The Advertiser’s Guide to Understanding Corporate Venture Capital (Full-Length)

Here’s what you need to know about the venture capitalists looking to fund the disruption of the media landscape.

Countless teams are working to find and invest in the disruptive companies of today and tomorrow. When you think about the growing number of corporate venture capital firms popping up, it is clear that many companies are aiming to stake a claim in, and reap the financial benefits of funding the next major innovation. They want to uncover value wherever they can find it. No doubt, this trend is upending the status quo across industries, especially advertising and media. The change in the business climate also includes high valuations, confusion and misnomers. The surrounding hype can make one question what the future holds and how this shift could affect their business or industry.

To get more insight into the trend, the first installment of the “Conversations With” series, The AD Club of New York & Young Professional Committee invited a stellar panel to help make sense of the evolving corporate venture capital landscape and peel back the curtain on how venture capitalists think about the market. The panelists come to the field from the corporate sector, not the larger institutional side of the VC world (think big players like Sequoia Capital). As such, each one of the guests and their respective organizations takes a different approach to investing. David Horowitz led the discussion and helped the panel navigate the terrain. Horowitz is the Founder & CEO of Touchdown Ventures, a firm that works with leading corporations to establish and manage large venture capital platforms. Before that, he helped found and manage Comcast’s venture fund.

Jessica Peltz-Zatulove is the Principal at kbs+ Ventures, the corporate fund at KBS+, the global advertising agency. Her primary focus is on early stage B2B digital media and marketing companies that are transforming Madison Avenue. This gives her a unique insight into how the two worlds of agency and venture capital can collide.

Michael Duda is the Founder and Managing Partner of Bullish. It is a firm that is one part agency and one part consumer investment fund. The firm acts as two separate legal entities operating as one with a focus on early stage consumer brands. His team has built its practice on bringing branded marketing expertise to the portfolio companies it represents.

With the media landscape changing rapidly, a media veteran rounded out the panel. Nisha Dua is the Founder of #BUILTBYGIRLS and a Partner at BBG Ventures, an investment fund housed within AOL. Its fuels its growth by investing in companies with at least one female founder across marketplaces, media, mobile services, commerce, connected living and consumer technologies.

This panel of incredible professionals represented different corners of the VC world. New business concepts, shifts in consumer behaviors and buying patterns, client expectations, growth, failure — — all these are baked into this volatile field. Ultimately the right investment strategy is one that works. So how is this affecting your business?

What is Corporate Venture Capital?

As the saying goes: nothing ventured, nothing gained. Venture capital is about looking for companies that have a high-risk profile, but also have the potential for high growth. VCs are typically looking for the trends that are three to five years out. Often the companies and the investments they work with are pre-product and pre-revenue. VCs look for teams that are highly focused on innovation and are inventing the future. Many large corporations too are beginning to look for value anywhere they can find it.

Some of the reasons that corporate VCs are popping up:

1) Financial Return

2) Competitive Advantage

3) A Strategic Value Buy (For Research and Development, for potential exits, for understanding different technologies).

Mike Duda: “Coca-Cola could not come up with the next Vitamin Water, but it had $4.2 billion to buy Vitamin Water. That is what’s going on now. Innovation is happening outside the womb. Many of these CPG companies, they cannot do the next shiny new business, like an Annie’s Organic. General Mills paid over $800 million to buy Annie’s Organic. More and more corporations are launching VC units. Seven Eleven launched a VC arm. ‘Sesame Street’ launched a VC arm. Hershey’s, Campbell’s Soup.”

What is driving this? On the corporate side, over the last 15 years, two cataclysmic events occurred, in 2000 and 2008, the financial crisis caused companies to lose massive amounts of business and a foothold in innovation. In the contraction of the economy that ensued these large enterprises had to lay off many people and it the output came out of the innovation and future profits. When the market recovered firms took a while to readjust.

Agencies Venture Out

To stay current, more and more agencies too, are beginning to act like VCs. The shops are creating separate arms or are starting to invest in startups. In turn, they make investments in companies rooted in marketing technologies, social media or analytics platforms or consumer-facing products and services. This is changing the traditional agency model overall.

The Rationale

As corporate clients seek answers, venture arms can drive an agency’s professional services business. The general idea is about growth. Agencies can help startups grow and also sell the through products and services to their clients. As such, the agency model is changing and new revenue streams get created.

Mike Duda: “The multiple on the investment may not be the ultimate thing, it is also the value added to the current clients, which is the revenue and yet you want to make money on this. There’s no one right way. You can bring something to the table besides money at this phase. The agency business does a better job than we give them credit for, these venture arms… it is a way of future proofing. Probably the best category example is advertising in the VC business.”

The benefit of this structure is two-fold. Not only can these agencies provide capital to the startups they fund, but also they can provide resources, expertise and scale to help these startups grow, in exchange for equity. This can supercharge the relationship. Further, for agencies, having access to more sophisticated tools can differentiate creative shops from competitors when pitching for business. Adopting this structure is a means to future-proof the agency business (for retaining and winning more clients) as the traditional model shifts.

Jessica Peltz: “We like to say that we are making our clients smarter and more ahead of the game by making these investments, which ultimately positions us more effectively as an agency. As we are investing in those companies, that is going to help our clients future-proof their business. That is going to help our clients understand how the market is moving. We are in the business of job preservation for the CMO.”

Shared Resources

With extensive networks available the rationale of this organizational setup makes economic sense. Agencies can introduce the startups to clients, strategic partners and different domain experts. And also bring them into the fold by showing them how to leverage the network.

At KBS specifically, post-investment, there is an onboarding process that takes the portfolio founders through, where the management walks through all the various layers of the organization and the network. This is to ensure that founders learn how to get the most value out of the partnership. Further, the model allows startups to battle test concepts. When doing diligence, the teams can incorporate various business units to gauge the viability of the product. They can ask questions like: would they use this? How does this get built into their existing workflow? Could it easily be integrated into our agency network?

Nisha Dua: “At AOL, it is about thinking through what’s the plug-and-play model that we can offer [to our portfolio companies] like audience distribution, strategic partnerships with our media assets, or a plug-in model to our sales team? That is great for AOL, but it’s great for our companies who are early-stage and need to work through scale early on at the beginning.”

Jessica Peltz: “We look at KBS and the larger organizations as a focus group for startups. In one case we had a startup that wanted to learn more about video. How is it bought? How is it sold? How is it priced? We can pull in these different domain experts from around our network and have a non-judgmental conversation without them feeling like they’re blowing their chance to pitch to a big company, having that opportunity to tap into all these different skill sets is hugely valuable to their startups.”

Don’t Bet on Old Paradigms

Nisha Dua: “You talk to a media buyer, and they’re thinking about this old paradigm. It’s hard to bridge the gap between innovation and this paradigm that currently exists and that people are still buying against right now. If anything, being part of AOL has made us reticent to invest in traditional media plays, because we see the way in which the landscape is changing.”

Communication and Changes

The lingo is important and knowing the audience is just as important.

Jessica Peltz: “Ad tech has become a dirty word in the venture community, it’s funny, it stems from [the asset category] becoming commoditized, it’s becoming over capitalized, it’s becoming too crowded. A lot of it is project based work, which is not an attractive business model for VCs. Ironically, marketing tech is the new ad tech, which is hilarious because it’s a little bit about semantics. The way that we quantify and define it as ad tech, historically, was a lot of that project-based work, and a lot of it was technologies that are helping you reach audiences at scale. That was that era that crept up of DSPs, the SSPs, ad servers, that whole ball game. Now, with the whole marketing tech, it’s more becoming about technologies that are helping you reach the individual at scale. A little tweak to the wording there, but that’s how a lot of people make that delineation. A lot of those are more enterprise software, annualized license, more repeatable, stable, recurring revenue.”

Stay Current

Nisha Dua: “When we’re looking at media, we’re looking for companies that are approaching content consumption in a completely different way. There are things that people come in with that sound really interesting. Last year, everyone came in and said, ‘We get Millennials.’ Well, come on now…that is table stakes right now…. the same is true for many things around native advertising, as well, if you’re still talking about those things, you’re behind the eight-ball. You are completely behind.”

Changing Revenue Models

Jessica Peltz: “A huge trend is that a lot of the recent innovations, are enterprise software companies or SaaS companies, which doesn’t fit into that neat box of a media plan. That’s something that we’re seeing as a struggle for agencies. They don’t know how to handle some of these new solutions, whether it’s predictive analytics or whether it’s these new messaging channels. It’s not intended to be a 12-week campaign. These are annualized contracts that brands need to figure out. That’s a pain point that agencies need to adapt to… how do you incorporate and how do you weave in some of these solutions that are really forward-thinking, cutting edge, but don’t necessarily fit into your fall fashion campaign box?”

In a Good VC Deal, Everybody Wins

Remember, the point of a VC investment is deliver a 10x return on the money that the VC puts into it. Everybody is at the same table working to increase the size of the pie. This can seem drastically different from the agency pitch mindset.

Mike Duda: “In the agency business, you’re taught, to do well, for you to win, everyone else must fail and in your business pitch. Or even if you’re sharing a client, you want to get a share of wallet. In the VC world, for the most part, everyone comes around the table to help that entrepreneur win, because then we all make more money. It’s not completely altruistic, but it’s massively refreshing in terms of deal flow going back and forth. That doesn’t happen in the agency world. It’s forced, in a good way, mostly, amongst the holding companies.”

Risk is the Name of the Game

Forget the checklist, in the VC business there is no “media plan” or predictable bet in the VC business.

Nisha Dua: “VCs strategy is not about future proofing or protecting against [change]. Ultimately you shouldn’t be looking at too many patterns, and you shouldn’t have too many checklists. That’s the trap you find yourself falling into when you meet a company, which is, “Well, I just don’t think consumers are going to do this.” The moment you say that, you should really try and look at the company in a different way.”

David Horowitz (Moderator): “Taking on risk is inherent. It’s about diversification. It may be hard to mitigate risk on a single asset or a single investment. The return profile is so high on these venture capital investments. They build a portfolio to diversify themselves so if one fails the risk will be mitigated. That’s the way that they’ll mitigate risk from a diversification perspective.”

Nisha Dua: “When you look at a bunch of companies and you say, ‘Well, that one could be a total failure, but if it succeeds it will be really big,’ that’s the kind of investment you want in your portfolio. If you’re looking for a 1000X return and you’re using a checklist for investing and you are doing pattern recognition, you’re probably not going to find it. Because all the black swans in the last 20 years whether it’s the PC, the iPhone, the Internet, or even if you look at now it’s like Instagram and Snapchat, they were not predictable things.”

Jessica Peltz: “VC is built on power loss, so you actually expect a lot of your investments to fail. That’s OK. If you just think about that fundamental change and consumer mindset, that’s the kind of stuff you have to be really open-minded about. Is if you see what network effects can this kind of technology create? It’s just thinking about the impact that it’s had on a consumer behavior. Of course you want to do your diligence and of course you want to make sure you cross as many T’s as you can, but a lot of times you have to think about the snowball effect on what this could create”

Nisha Dua: “You should be looking for something that’s actually completely different to what’s happening now. If you’re safe and you’re trying to plan for trends, then you’re probably doing yourself a big disservice. At least with the VC model, which is how do we get a thousand X returns? When you start saying, ‘Oh, that’s a really nice business’ about some other companies, you know you haven’t taken enough risk.”

Betting On Founders, Problem Solvers, What do they look for?

In some cases the companies that VC deals involve may not have any revenue, they may have very few customers. It’s important to know what distinguishes a good investment or a good opportunity versus one that wouldn’t pass snuff through the review process or after looking at their business plan or presentation.

Mike Duda: “You’re betting on people that you don’t mind taking a call from at midnight.”

Jessica Peltz: “At the early stages. It’s all about the people. You really want to get to know the founder, how they see the world. What secrets have they uncovered? What’s broken? Why is it broken? Why do they want to obsessively fix that problem? Do I want to work with you? Then, too, it’s do I believe that this is a problem? If I believe this is problem, do I believe this as a pain point that people would pay for? Do I believe there’s a market opportunity? You want to look at the market a lot. The market size, how big is the market? Who would pay for it? Then it becomes, do I like your solution?”

Nisha Dua: “The best founders in our portfolio are so obsessed with the product or the problem that they’re solving. There are two defining characteristics: one is that they don’t come in with just a product but they come in with a huge vision. The second thing is I’ve met a lot of obsessive founders who will be able to grow into that vision or be iterative or nimble, have thought about a lot of the questions you’ve asked them. They’re thinking five steps ahead all of the time and they may not have all the answers, but that map is laid out for them and even if they don’t have the answer, they’re halfway there to thinking about it or they have a good reason for why they haven’t touched it yet.”

Jessica Peltz: “We never really fall in love with the product as it is at the seed stage because you know it’s going to change and iterate a million times. You want to know that the founder can be really nimble, really approachable, and really open-minded to be able to iterate and figure out, what is going to be that product that we’re going to fit there? Then it becomes can this scale and can you execute? It’s really digging into the founder. Is this somebody that has past domain expertise? Have they spent time with the customer? Do they know their customer? What superpowers does this person have that’s going to make them successful? Ideas are worthless. Execution is everything. Why is that founding team going to be the one that’s going to make this business a hit?”

Where Are We Headed?

Through all of the complexities the key is that VCs are always looking ahead.

Oldies But Goodies

Mike Duda: “Right now, you hear a lot of VCs, ‘There are 80 million Millennials out there and they all like experiences’…for all the talk of Millennials, which are influencing everyone else, everyone’s sleeping on the 50-plus [age group] It’s amazing. If you look at the 50-plus, it’s an area where divorce rates are high, Internet and mobile adoption are really high, medical devices, people are playing tennis at 70 better than ever. The drugs, Viagra, etc. Match.com adoption is highest there, as well as the 18- to 24-year-olds. If you look at who’s servicing that market, AARP. It’s a bit fuddy-duddy. Someone should be disrupting them…someone’s going to go after AARP, and someone’s going to do it well.”

Consumer Behavior Still Catching Up

In Health Care, Consumers are still catching up to the Technology.

Nisha Dua: “From a consumer perspective you see all these apps popping up that are tracking something, particularly in relation to chronic disease. We’re at this moment in time where there’s actually a gap in data and consumer behavior. Two things are happening. One is these consumer apps propose to provide a whole bunch of data that theoretically should help me improve if I’ve got multiple sclerosis, PCOS, endometriosis, or whatever it is. The challenge with that is most of these consumer apps don’t yet provide actionable insight to the consumer. They’re just providing tracking data. That’s great if you’re an Excel geek and a former management consultant totally obsessed with that. For the majority of people, they don’t care; consumer behavior is not there yet in terms of proactively taking care of your health. People take care of their health when they’re told they’ve got a very, very serious illness. That’s still the gap that we’re facing at least in the consumer healthcare space.”

Technologies and Trends In Focus

Jessica Peltz: An area that we’re spending a lot of time in right now is conversational commerce and the impact that messaging has on brands. We made an investment recently in a company that’s human-assisted AI to help brands manage one-to-one messaging at scale. This is something, when we started digging into it last summer. Facebook Messenger had just recently released Messenger IDs for brands. When I ping Delta, I don’t want a response 43 minutes later. I want a response immediately. That type of nuance is something that we recognized there was a big gap in the market. This particular solution is an enterprise solution that enables you to have millions of conversations at scale across different languages all at the same time. That’s something that we believe there’s a big gap. You’re going to see a lot of different AI solutions, both horizontal AI and vertical AI that are going to be adding different solutions. Facebook wants Messenger to be the new browser. That’s the reality of where we believe things are going, to replicate what WeChat is doing in China. We’re spending a lot of time in that space. Not only from an analytics and measurement standpoint but how native plays into the whole thing, how messaging plays into the whole thing. Brand safety and security is another area we’re starting to spend a lot more time on. Personalization at scale, new communication infrastructure, not only what are new ways to interact with your customers through different content or different channels, but what are new ways to communicate with your customer in an effective way?

Nisha: “We’ve seen this transition from highly bespoke content to automated content. Now you’ll see human curation and personalization matched with automation. For us, it’s about staying away from media assets that are driven by the traditional advertising model. When we think about commerce, as well, we’re also thinking about conversational commerce, and bots keep coming up. We’re looking at really interesting mobile video plays. We’re looking at VR/ AR, it’s the hot topic of the moment. No one knows where it’s going to go. The best way to think about trends is to look at what Facebook is doing. At least from a consumer and media perspective it’s live video. It’s chat bots. One good way to think about, ‘What should we all be focused on?’ I would look at a company like Facebook where you say, “They’re future proofing, but they’re future proofing in that they are planning for the future.

TAKEAWAYS

Agencies, investment firms, and startups are co-mingling. It’s changing the face of an entire industry. In fact, everyone is planning for the future. Both agencies and the corporation are in it to win it. This group of innovative firms goes beyond traditional professional services and are getting into the world of venture capital. The benefits it brings to the parties involved are set to impact the future of value creation in both commerce and communications.

Corporate venture capital about deploying capital in creative ways to unlock potential. These investments exist not only financial goals but also for strategic alignment. Everyone is looking for the long-term value ideas and shopping around for deals. Each firm will have its own ways to find, cultivate, and vet value. But the agencies and VCs together at the table could usher in a changing dynamic.

The new era could drive decision-making, and the world could begin to see more startup and agency partnerships. The corporate venture capitalists are here for now. It’s important to understand them and their goals.

Conversations with Venture Capitalists was planned by Robert Kleiman & Colin Powers of the Ad Club Young Professional Committee. Special thank you to the panelists.