How Corporate Venture Capital 2.0 is Reshaping M&A with Jennifer Miller

23:01And some of them can't do it. And then I have to go and get the technology team to verify that it's not clear yet what they're doing or how they differentiate or how they'll help us. So that's the initial conversation. We usually bring in the technical leaders who would actually be working with them early in the process just to get a quick read. And then we have a team that's more kind of advisors to us that we bring in regularly to support the process on the technology side and do diligence with the companies. So after an initial meeting, we do technical diligence first. The business side, we're not necessarily going to invest.

23:33And we're upfront with those companies on that. No, it's we're going to look at the partnership first. Is this a good fit for us? And we'll tell you that. If that's the case, then we'll invest. If not, chances are we're not going to invest. That's not our goal as Oshkosh. I don't think our shareholders expect us to go invest in companies that could be unicorns. We're looking for the winners, meaning they're going to be a strategic fit. They'll be in business down the road and they're not going to lose money. But there's also leverage for your organization to benefit from that technology. Can we talk about structure?

24:02I'm curious. I want to play on both angles here from both your organization, but also the startup. So for your organization, there's clearly the IP that's of interest. I would also assume that there's optionality for acquisitions down the road. Yes. I'm curious. It seems like those are the two main things. Talk me through what's the thinking around that because there's that balance of how much of this IP you're going to have exclusive to, you know, and then there's obviously other variables where you're helping to co-develop some of the IP. What does that generally look like from your point of view as an investor when you're sort of looking around expectations for both IP and then optionalities around acquisitions?

24:38The simpler one is probably on the future acquisition. Some companies we don't anticipate acquiring. We just want to know if they're going to be acquired, that it's a partner we're comfortable with. So we usually ask for information rights so that we know when they're negotiating. We don't want to do anything that's going to hamper their negotiations with the potential acquirer unless it's something we absolutely must own. So those deals look like we will get information on any kind of future investment, partnership, or acquisition. Before you do this, you'll keep us in the loop. We look for board observer seats, sometimes board seats, although most other VCs will tell you they prefer not to sit on the board because there's a fiduciary responsibility then.

25:20Whereas an observer has the right to see the information without the duty to support the company. So that's the approach. we've done both, but most companies prefer not to actually take those board seats. So that kind of covers the M &A piece. We don't want to limit the company. But then just access information. There's no first right refusal or any... Sometimes we'll put it in. We don't want the last right because then any company that comes in to negotiate knows that Oshkosh can then take that deal and just pay a dollar more and get the company. So we don't want to do that. Then that would limit the startup.

25:53So it's kind of nice you're being, we'll consider it for the startup. They have to be. I mean, we want them to grow and we want our money to be valuable. Most of the time, we won't be the right acquirer unless we're very confident that we're going to acquire the business. That's the approach we'd take. And if we are that confident that we want to acquire them, we might as well probably do it now before the valuation rises. Right, right. Now, if you get the right information and you do find out like, hey, I don't think this is going to be a good thing if this company invests, then do you start pursuing an acquisition or can you?

26:21Absolutely. Okay, but there's no like first-fire refusal. Maybe negotiating against others. Exactly. It's just a competitive process and you go for it. Yeah. That's actually pretty interesting. Just get the right to the information so you know ahead of time that something's cooking. Maybe it's too nice, but I think it's a fair approach. It's better than nothing, right? If you didn't have anything at all, then you can get caught off guard. But if you at least have access to know about things that are bubbling up, then great. It allows you to still play in a fair market. You're not limiting their options.

26:51So that's good. How about the IP part? One thing we've learned as a company is co-owned IP is not as easy. It's better if one party owns the intellectual property and the other one licenses it. So as Oshkosh, we have a strong legal team. We have the ability to enforce patents and just make sure that we're defending anything that comes our way. The startup's not really well positioned to do that. So in our negotiations, we tend to say we'd prefer to own the IP that might be developed between us. And then we would license it back to you. And that could be for some license fee or it could be free for certain use cases.

27:31So let's say we want exclusivity for our market with the IP that we developed together. We would just say, we're going to own the IP and we get to use it here. To the extent the startup wants to use the IP, they can do that in a group of other markets, but they can't go after ours without permission. And as a good citizen, when things change, we're open to changing those. But that's kind of the initial position. And we actually put that in the NDA. So right away when we start talking, so this is not a surprise to the startup. That's our approach. That's just how we do business because we've seen it go bad fast.

28:04Initial discussions, you create ideas all the time. We're always talking about what if we did this here? It's just conversation. But if the other company goes and takes that knowledge, then we have to be careful. The other thing we have to watch out for is we're often developing competitive IP internally. Limiting who sees the information that we might get from the company in the early stages of diligence is important. So we limit that to a small group and enforce that we are allowed to go develop our own technology without the use of your IP. So that's very important to a large entity that's doing a lot of development.

28:38That's an NDA. Yeah. So isn't it tough for the startup though? startups all have different approaches. Some sign it without a question. And that actually concerns me because I wonder if they've actually read it carefully. And then others get nervous about it. And we're able to usually explain to them our rationale. And once they get past it, they can see why we would do that. If we don't develop IP, it's not a problem. And we always say we're not intending to develop IP under an NDA. But if it happens, we want to protect ourselves and you. No clawbacks or where they push back and negotiate? Oh, they do.

29:12They do. They do. Is there like a balance or? Depending on the situation. And sometimes we just stop not to partner because it may not be the right fit. That's so interesting. Yeah. I used to be one of those people that just signed the NDA. Didn't have patience for it, but now I learned you had to read those things. You should read it. Always read agreements you're signing. Oh, especially in the context of these deals, because it's so much that could come back for you. So that's first and foremost, you get that put out there of, hey, this is the rules that we're playing around. But it's interesting that you mentioned the IP deals basically shoot to get at least exclusive in the segment.

29:48So you might not be a fully exclusive, but it's like, hey, we're going to use this in our all-terrain military self-driving technology in those vehicles. That's our application that we want to protect. Right. So we're exclusive to that. So you just can't go to the direct competitor selling the same thing. Yep. That usually works. And it varies. Sometimes we need that. Sometimes we don't. Or it could be geographical, depending on... And if you can draw a line, it's like maybe just require the technology if it totally makes sense to. Now, from the startup's perspective, play a little devil's advocate here.

30:18How do you sell against... And I'm curious about this as a company that's... We're like 50 people, 10 million are growing. You're starting to explore M &A, which drives you to go raise some capital. You have a lot of options now in this active market because there's capital everywhere. So you could use... There's VCs out there. There's all these growth equity funds out there. There's very wealthy private individuals, as I learned, that are out there. Family offices that want to get into private companies. And then you got the strategics. And I feel like it's just like such an interesting... If you look at something like a hot startup, they have a lot of options.

30:52How do you position, even for that startup, of what's the difference or the benefits of working with a strategic over the corporate or one of the traditional PE growth funds? So in most cases, the startups that we're talking to see the value in a strategic partner and believe that having our name on the cap table is helpful to them. There's always that question of, is that true? In the past, you might say no, but CVCs are involved in a lot more transactions than in the past. And there's some evidence that they tend to be better companies. We lend proof to help them get investment from traditional investors.

31:29So that's one piece. The other is we try to be good citizens. We're not there to make money. We're there to accept a deal. We often follow. We're looking to the lead investor to set the valuation. We aren't going to negotiate much on those kinds of terms where we negotiate and they might not love it as the side agreement on the partnership. Those for us, it's at the same time. We always tell them we're not your partner because of our money. You can get money from others. We're your partner because we're going to help grow the business. And the more we can lay out what that looks like ahead of time, the better.

32:01So bringing in the right teams so that they're seeing who they're going to be working with on any co-development is key. So it's not just me and corporate venture capital and corporate development telling them a story about what we might do together. It's the initial collaboration is done as part of the diligence. You start putting things on paper. They can see what the future looks like. So there's a team, hey, working together. We can see our revenues growing faster, reaching more scale, like getting the solution into more customers. Those are the big ones for the company to look at like, hey, maybe the strategic can actually give us more of a stronger lift in the business.

32:36That sounds good. Yeah. They're looking for customers. So if we can just be a customer, that's a great starting point. Do you like clarify or detail expectations on revenues that you're targeting in the partnership? In some cases, but in most, we don't have enough information at the time we're investing. We might have an indication of what market we're going to take it to and how we'd like to go forward. But we're not great at estimating customer uptake for some of the technology we'd add. And a lot of the time, it's just a feature that gets added to our product. So nobody's actually paying for it, per se.

33:10We'll pay for the hardware or the software on a per unit basis. It's not like our revenue is going to go up. So that's where it becomes a challenge. We might know what we're estimating we're going to sell for that product. And we can tell them that. Yeah, it's curious. I've seen some of these deals where they're a strategic doing an investment in a startup. They will definitely push for the option to acquire it down the road. Just an option, period. And the counter defense on it is saying, hey, why don't we set up some revenue targets? So if we don't achieve some real value from this relationship, we'll call that option off.

33:46We haven't done that yet, but I think that's something we would like to explore. The other would be, let's say we help the company grow and they meet certain targets. Rather than just a pure equity investment up front, it might be something where we could get warrants. So putting in those minimums or expectations on what happens if we achieve them together, then we get some equity later. Yeah. Can we explain warrants? I guess you kind of got the gist of it. Rather than an equity investment in the stock, it's almost like an option. You earn stock in the future with certain metrics that are put in place.

34:20So the company's revenue success, if they achieve X, Y, and Z with our partnership, then we get that ownership down the road. So it allows us to basically invest in the winners without putting a lot of money to work up front, other than through the partnership. So a lot of the time, we'll pay for some of the development that we're doing for the company with the expectation that they're going to develop something for us with that money. So we're paying for it. And you can just make that a simple commercial agreement where we're providing. And then you can still add warrants to it. Yeah, but warrants on top kind of, it's like a sweetener.

34:51Right. This ends up being a big commercial success. It's sort of a win for everybody because we helped contribute to it. That's pretty interesting. There's a lot of ways to structure this. It's creativity more than that. Yeah, that's what I was curious. It sounds like it's pretty fluid when you work with these companies is because obviously the startups come in all shapes and sizes. And it sounds like your particular group is pretty flexible about what kind of terms you structure because there's a lot around the IP part, how you utilize it internally, how do you segment it off for certain markets for exclusivity?

35:21And then what does the future rights look like down the road? Then you got the actual ownership of the business. So you got a lot of variables going on here. When you think about some of the things you mentioned around the team and getting them, like the startups aligned and jiving, because we talk a lot about integration is a big driver of M &A success. It all hinges on how well you integrate the company. If you do, you'll end up creating a lot of value. If you don't, you could destroy a lot of value. How do you see that when it comes to these kind of investments? When do you think of integration the same way?

35:51Or is it completely different? Is it more of like just socializing with people early on and just letting them run off with it? Probably a subset of the full integration. You want to do some of the cultural diligence up front to make sure your teams are going to jive. And then when you're actually working together, You need to set parameters, goals, plans for who they can talk to. Whether you acquire a business or invest in a business, you don't want to have 50 people from Oshkosh calling this small company weekly because they're going to get overwhelmed. We put in place rules. You have this as your key contact.

36:20This is who you're going to talk to. And then over the next three months, we're going to do this much development. And then there's a milestone. We're going to evaluate and move from there. If it's successful, then we move on. And we're working on this as part of the CBTC 2.0 process. We don't have a team of people at Oshkosh ready to accept 10 companies per year. We might if we find enough different business units to work with. But often it's one business unit is really excited about working with startups and they would love to do four or five deals, but they don't have enough people to manage it.

36:52So adding a project management layer where just have somebody kind of checking boxes and making sure they're meeting all the milestones is important. We're working on that piece now. We do a little bit of diligence up front, like you would for any integration for an M &A deal where you're trying to understand their systems and cybersecurity. So if you're putting together two companies and they're building software, we have to make sure it's safe and secure. And if not, we have to have a plan for what we're going to do to upgrade it to our standards. Same with hardware. So there's a bit of that diligence process, but we're not integrating.

37:23We're not RRPs or anything like that. Does it go through your integration team? It sounds like it works directly with the business unit. It works directly with the business unit. And we have a few other people who see a lot of these who look at the same things over and over. So we have a good kind of checklist of the things that might be problematic when we start. What are your biggest risks when doing these kinds of investments? I guess one is just that we stop and we don't pursue what we're supposed to be doing. And that can happen. We'll have a team that kind of takes a look and does a quick evaluation.

37:53And we've spent a lot of time up front, we think, getting alignment. And then if they just don't have the time or it's not their priority or where they are told to focus, we can drop it and then not help the startup. It doesn't help us. The financial returns are going to be a struggle. And then monitoring that company. So if we do that and then they say, hey, you have exclusivity, we're not able to go after this market. We have to be at least ready to pivot or allow the company to pivot and change our agreement and say, oh, yeah, sorry, we didn't pursue it. But feel free because it wasn't the right fit for us after all.

38:24It's OK to have a no where we evaluate, work together and decide it's not the right path. You expect that in venture with enough transactions. Anytime you're looking at startups, they're high risk. But we don't want to mismanage it is the key. Other than that, risk of the technology kind of causing problems in the market. You're working with something that's not really ready for market and everybody gets excited and says, we've got to get this out in six months and we don't go through our normal processes of tests. There could be issues in the field that hurt our reputation. So that's a challenge, too.

38:58So as much as we're trying to bring the nimble excitement and tech development aspect to this and get the culture of Oshkosh to be faster, we still have to take care to protect our relationships with our customers. Hypothetically, if you found out the self-driving technology was fake. Take it out. Yeah, not good. No. Those are interesting stories we've seen. Can you tell me some stories of like winners and losers and these kind of bets you've taken? I don't think we know yet what the winners will be. This is one of the cautions of CVCs. You're working with early stage startups. So even if they can give you their hockey stick growth, then you push it out three years.

39:36Chances are it's another three years before you're going to see real success. So we're not yet at the point where we're seeing exits. We're seeing some winners actually in the more recent investments because there was a plan upfront on how we'd work together. So we're starting to see that those will come to fruition. What I would describe as success and how we're measuring it, is there a partnership? Is there a path to market with the technology where Oshkosh will be putting this technology out either on a product or with a product? So if it's a service that goes along with our product, that piece.

40:09The other metric is just how many of our business units are interested in this. So that's always been something where, yes, sometimes it's one specific technology for one business, like our fire trucks, but other times it's something that can cut across all. and trying to go from that proof of concept to a lot of people using it. That's the stage we're at right now. So we have a few companies where we're looking at that level of success. And then the financial pieces, we had a few earlier investments where we kind of took a bet on more hardware or software and a play that we weren't ready to take to market yet.

40:42We weren't ready. The market wasn't ready. The company didn't get there because the market didn't develop at the pace they needed it to to put their tech on products. Oh, I got it. So think of autonomy. There's a lot of money that went into that space. If we all invest, most of it is going to be wasted. But it gets us to the point where maybe the market will be ready in the next 10 years. And now we've got this leg up of tech that's out there, IP that's developed. And the company's all failed. But the IP is there to take us to the next step. So we look at the hype cycle now. Yeah. The hype curve.

41:14The ones that panned out really well, what was the nature of them? Was it something that was just tangible near term? They were a little bit farther along. technologies that were in the market, maybe that other customers are already using. Proven out. Where we just needed to make some tweaks and be ready to leverage it on our products. So as much as we want to say we're looking at the early stage companies, we are, but where we're actually putting our time is in the ones that are closer to getting to market. So there's like two factors. There's the maturity of the technology itself. And then there's the hype cycle of the overall sector of that technology.

41:46Yeah. So is the tech ready? And then is the market ready to take the tech? There you go. That's a really good way to put it. Given you have experience on both buy, sell side of M &A, and looking at entrepreneurs, smaller companies, myself as an example, and we're considering strategic investors versus financial investors, what advice would you give to startups when it comes to positioning themselves in market to work with these investors and also understanding the trade-offs? I want to be real with where the company is and what goals are there. If you overstate your position and are overly confident in how things are going to turn out, it comes out quickly in the diligence.

42:28So any good investor, whether it's a strategic investor or a financial investor, asks a lot of questions to verify everything you tell them. If you don't have good answers to those things, then they're probably going to say no just because they can't evaluate it. They hear one thing from you and then the data they're seeing doesn't match. So just being open and honest is one of the first keys to success. There are investors who look at different stages. Lots of them are very interested in being the first one into that company. They're not expecting you to have revenue. They're not expecting you to have lots of customers lined up at the door.

43:01And if you tell them you've got all these pilots going on, they're going to take that with a grain of salt. It doesn't mean that much, but that's okay. It's finding the right investor for where you are. If you're much farther along, you might have a different approach. And from the M &A standpoint, when I work with entrepreneurs who maybe they've built a business over decades and they want to sell it and it's a one-time opportunity, there I'd take your time. You have to really plan, think about who's going to take it over and what does that mean? In most cases, and this is for investments too, you're not going away.

43:31You're not leaving immediately upon the close of the transaction. In most cases, finding the right partner is going to be important. Are they going to do what you want with that business? So having them tell you the story once the acquisition is done or once they're done investing, what does it look like to them? Where do they see the company in five years? So you're hearing your story told through their eyes. And if it doesn't feel right, then that's not a good fit for you. If they get you excited about what they can do with it, do your diligence on that. What does that look like? If you say I'm going to grow by five times, you're going to make my company so much bigger than it is today.

44:06How? What do you mean? Who are you going to hire? What markets are you going after? Show me that market data that says you can grow it that big. Like maybe they can and maybe you've just been thinking small, but that's how you know whether the partner's really invested in helping this business and that they're doing the work to be realistic. So spend that time on doing the diligence on your buyer. This is really good. First and foremost, no fluff. So it's not 10 million AR, it's 8.8, on track to hit 10 million for the new year. Yeah, explain it. The post-close world, like actually, what does that look like?

44:38Whether it's a minority investment or M &A, getting a sense of what that relationship is going to look like, with the company. And I really like your view of having the buyer tell you in their eyes, where do they see your story evolving over the next five years? And then digging into that, like, all right, let's do my diligence. Like, tell me how and how are you going to actually realize that? I like that a lot. So it gives you a lot of it, especially if you have competition, if you have multiple people looking at the business and considering investment or buying it. If it's a buyer, it's one buyer.

45:09You have to pick one. Who do you believe in and who's going to pay you who can value your business at the highest number. And if it's a minority investment, you can potentially bring in multiple investors, but you don't want them to be fighting. So you want to have those that see a similar vision for the business and can help you grow it in that direction. Great advice. Now, I got to expand it for your peers in the market, folks in corporate development that may be early in the journey of building out their CVC, or they just are rebooting it and giving it a fresh breath. What's your advice? Move fairly quickly.

45:43Don't be too focused on getting it perfect because you need to find a lot of companies and you need to invest a decent amount to start seeing results. And as you go, you're going to learn a lot. So it's experimental kind of by nature. If you put too many rules in place and too many expectations, it's a lot harder to do what you said you're going to do and be ready for change. Your business is going to change. If you're a big corporation, the priorities change over time. The people sitting in each role, they change over time. You have to plan to be nimble. Put in place a few key metrics that you're trying to succeed on.

46:19Not all financial. Make sure there's measurable so that you can go back and say whether you did it. And then as you put in place structure, figure out what the team looks like. Start developing relationships across the company fast. because you need to figure out who the right people are who are going to understand what you're trying to do and be supportive. And that's where the rules come in. So it's not about how your fund is structured and where the money's coming from, how fast you're going to return it, how much you're going to put to work each year. It's how do I work with each of my business units?

46:51How often do I talk to them? What does that conversation look like? What are the tools I'm going to use to track the deal flow? And those things, just get on that right away. Move quickly. think agility, how you can be adaptive and then metrics, make sure they're measurable. Only a few, not too many. Make sure they're measurable and then the structure, the team, how that working relationship is going to look like. And have the right people involved. I like where we sit. So if you're trying to figure out where do you put these people? Is it in the technology team? Is it on the corporate development team?

47:19We're actually a hybrid. We have two people in corporate development. One's solely focused on venture. He lives in the Bay Area. We have me and we have a counterpart in the technology team, part of the Pratt Miller business unit. So that's engineering, almost like a skunk works program. He's focused there and he sits in Detroit. So none of us are in the same location and we all are trying to work together. So you have a technology lens, you have somebody seeing all the deal flow and you have somebody sitting at corporate thinking about strategy all day long too. And I put all those pieces together.

47:48Jennifer, what's the craziest thing you've seen in M &A? I haven't seen a lot of crazy things happen. I would say the one thing... You worked in banking, of course. I do work in banking. So I was there early career. It was a long time ago. So for me, it's not banking specific, but I worked for Lehman Brothers. And two months into my job out of college, 9-11 happened and we lost our offices. We were downtown, not in the World Trade Center, but the World Financial Center and had to move to Midtown. And I worked out of a hotel room for seven months. We had tables set up, like folding tables and chairs, and they brought in new computers.

48:20And we sat in kind of a hotel chair with the beds taken out of the room. And that's where we worked. Wow. So for me, that was probably the craziest. That is pretty crazy given the times and where you're right there in New York at that time. I set up a trading floor in one of the big ballrooms in the hotel. That's crazy. It was crazy. All over a weekend, we were back up and operational very fast. Wow. Wow. That is wild. That's an interesting 9-11 story. I haven't heard anything like that before. Jennifer, this has been a great conversation. I appreciate you taking the time, helping me become a better M &A scientist.

48:52It's great to talk. Those of you still listening, fellow M &A Science family, if you could get to the end of these podcasts, I love to connect with you and hear from you. I'm always open on LinkedIn. Reach out to me. Connect with me. I'd like to hear topic ideas, feedback, criticism. I'll take it all. Don't ask me for crazy favors because it's tough to do sometimes, but try to be helpful when I can. Until next time, here's to the deal.

49:27Thank you for taking the time to explore the world of M &A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M &A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email, Kisan, K-I-S-O-N, at mascience.com, or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter.

50:12Again, that's mascience.com. Here's to the deal. Thank you.