Following the acquisition of InvenSense, where he worked managing ecosystems and partnerships, Nicolas was ready to dive into a similar role at TDK. But little did he know, he was about to launch their very own CVC arm.
A few months after TDK acquired his company, Nicolas attended the Stanford Executive Programme. Up until this point, he hadn’t thought of VC or CVC, rather more intent that he was going to found a startup of his own one day. But following several lectures, Nicolas found himself with a dilemma. He felt compelled to launch a CVC after a talk from Jesper Sørenson (professor of Organisational Behaviour), and totally compelled not to after a lecture by Ilya Strebulaev (Professor of Finance), about all the things Corporate VCs do wrong, all the reasons they don’t work.
So he shared his dilemma with Paul Holland (General Partner @ Foundation Capital) who simply told him that both professors were correct: but, if you follow the best practices and you understand how to do it well, you can make it work.
Spending more time with Paul trying to understand what these best practices were, Nicolas was figuring out the drivers behind what makes the best Corporate VC, how they could become the gold medallists of the CVC world.
Nicolas, who happily admits that he’s not the obvious choice to be launching the Venture arm of an 80+ year old Japanese electronics company, set off to convince TDK to set up a Corporate VC.
And he got a lot of No’s, a lot of people telling him it would never work.
But by gradually building internal support, he was given 15 minutes to present to the CEO of TDK. And presenting the analogy of a surfer being smashed by a big wave, Ishiguro San told him and his team that it was exactly what he wanted.
“At the end of the day, I was raising funds. It’s just that I was raising funds with a big corporation, as opposed to angel investors or VCs.”
What was it like starting a Corporate VC from scratch?
I treated TDK Ventures like a startup, and I think that is the right way to think about it. You need to define your mission, your vision, you need to be very intentional about who you are going to recruit, and how you are going to position yourself to add value. And, like with a startup, if you don’t do that, you won’t be able to raise money. And that is why I always say that it’s not about me, it’s about our core values, which drives every decision we make.
At the end of the day, I was raising funds. It’s just that I was raising funds with a big corporation, as opposed to angel investors or VCs.
What are those core values?
Firstly, it took two years before we had the core values written down. One thing I don’t believe in is top-down values. I want values to be bottom-up, and so we spent a lot of time reverse engineering our core values, and finally documented them. We nicknamed them our ‘CODE of Conduct’, with CODE being an acronym.
C – Contribution to society: we are not going to invest in companies that develop solutions for weapons, or e-cigarettes, things like that for example. We are looking for real, meaningful projects that will move the needle to contribute towards society.
O – One team reaching for the sky: we want real diversity, real expertise in our team, but we also want to work with the full TDK team across the world – we believe this to be our superpower. And how can we amplify that superpower to make our portfolio companies shine.
D – Delivering Deep Insights: This is really important, the raison d’être of TDK Ventures. We want to give TDK a very clear view of where the disruptive tech waves are going to slam, and help them anticipate and surf those waves, as described in the slide with the surfer I had presented to our CEO. If you wait for markets to be mature, you lose. So the insights we are providing are 5-10 years in the horizon, and will help TDK develop first-to-market products.
E – Entrepreneurs first: If we mess up with that, we don’t deserve to be here. It’s about bringing passion, conviction, courage, and patience to serve entrepreneurs and help them accelerate their dreams; this is why you will hear us talking about TDK goodness so much.
Those are the 4 core values, and they drive everything we do: our decisions, our best practices, how we interact. And that is why, for example, we spend a lot of time giving quality feedback even when we’ve said ‘No’ to entrepreneurs.
“Our mission is an exploration mission. We are trying to make investment bets into a future that does not yet exist, and where TDK does not yet operate.”
Was it a tough decision to choose investing from a fund over the balance sheet?
This was a no brainer decision. TDK Ventures is designed to act like a financial VC (fast, financially driven, close to other top VCs, focused on financial success of startups) with the benefit of an amazing mothership company to help our portfolio companies. To do that, you need a fund, which also, and importantly, allows for a reserve to support follow-on investments of our portfolio companies like all other financial VCs. We allocate 50% of our two first funds as reserve.
How and why did you settle on your stage focus (e.g. Seed, Series A) and ticket size?
We need to be engaging with the very best start-ups in a future that is strategic to TDK but where TDK is not executing yet, while being able to influence positively the outcome, so that entails early stage projects. Ticket size was initially $250k to $2.5M but we increased to $5M within two years as we saw opportunities to have larger ownership and/or a little later stage investments from time to time.
How did you design the team at TDK? Was it with a blend of both investing backgrounds and TDK backgrounds?
Again, our mission is a mission of exploration. We are trying to make investment bets into a future that does not yet exist, and where TDK does not yet operate. So it was important for me to intentionally recruit Investment Directors who were not from TDK; to avoid any filters about what TDK may or may not become.
Because I had found really good coaches (like Paul Holland and the team at Mach 49), I could afford to recruit people on potential, not experience – because with experience comes biases. So it wasn’t people with 10 years of VC or CVC background. I recruited people who were really technical, who wanted to bet on a future that doesn’t exist.
The last factor, is that because we are betting on a future that not many people can see, I purposefully recruited people who did not see the future in the same way as me. Diversity of thought is so important.
Do you include executives from TDK as part of the Investment Committee? If so, what is their primary role in that process?
By design, we wanted the Investment Committee to be 1) top management executives 2) three of them, and 3) all in same timezone, as I am the second timezone. The reason for 1) is that this ensures both a long-term strategic fit (these top executives are the very best proxy of a company’s long-term strategy) and facilitate executive support to bring synergy projects where they make sense.
Talk me through the investment in Starship, your first investment as TDK Ventures
When we invested in Starship, there were so few delivery robots in the world, maybe 100 deployed around Milton Keynes and 1 university, and many did not believe they would ever become ubiquitous. But we believed in that future, in a more inclusive world where people have the option to get things delivered to them.
The Net Promoter score was above 70%, which if you know about NPS methodology is excellent. So they were clearly delighting their customers, and they had a path to profitability. In fact, they had positive unit economics for parts of their business, and I could see how that could improve over time as they scaled.
And in this case it was actually quite simple. It’s not like food delivery by humans, where you still have to pay someone to deliver it. As they get more services, more customers their unit economics would vastly improve. Starship is not just first-to-market, they are the clear market leader, with a really strong and compelling solution
Digging into Corporate VC
“If you pick the second or third best startup in a category, you’ll get strategic learnings. But let’s not kid ourselves, you will not get the level of strategic learning that you would get if you picked the number one startup in that category. And likewise, you are not going to get the same level of financial returns.”
Picking up on your final core value, do you think one of the major mistakes corporate VCs make is being corporate first, rather than entrepreneur first?
This is very interesting. Every 2 weeks I do an interview of a CVC (the Corporate Venturing Insider series with 500 Global), and I ask this question about who is your customer from time to time. Every time I hear someone saying, “well, we have both”, or “corporation first, but entrepreneurs too” then you know they haven’t made their choice. And at TDK Ventures, we want this to be extremely explicit – we only have 1 customer – the entrepreneurs. The corporation is our partner. And this is where it makes sense to work with the TDK teams, as our partners. We want to create a win-win projects with the entrepreneurs and the many TDK teams.
How do you see TDK Ventures sitting in the battleground between Financially motivated funds and strategically motivated funds?
Yes, many times people ask this – are you financial or are you strategic? I think this is the wrong question to ask, this is a framing question anchored on a frame of mind that dates from the earlier generations of CVCs, and the reason is that the job of a VC or a CVC is the same – it’s to find and pick winners. If you do that, you’re going to get financial returns, and strategic value.
If you pick the second or third best startup in a category, you’ll get strategic learnings. But let’s not kid ourselves, you will not get the level of strategic learning that you would get if you picked the number one startup in that category. And likewise, you are not going to get the same level of financial returns.
So let me put it this way – financial returns is a proxy for the quality of the strategic learnings. If a CVC has a 5x fund return, it’s likely that they’ve picked the winners, and will in return get high quality strategic learning.
How does this play into the Investment decisioning?
We are blessed, we have a really amazing brand with TDK, so we are reviewing around 100 companies a month (over 2,500 after 2 years of launching, or 3 every single day including weekends), and we have invested in 18. So for every 1 we say yes to, there are more than 100 where we said no.
And this means that we can be really strict about only investing at the intersection of: 1) ‘can it return the fund?’ (financial return), 2) ‘do we believe there is value and synergy we can identify with TDK?’ (strategic return), and 3) ‘is it attractive within a sustainable future?’ (our mission).
I have no KPIs for my team in terms of number of investments. This year we could make 3, we could make 17. I only care that each investment we make, we strongly believe that yes is the answer to all 3 of those criteria.
Do you see that ability to be patient as an advantage?
Different corporations will have different levels of patience. TDK is a company that has patience. My boss, TDK CEO Shigenao Ishiguro, does not put any pressure on the number of investments, just that we are investing in the best entrepreneurs that want to contribute to society.
But we are also patient in our process, and the one thing that I really care about is how high quality is the due diligence the team conducts, which determines the outcome – either we invest, don’t invest, or decide to invest later.
What I’m trying to reward my team on is the quality of their decisions. If I rewarded the team on number of investments, there are times we would probably say yes to projects that aren’t quite right for us, and that would deteriorate our reputation over time – we would end up with companies we don’t 100% believe in, and would maybe not go the extra mile for them.
It was a huge pleasure to interview Nicolas, who has an incredibly thought through concept of Corporate Venturing, and the experience of creating a fund from scratch.
One of the key takeaways from this interview is the understanding that being financially motivated and strategically motivated should not be seen as competing or incompatible agendas – far from it. They are actually one and the same goal, and perpetuate each other. The companies that will give you the best financial returns are the ones that will also give you the best strategic learnings. And that adds an emphasis, or clarification to Strategic VC investing, where we shouldn’t be weighing up whether they are more focused on one thing over another. To be focused on strategic investing, and bringing in the best insights for the corporation is one and the same as bringing in the best return on the fund.
We highly recommend following Nicolas and his Medium blog, where he regularly contributes thought leadership pieces on Corporate Investing.
Read more on Strategic VCs in our article ‘Venturing into Corporate Investing’ here.