Driving Growth: The Role of Scaling and Engagement Teams in CVCs
By William Graves, General Counsel of TDK Ventures
For most corporate venture capital (CVCs) groups, investing is the easy part. What follows is where fortunes are made and greatness is achieved. So how can CVCs assist portfolio companies to maximize their likelihood of success? It turns out, quite a bit. Most CVCs have human capital resources in abundance, especially when considering the entire enterprise such CVCs represent. With some relatively simple planning and the proper allocation of these resources, CVCs can set themselves apart from traditional venture capital firms and help portfolio companies thrive.
In his book Good to Great, Jim Collins describes the notions of “disciplined thought” and “disciplined action.” Disciplined thought refers to the concept of making good decisions in the midst of facing numerous challenges (which are commonplace for start-up companies) and creating a culture where voicing one’s ideas are encouraged. Disciplined action refers to executing corporate strategies effectively while both adhering to corporate culture and utilizing one’s discretion and freedoms to reach the desired outcome. If combined with effective leadership (i.e., a visionary open to input and guidance) and a strong sense of what fuels the economic engine of the business, a portfolio company has a much higher probability of reaching its ambitions.
So, how can a CVC deploy its human capital to help portfolio companies drive disciplined thought and action, and thereby help these companies reach their full potential? Establish both a Scaling Team and an Engagement Team.
Scaling Team
Simply stated, a Scaling Team is a group of experts in various disciplines who can augment the existing skill sets found within the portfolio company. The key word here is augment, not replace. The function of the Scaling Team is to guide disciplined thought towards disciplined action by offering new perspectives based on skills and experience not readily available within most start-up businesses. The Scaling Team becomes an advisory group and resource to the start-up as it plans strategy and while facing challenges. By adding complementary disciplines to the (hopefully) already strong management team of the portfolio company, the CVC can help foster growth. This is especially true for early-stage start-ups looking to raise their first rounds of capital.
In most cases, early-stage businesses lack the resources needed to hire experts in the fields of finance/accounting, marketing, recruiting, legal, and human resources/recruiting (to name a few). This expertise can be invaluable to a start-up. By offering these resources to its portfolio companies, a CVC not only provides added value beyond capital, but it also actively enables management teams to reach their full potential. This value can be further accentuated by offering these services without cost to the start-up. Imagine being a start-up CEO and having no-cost access to a professional recruiter? Or support from an experienced marketing team to guide a full-launch strategy? Or a finance expert who can help locate non-dilutive capital? Leveraging these resources from larger and more established businesses, such as a CVC, and without the financial burden associated with building these teams internally can be a tremendous competitive advantage for any start-up. Additionally, this no-cost solution brings tremendous goodwill, negates any perceived conflicts, and dispels any notion that the CVC is attempting to recoup investment proceeds by imposing fee-based services on its portfolio companies.
Not every start-up will have the same needs, so a well-structured Scaling Team will be comprised of individuals specializing in many disciplines. This allows a plug-and-play approach to filling whatever niche services are in most demand by the respective portfolio companies. In most cases, the typical start-up will include a CEO, CFO, and perhaps a CTO. Each of these executives wear many hats in managing the day-to-day operations of the business. A Scaling Team can alleviate some of these daily stresses by taking ownership of matters which may not be in the wheelhouse of the management team. Until such time as the start-up has fully staffed personnel to oversee marketing, legal, HR, etc., the Scaling Team can offer a no-cost solution to bridge the operational gap.
While no two Scaling Teams will be identical, the point is that a CVC needs a strong understanding of what skills are most needed by its portfolio companies at their earliest stages, so that it may staff its Scaling Team accordingly. As many CVCs may not need the skill sets of the Scaling Team members on a full-time basis, it only makes sense that these resources be made available to the portfolio companies in order to take full advantage of these team members.
Each CVC will have its own best understanding as to when and how to introduce a Scaling Team to its portfolio companies; however, most will agree that earlier in the process is better than later. Often, those individuals that are most familiar with the portfolio company’s management team (for example, the CVC’s lead Investment Director on the project) will have a strong sense for when the time is right to make the introduction to the Scaling Team. In many cases, immediately following the closing of the initial investment may be an opportune time for introductions, given that the portfolio company’s management is often most open to engagement with new investors after a successful close of a financing event. Most importantly, the introduction process should be paired with written materials summarizing the various services offered by the Scaling Team, including team bios. Also, the use of a brief questionnaire may be advisable so that the Scaling Team can better understand the immediate needs of the portfolio company. Armed with this information, both sides can have a very productive and meaningful initial meeting for the purpose of live introductions and determining next steps.
Once the Scaling Team is identified and introduced to the portfolio company, it is important to create a process by which the portfolio company can gain access to the Scaling Team resources and to set expectations. For example, to avoid potential conflicts of interest, an attorney of the CVC may need to set “ground rules” prior to offering assistance. Depending on the nature of the assistance, this may necessitate a written conflict waiver or a strong understanding of what legal services may be provided without violating rules of ethics. In the case of a recruiting expert, the recruiter may want to clarify what roles she or he is best suited to fill. In any case, “overselling” the capabilities of the Scaling Team is not advised, as it may lead to resentment and potentially damage the important relationship between the CVC and portfolio company. The idea is to create value, not unfulfilled promises.
In addition to offering strong skill sets in complementary disciplines to portfolio companies, a properly run Scaling Team also serves to mitigate investment risk. This concept is often overlooked by those CVCs that have yet to establish Scaling Teams. As most professional investors know, the management team of any potential investment target is often the company’s most precious asset. Given that a Scaling Team is meant to complement management teams and help such teams reach their full potential, this added service drives “disciplined action” leading to more linear growth and business success. As previously mentioned, the strongest leaders are those that are open to new ideas and strategies. The entire basis of a Scaling Team is to provide that missing “out-of-the-box” thinking and backfill any blind spots of the portfolio company’s executive team. If done properly, this dynamic propels companies to the next level.
Engagement Team
While a Scaling Team serves to assist portfolio companies with both operational and strategic day-to-day needs, an Engagement Team serves as an advocate for the portfolio company within the CVC’s organization. Most CVCs are structured as a business group within a much larger enterprise having multiple product lines, R&D centers, and often operating in many industries. The Engagement Team acts as a conduit between the portfolio company and these various business groups within the CVC’s enterprise. For this reason, an Engagement Team is unique to CVCs. For more information on this important topic, please see the articles “CVC Best Practices from the Field — Diverse Strategies for CVC Success” and “CVC Best Practices from the Field- Strategies for Equal-Win Parent Portfolio Engagement” written by TDK Ventures’ Portfolio Program Director Geetha Dholakia.
For those portfolio companies exercising disciplined action, an Engagement Team is a lifeline into what may otherwise be an obtuse and challenging undertaking to access a large, global organization. Naturally, the members of the Engagement Team will have a strong understanding of both the CVC’s individual portfolio companies as well as all the CVC’s affiliated business groups. This understanding can only follow from extensive homework on the part of the Engagement Team and a true understanding of the portfolio company’s business and solutions. Only then can the Engagement Team fully understand the potential synergies between the CVC’s enterprise and the portfolio companies and drive an “equal-win” engagement.
Most successful Engagement Teams will be comprised of individuals having very strong technological backgrounds that can quickly identify which business groups are most compatible with the portfolio company. This is actually a two-way street because often times the CVC’s affiliates may utilize the portfolio companies not only as potential customers, but often as a supplier or partner as well. For large organizations, the Engagement Team’s responsibilities are compounded, given the need to build relationships within multiple business units. Often, building these relationships can be a months-long (if not years-long) process, but if done correctly, these relationships can be the cornerstone of a successful CVC truly bringing value to its most important stakeholders. What portfolio company would not want a ready-made customer in addition to a new investor? Only a CVC with a strong Engagement Team can make this a reality.
Once the Engagement Team has identified the potential synergy with a portfolio company, the next (and often trickier) step is the process of attempting to formalize a relationship. As you may imagine, this can be a very slow and deliberate undertaking. Often, non-disclosure agreements need to be executed before any initial discussions among the portfolio company’s management group and the business groups of the CVC’s organization. It is highly recommended that the CVC has a very simple (ideally, a one-page) form of omnibus non-disclosure agreements that may be executed by any business group within the CVC’s larger organization, and which is binding upon and protects all business groups. Such an agreement will greatly streamline the execution process and prevent the need for the portfolio company to enter into multiple and differing agreements with every business unit within the CVC’s enterprise. Even then, there will be inevitable delays resulting from scheduling meetings, coordinating internal discussions, sharing information, and producing legal documentation in connection with commercial relationships (assuming a commercial relationship is viable). Even after documents are signed, there are often additional delays while waiting for relevant production windows to open, potential retooling, or depletion of current inventories. This long process can be extremely frustrating for start-ups that are often needing cash-flow to cover expenses and to meet investor demands. In these scenarios, the Engagement Team can be super useful to serve as a primary point of contact for the portfolio companies, manage expectations, and do some handholding.
As mentioned at the beginning of this article, the start-ups with the best potential from an investor’s standpoint are those that follow the concepts outlined in Good to Great. The primary mandate of any successful venture firm is to harness its resources to drive its portfolio companies to implement disciplined thought and to exercise disciplined action. For a CVC, the development and proper use of strong Scaling Teams and Engagement Teams can substantially increase the likelihood of success for the early-stages businesses within its portfolio. Furthermore, the inclusion of Scaling Teams and Engagement Teams will create tremendous goodwill and value- added opportunities. At TDK Ventures, we call this “TDK Goodness.” In return, through the successful implementation of its Scaling Team and Engagement Team, TDK Ventures has achieved both financial success and greatly contributed to society through the advancement of its portfolio companies’ technologies and businesses. As word spreads of our achievements and meaningful assistance, we believe this system will only lead to more investment opportunities and successful outcomes. We also believe if other CVCs adopt a similar model, these successes will be compounded. This is the cornerstone of disciplined action.
