominant in, I think we all know that if a strategic investor goes in too early and is dominant on the cap table with rougher rights and so on, it can go really wrong. The role of Henkel needs to be to help the company don't make mistakes, to get the insights we know. We help the company to grow. And of course, we are wearing the head of the company and that's our role.

17:24The role of Henkel is, for us, a very important thing because if you don't have a role in investing in a company, you might not really should invest in. And it is, we are having a financial discipline and we also have a strategic discipline. And for me, it is super relevant that we stay focused to what we understand and what we know and not go abroad in every opportunity because then you get lost and it's a biggest threat for your financial discipline at the end as well. So dig to what you really understand and the role needs to be to fulfill the gaps of the company. Even with the Bible in place and you have all these playbooks of how to do a ride, you know where does a deal normally fails within intern review and you know where where do you have the most challenges even though you have prepared so much so the strategy of our company can also change like every strategy from every company so for example one of the big learning curves we had in the past has been that one of our investment hypotheses in sustainability of synthetic materials has become true but you know some kind you need to understand what are the regulations when are coming in and how important is it and sometimes it's also that the customers are doing different things in the shop then they are telling you if you would ask them before would you pay three euro more for a sustainable product yes or no they say yes they go in and buy you know not the sustainable one and to safeguard some some euros it's also some things which we understood that you know the behavior is not always you know rational but the things which is failing is usually i could really bring it down.

18:54We have started, no, we have seen since 2022 more than 5 ,000 companies which are relevant. We started more than 500 times the due diligence and we only invested at the end into something about 40. It shows a real funnel. Why are they failing? Too high valuation, then there is another thing. Maybe not enough funding for the next round to reach the milestones. Over optimistic next round milestones. Usually startups sometimes, usually are intending to say, okay, sales cycles are very small. We think it could be bigger, especially if you're dealing with big corporates. So if the milestones are not clear, and also is the team the right team to make it happen right now?

19:35Do they have all the things for the next maybe 12, 24 months? What is it what's needed in the long term? Of course, you have specialist funds where we love to invest with because they understand completely what they do. Because what you should not have is a fragmented cap table with a lot of different companies on. Everybody has an idea, but nobody is an expert in what it is. So then also there are some alarm bells. There are many different things where we stop it, but also there is one thing when we need to stop it if we see it's not the right company, we are not the right company to invest in because if we are not the right ones, maybe somebody else should do it.

20:11That's also very relevant. So if you cannot fulfill the expectations, we might should not do it. And it's sometimes hard because it's financial opportunities, but it is a lot of different things. But valuations, of course, in times of blown up valuations, plays a big role. But also exit scenarios need to be clear. And sometimes it's not 100 % clear. It's never 100 % clear, but sometimes it's not clear. Okay, what is it where this company wants to go to? And some of them want to make a quick exit, maybe within a year or two. That's not what we want to do for strategic collaborations. Then there are a way.

20:47Mark, just following up here, right? what you often hear me say on stage is that we know two things in corporate life and that is that people and strategy change now you covered a little bit on the strategy side uh also for from some of your previous answers you know on the people side do you have special measures for your core colleagues of how to collaborate with hinkle ventures you know what what are their incentives to do this. Yeah, a good point. I just spoke this morning about this internally because as we started four years before, it was a different thing. We started the first nine months to building just the documents, but we aligned all the documents with the relevant stakeholders in the company.

21:27So everybody should be aware what we do, why we do, how we do. Everybody should be aware what we're expecting from them, what they can expect from us. We have described the roles and responsibilities, and at the end, we approved it together and said, this is what we want to do, so no surprises. but human beings might change over the time and then if in your investment committee two people are changing you start over maybe also building trust but trust over the time is the most important thing if they understand that you can deliver tangible outcome for their own KPIs it's also very good for them to have this collaboration and at the beginning it was that we've been a little bit seen like an alien because always spending 10 years from now and corporate usually concentrated on the next 12 to 36 months.

22:13Could be seen as a little bit strange, but over some time it's showing that, oh, the guys pointed it out. We're building some research, share it. It's an upskilling and foresight thing. So they say, okay, this is what we see. And then it comes down to maybe the most important thing is now after three years it starts that our teams, my teams has been integrated into internal strategic planning of the business units partly. So they ask people from my team to, hey, can you give your perspective? And I think then you are deep in. And that's, for me, so relevant to have this trusted relationship. But it took some years, and it can take some years.

22:50Trust is not built overnight, I think. That's true.

22:53Andreas Munk Holm:Mark, I'd love to make this super concrete by looking at one of the investment cases that you shared with us. If we start with the search field, which is you saying, okay, we're going to look in one of these verticals, because this is important to us, let's take AI, because that one is very upfront for everyone right now, and everyone feels like they should be doing something in it. You made the investment in ResearchGate. And I think that's a bit of a non-obvious to people, why would Henkel make this investment, and how does it map into Henkel's business units? So I'd love to take that case to try and unpack and understand, how did you go from search field to investment and where are you today with that investment?

23:33Yeah, good point and it's a good pick. So this has been done very early, a bit before the time of the opening eyes and so we could clearly see that scientific research is super relevant for R &D teams. So it was clear that if the scientific journals are uploading their papers and there is a lot of, it's like a network for scientists, a lot of intelligence and research becoming visible. So let's assume a company like Henkel needs to get this input. So how are we doing that? Usually we have a lot of scientific people as well on our side. We have a lot of PhDs in chemistry and so on. But of course, we cannot read everything, what's being published in the world.