How has corporate venture capital changed over the past decade?

Our third Innovation Coffee Break features Jonathan Charles, Investment Director at the Samsung Catalyst Fund (SCF), in conversation with 500’s Vijay Rajendran.

Check out the recording to hear Jonathan’s thoughts on:

How CVC has changed over the past decade
Common misconceptions about corporate venture from founders & VCs
How COVID impacting access to funding from a corporate perspective

Interview Transcript:

Vijay Rajendran [00:00:00] Welcome to your Innovation Coffee Break. I’m Vijay Rajendran, Director of Innovation and Partnerships at 500 Startups Ecosystems Group. I’m excited today to be joined by Jonathan Charles of Samsung Catalyst. J.C., how are you?

Jonathan Charles [00:00:16] Good, Vijay. I’m in lockdown just like everybody else, and so dealing with a little bit of monotony, but the way I think about it is at least we’re all in it together. And we’re just doing what we have to do to make it through. And I wish everybody well and you know, stay safe and try to get out, get some sun, some exercise. I’ve actually ratcheted up on that. I find it very helpful.

Vijay Rajendran [00:00:38] Oh, that’s awesome. Yes, to the extent you can do that. That matters a great deal in lifting all our moods. Another thing I highly recommend is caffeine of course. So this is Innovation Coffee Break. What we’re hoping to do is connect over the time it takes to drink a good cup of coffee with interesting folks. And J.C. is is one such person because of his role at Samsung Catalyst, which we’ll talk about. You can subscribe to our YouTube channel and hear more about these conversations with interesting people at the crossroads of investing startups and corporate innovation. So let’s start with Samsung Catalyst and your role there, J.C. what is Samsung Catalyst and what does it do?

Jonathan Charles [00:01:37] Yes. So the Samsung Catalyst Fund is one of three corporate venture capital funds that Samsung Electronics has set up. We were created around 2013 and what we do is we invest primarily in two areas. Number one, like most traditional business business units supporting CVCs, we direct investments to support strategic goals that are worked on in conjunction with the business units. But what we also do, because we report to the chief strategy officer of all of Samsung Electronics is we think about the areas where Samsung should be either in the near term or maybe a little bit further out. So case in point is auto tech. This is a prime example where the VC team started investing a couple of years ago.

Samsung, by the way, didn’t really have a presence in the automotive industry. They had actually exited the semiconductor automotive industry probably 15, 20 years before we start making good friends amongst the other VCs in the industry and auto tech. We start meeting OEMs and Tier 1s, we start placing investments. We learn more about that industry. And then that actually informed a big giant M&A decision where Samsung actually acquired Harman, which is a Tier 1 automotive supplier. So that was around 9-10 billion dollar acquisition. And in one kind of swoop, based on a couple of years of investing, Samsung then basically enters an entirely new market. So that’s how we think about what we do as corporate venture capitalists, support business units and then think about where Samsung should be. So as the great hockey player, Wayne Gretzky said, you’ve got to skate to where the puck is going. So we also think about that.

Vijay Rajendran [00:03:21] Yeah. And these days, it seems like CVCs have to skate fast because the world is going in that direction in a hurry.

Jonathan Charles [00:03:31] That’s right.

Vijay Rajendran [00:03:31] Yeah. How has CVC changed in the last 10 years?

Jonathan Charles [00:03:36] Well, I think it’s changed a lot. So we’re a part of an organization, shameless plug for them. It’s a global corporate venturing. And what they do is they track a lot of corporate venture capital data from around the globe. And they have events and it’s a great networking opportunity. So for any species that are either new to the market or are unaware of the organization, they may want to be a part of it. And I was just looking at some great data.

Vijay Rajendran [00:04:02] It’s a great organization. Super events as well.

Jonathan Charles [00:04:04] Yeah, super events. They actually have a big yearly one in Monterrey, but they also do London and other locations. And I was just coincidentally, I was just looking at some of the data for an internal presentation we’re doing. And it’s basically exploded in one word over the last 10 years or so. So I looked at one of their charts and for example, from 2011 to 2019, the number of CVCs that participated in some way, shape or form in the ecosystem was about 3200 funds. That’s huge. And I think from about 2011 when there are about 320 or so funds, it’s more than quadrupled since that time. So it’s basically exploded particularly in the last couple of years. But it’s more than that. They’re deploying more dollars. Some of the other charts show, for example, that up to 50 percent around 2018 of up to about 50 percent of total deployed capital across deals was actually in part from CVCs.

So that’s actually pretty high. It’s come down a little bit in 2019, but the whole market’s actually come down so relative to everything else. So all else being equal, it’s still a significant chunk versus 10 years ago. Some of the other dimensions I would say that are super important for particularly the entrepreneurs to understand is I think the teams have become more sophisticated. So they’ve been at times pulling from the ranks of private VC firms. They’ve set up systems to recruit, train and retain their their team members. And I think all that bodes really well to basically being, value add participants in the ecosystem.

Vijay Rajendran [00:05:45] Certainly the professionalization and the sophistication and other things like you point out have have changed a lot. If there is one metric that might be that the thing you had to watch, it could be that the speed at which corporate venture investors can can do deals. Do you think they’re doing them faster?

Jonathan Charles [00:06:09] Yeah, I think, the answer is always it depends. So the CVCs is that I’m referring to are all over the world. And those in hot innovation areas like Silicon Valley, for example, I’m just choosing one because I happened to be there. I think they tend to move pretty quick when they need to. More traditional funds that maybe in other parts of the world that have to have extremely strong collaborations with their business units, meaning they have to do extensive technical due diligence to make sure that, say, the startups technology fits the product roadmap. Sometimes that can take some time, particularly in a COVID environment that we’ve certainly seen slowdowns because business units are fighting COVID fires, all around the world, particularly in their manufacturing lines. And so I think it’s a mixed bag. But I think the general trend is the really professionalized CVCs that are experienced know that they have to move fast, particularly around competitive deals. So the metric I have from our fund, for example, is one time we found ourselves in a competitive situation and we did a deal over a weekend. So that’s pretty fast, for a big giant tech company to do that. The average could be measured in a couple of weeks, but that would include pretty extensive, not only traditional venture capital due diligence, but also technical due diligence as well, where I think most CVCs probably tend to do more on the technical due diligence side than than financial.

Vijay Rajendran [00:07:39] Yeah, I think that can point to like the research we’ve done at 500 Startups and published in our Unlocking CVC Report because there are multiple committees often and business units that sign off because the majority of these are of course strict strategic and the slight majority are just investing up the balance sheet. So they know by default you need to go through additional alignment. So fact that you were able to get a deal done over weekend is very impressive.

Jonathan Charles [00:08:19] Thanks, yeah, our team tries to do the right thing in quite a variety of situations. My last point on this would be, I think it’s perfectly OK for entrepreneurs to press their potential corporate venture capital investor on, what does the timeline look like? What are the processes? What sort of approvals do you need to get? It may not be appropriate to go away into the details on that, but at least to get some sense of what is going on when you’re working with the CBC. I think that’s perfectly valid. And, of course, entrepreneurs want to know about these things. And, my advice would be to actually ask those questions to the venture capital team and really kind of ferret out, what is the extent of due diligence and the timeline. I think that’s perfectly valid and a good topic to bring up.

Vijay Rajendran [00:09:11] How do you think most CVCs that you’re talking to are contemplating the recession that we’re facing today?

Jonathan Charles [00:09:23] Yeah, very good question. I know, this is the number one topic around the globe. When it comes to venture capital, entrepreneurship and all things else. Anything that touches the economy, not to mention individual lives. We all are very aware of the sad stories we’re hearing, and it’s not good. So I think, there’s tremendous uncertainty. What we’re seeing is venture capitalists, both financial and strategic CVCs are certainly pressing their companies and their portfolios to basically do scenario planning. So what’s the worst case? What’s the medium case? What what was going on pre-COVID and then kind of making sure that everybody’s on the same page and thinking through what are the issues and then how do we handle those? And then, for example, unfortunately, this COVID thing may actually come back in waves.

So I was just on a call yesterday with an entrepreneur and saying, look, are you thinking about how you can quickly spool up the worst case scenario? And I literally asked him, can you do that in a week? Can you do it in two weeks or will it take a month? Because for example, if you are going to reduce people’s income and maybe even furlough people, you’re involved with salaries. And you can’t just do a change on that the day before payday. It doesn’t work and there’s a legal issues and whatnot. So I think that’s number one is everybody has to plan, unfortunately, for the worst. Then I think, the next level is, OK, what is an assessment that everybody needs to make, both the investors and the entrepreneurs on the cash requirements? Cash is king, as they say. And in these situations where funding is uncertain, the demand from your customers may be tremendously uncertain. How much cash do you have now and how far is that going to take you? And then what are you doing?

Like, for example, investigating the CARES Loan Act and how does that benefit your startup or the PPP, Paycheck Protection Plan? Or are you thinking about venture debt? All of these topics are extremely important right now, given the COVID situation. And if your investors are not asking these questions, something’s wrong. And if the entrepreneurs are not thinking about these things, something is wrong. And I think both sides need to come together and come up with the best ideas around all of these topics to figure out how do we survive and how do we get back to where we were before once the economy opens up again.

Vijay Rajendran [00:11:56] Absolutely. I think that collaboration is really where the best folks can really shine in terms of their ability to to work through problems and have that partnership between investors and founders.

Jonathan Charles [00:12:16] Right. And just another thing I’ll add, which I was talking to an entrepreneur about yesterday where I thought they were doing a good job is, messaging what is going on with your staff, particularly if you’re going to be making cuts, dropping some salary levels in the worst case scenario, maybe letting some people go. You have to be very mindful and very careful, because the reality is, unfortunately, people are scared and they’re worried. And, there has to be a lot of tact in doing this. And then, even, some companies are also subject to being poached by bigger tech companies. So imagine you have a rock star engineers. You have to think about, how do you balance retaining them, but then balance the cash needs of the company because they may get poached by big giant company. This happens all the time in Silicon Valley.

This is nothing new. This happened pre-COVID. I’m just saying that this could be more of a point, an issue now where some people may be making that calculus in their head on, safety and security versus potential upside. And, I think all the founders of companies, the executive teams that need to be very thoughtful about how to message this. Unfortunately, sometimes because the industry is so numbers driven and technology driven, sometimes not always, but sometimes people forget the human element. And I would just, hope that everybody kind of thinks about that because we’re just living in—this is one for the record books and again doesn’t happen all the time. And it’s very painful for a lot of people. And we have to be mindful of that.

Vijay Rajendran [00:13:57] Well, if I recall correctly, you actually have a degree in public health. You have an MPH?

Jonathan Charles [00:14:04] Yeah. This is actually it somehow this COVID thing is firing up very old neurons in my head from my public health day. So, yeah, I did a long time ago, I took, the basic epidemiology and bio statistics and all that kind of stuff. And so, I don’t remember all of it, but I remember enough to at least, follow the news at least somewhat intelligently. And because there’s a lot of noise out there, too in the age of disinformation, but we are aware that sometimes some untrue information is perpetuated on the Internet and various social media outlets. But, yes, I did live in the world of public health and life sciences and health care for a while. In fact, when I started my CVC career, I actually started at a biotech fund when I was in business school, but I don’t focus on that exclusively now. I do get exposed to some digital health deals, which, by the way, I think, clearly are going to be having an uptick with the with the new world we’re living in. But, yeah, I do have some touch points with the health care world.

Vijay Rajendran [00:15:11] Yeah, and the reason I bring it up, because I want to ask you, do you think of COVID-19 as a Black Swan event?

Jonathan Charles [00:15:20] Yeah, I think ultimately you have to look at it that way. The tricky thing about pandemics is, a lot of the experts I’ve been talking about this, people that are in the industry full time, are aware that these pandemics do occur. The last big mega one that was kind of on a global basis was the Spanish Influenza right around the end of World War I. And people forget that it wiped out, I think, 20, 30 million people, unfortunately, around the world. And at least in the United States, it’s sort of like an unknown history. The impact was very dramatic. And and there are a lot of parallels that we can draw today. For example, what did some states do that other states didn’t? And it turns out what I’m seeing in the news is that those states that did social distancing, they probably didn’t call it that back then over a hundred years ago. But those states that were really vigorous about locking down the economy and implementing social distancing, actually when they came out of the Spanish Influenza, they actually got back to work and perform much better than other states. So there’s a lot of lessons to learn historically here.

Vijay Rajendran [00:16:27] That’s fascinating. And certainly our ability to respond to events like a pandemic, climate change, a whole lot of things that are going to feel outside of our control, but for which we’re going to need to develop solutions there. Hopefully some of the areas where, founders and VCs and others can kind of roll up their sleeves and get to work on backing possible solutions to potential futures.

Jonathan Charles [00:17:04] Yeah absolutely, we’re eventually going to come out of this right. Now, the long term impact in terms of where investors invest and what kind of new startups are founded. A little bit TBD, but we know already that certain categories have been dramatically impacted. Things that are consumer facing, hospitality and travel, sort of the obvious things that you might think have been impacted by COVID. No doubt. I think everybody has kind of a consensus on that. On the flip side, There are also areas that may benefit greatly. So one thing that we found, because we tend to do a lot of core tech investing is, for example, cloud infrastructure. We’re actually seeing a lot of activity in that space right now, even with COVID. And it’s very simple, right? The use of things like Zoom and similar products, gaming, not that it uses a lot of bandwidth, but even things like e-commerce has dramatically gone up. But then, even things like cyber attacks. Right.

Somebody was talking to me yesterday about the fact that one of the big cyber security companies has seen a 600 percent increase in phishing attacks on people just since COVID hit. Right. So unscrupulous actors are trying to benefit from a situation. So cybersec may also be a space that becomes even hotter than it was before because of COVID. And I think particularly for those entrepreneurs that want to start something right now in a recession, they have to take a hard look at what they’re doing and then kind of assess do they want to put that on hold a little bit or do they want to charge forward based on what they think the demand might be in the new world that we’re living in?

Vijay Rajendran [00:18:49] So if we think about enabling that new world and if you are a founder and you want to find the right kind of partner who can help you both with capital but also other resources, what might be some of the positives of taking CVC money as opposed to a traditional VC money today?

Jonathan Charles [00:19:11] Yeah, a couple of things. So I think first and foremost, the beginning of going through that thought process is, how difficult is it for an entrepreneur in the startup to actually get in touch with the business units? Right. So, for example, Samsung is the world’s biggest information technology company in terms of breadth of products. Right. We make everything from washing machines to semiconductors, and mobile phones, tablets, all sorts of devices. Right. And flash memory, for example, as well on the semi side. There I was thinking about it earlier today. There’s no 1-800 hundred number that startups can call to say, hello, I’m a startup and I would like to do business with your semiconductor group or your mobile phone group or whatever. Right. There is no startup line at all. Big tech companies precisely for this purpose.

So, if a company is in, say, headquartered in, say, Silicon Valley, perhaps this is a little bit easier to do because as we know, the startup and DC business is very much about your networks and the chances that, somebody at a company, a big giant company that’s headquartered in Silicon Valley is probably much higher than one that is based in Asia. And I’m seeing this from the perspective of being in Silicon Valley, like, let’s say, I’ve been in Silicon Valley based startups before. And from that perspective, it’s a whole lot easier to just drive down the 101 and try to find my connections to whatever big company a little more challenging. So the four companies that are based in Asia, in my point there, is that really good CVCs are there amongst many of their duties to help grease the skids. To investigate what the business units—number one, is this interesting to the said business unit? Number two, now that we know it’s interesting. What could you potentially do together? We call this a win win collaboration. One plus one should equal three or better yet, five. Right. It shouldn’t be a situation where, maybe this is just better if the company is just a vendor to vendor to the business unit and there’s no need for a strategic investment and there’s no additional function for the CVC to actually engage in that. That’s what you don’t want to do. And this could probably take a whole hour or more just to talk about this topic. So I’m kind of cutting to the chase, which is, often, particularly with situations where there’s very complicated technology on both sides at the startup and at the the mothership or the business units. You need—what we found is it’s very helpful for the CVC as to be on top of that almost on a weekly basis, doing anything they can to make sure that there’s correct messaging and understanding between the startup and the business units, make sure everybody’s on the same page as you get to some sort of win win collaboration, which hopefully is deployment of the startup’s technology inside of, the products from the mothership on the corporate venture capital side.

We actually have a dedicated team in Seoul, Korea, for example, that a large part of their duties is to precisely do this. And of course, this is the difficulty level here is multiplied if you have multiple languages. So Samsung has 127 offices around the world. Imagine the number of languages that are spoken and the mothership languages, Korean, of course. Now, many people in Korea do speak English, often perfectly, because they may have been educated in the West or maybe just picked up English from from any number of ways. But what we find is, that’s not the case with 100 percent of everybody. So I think the really good CVC as an entrepreneur should ask about this. Who is there, particularly if you’re working with an international CVC, who is there to help at the mothership that can navigate things like culture and language and, other elements that maybe actually even unique to a particular company. You could call them Sherpas, guides, whatever it is, but particularly with big giant international companies. This is very difficult for a tiny little startup to navigate by themselves. There is no hotline to call. And even if there was, how would who to talk to inside the big giant company? Right. It’s almost impossible to penetrate in most cases. And so I would argue that. The entrepreneurs should be looking for those teams that are set up to precisely do what I’m talking about, which is to be a guide and to grease the skids to get to a win win.

Vijay Rajendran [00:23:59] Yeah, having those guides is critical to finding your way and like making sure you can get value out of that, the relationship for everybody, both sides.

Jonathan Charles [00:24:09] Yeah, absolutely. Yeah. And just last note on that. I’ve literally worked with entrepreneurs that I’ve basically cold called and ultimately made an investment in. And they told me, Samsung was not even on our list because they didn’t know where to start. It’s exactly kind of proving what I’m talking about. In this case, this was a semiconductor company. They literally did not know who to talk to, where to go. And even if they manage to find a phone number or an email address, is that the right person? Is it appropriate to reach out to that person? And, often is the case and this is applies to all big companies. They can sometimes be a little bit scary for startups, particularly around issues of IP and things like that. Right. So sometimes the startup may be hesitant to actually engage, even if there was a phone number, even if they did have a name. Maybe they’re a little bit hesitant. And I think the good CVC again can be that Sherpa or guide to say, look, this is how we roll. This is how we see the world and this is how we do engage with startups. This should all be for me, it’s table stakes for a good CVC. This this speech, if you want to call it that should be in the memory and a CVC should be able to, basically talk about this at, networking events or when they’re on stage or when they’re on a video like we’re doing right now or if they’re in a private meeting. This is table stakes and the really good CVCs are aware of how to navigate the mothership.

Vijay Rajendran [00:25:43] With that, what kinds of startups do you want to back? What kind of investments do you want to make in the future?

Jonathan Charles [00:25:50] Yeah, we historically we’ve been investing pretty broadly. So we do things like Internet of Things, cloud and data infrastructure, digital health. Of course we do semiconductors or any sort of sensors or components that would go into a variety of consumer electronics devices. But let me take a step back for a second. Say, one of our macro theses is data and A.I. and we know a lot of firms talk about that, rightfully so in the age of A.I.. But what we’re really interested in is who’s collecting new kinds of data and then through the use of A.I., applying it in sort of, ultimately getting to analytics on things that they didn’t know before. So let me give you one area where we’re actually working with some companies right now on potentially investing or we have already invested.

So another big bucket for us is Industry 4.0. You can imagine that’s relevant for a large manufacturing company like Samsung. I’ve already gone through sort of a list of different devices that we manufacture that are very broad across multiple business units. And we’re very curious about particularly going into early 2020 here or in early 2020, what kinds of new data can be captured on manufacturing sites? So in the last couple of years we’ve seen quite a few things around predictive maintenance. The machines are throwing off data and you can analyze that data to maybe do things like predict failure of machines. OK. That’s been around for a couple of years. We understand that space really well. So now we’re stepping back and we’re asking what is the next sort of digitization of the enterprise? That’s another way to say it. How do you take old school sort of processes and apply information technology to them to turn whatever is going on into, basically binary digits? And it gets digitized and then you can apply A.I. and analytics on top of that.

Another kind of area that we’ve been thinking about more recently, which falls into the data and A.I. is fintech and insurer tech. We actually started looking at this around, five, six months ago. And it’s very interesting if you kind of take a step back, who has a lot of data? Well, FinTechs always had a lot of data, right? Even before that, tech was added to that. The banking world has had a lot of data. It just happened in decades. Well before information technology that was mainly captured on paper and, on a big giant spreadsheets that were very manual. I’m talking about the days before Excel. And so fast forward to the 21st century. And we’re seeing a lot of activity around consumer fintech. And of course, we have a whole bunch of mobile phones that we deploy around the world with with consumers. So maybe it’s interesting for both the entrepreneur and a company like Samsung that if you have data about a person’s financial world and they’ve got mobile phones, remember how I was talking about earlier, one plus one equals three or better yet, one plus one equals five. Perhaps you have a situation here where you’ve got financial data all against the backdrop of the consumer’s life and then you add to that data. More data in A.I., and then you have a winning combination. So we’re not ready to announce anything quite yet. But we pulled the trigger on an InsurTech deal just recently and we’re looking very closely at a lot of fintech opportunities as well.

Vijay Rajendran [00:29:30] That’s super exciting. Thanks so much. We’ll have to leave it there, I’m I’m all out of coffee and we’re all out of time. So thank you, J.C. Really appreciate it. And it has been exciting. Stay safe and stay healthy.

Jonathan Charles [00:29:46] Thank you. Yeah. Stay safe and healthy. Everybody out there. Thanks for the opportunity today. Let me know if you want to grab another cup of coffee. That be great. And looking forward to the potential. Next coffee break.

Vijay Rajendran [00:29:59] Sounds great. Take care.

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