In our last two articles (“The Investment-Innovation Paradigm in the Built World” and “Contemporary Venturing”), we discussed some structural features of startups and innovation in the built environment and related cleantech space that are ripe for a new VC model. In this article, we introduce a differentiated investment model that focuses on bringing life to innovation in a sustainable and predictable fashion.
Sector-Specific Features
Built-world technology and related cleantech have some unique features that separate them from the broader tech world:
Long innovation cycles
High capital intensity
Entrenched go-to-market channels (particularly in the built world)
Long innovation cycles:
Other than pure-play SaaS solutions, most startups in the AECO and clean energy space focus on innovative new products like advanced materials, automation, IoT-enabled platforms, and robotics…. in a word, ‘hardtech’.
As anyone with hardware development experience can attest, successful companies have hardware development plans that span years, not weeks or quarters. Monetizing fundamental breakthrough research from universities can take years. Designing a hypothesis, developing experiments, prototyping, building, testing, market feedback cycle takes several quarters. The smartest entrepreneurs in the space recognize that market feedback may be months away, and design and test several iterations of products simultaneously.
High capital intensity:
On the same note, setting up a lab, factory, or a prototype plant requires immense capital. Hardtech founders in the digitally developing built environment must invest significant capital into items like equipment, fabrication facilities, raw materials, robots, etc., unlike SaaS startups, which have significantly lower capital requirements to achieve success because of the sector’s asset-light nature.
Just as cloud computing required the support of corporate leaders to develop in the late 90s and early 2000s, the built world will require a similar level of strategic support to lay the foundation for this industry’s digital transformation.
Go-to-Market Channels:
The built environment has developed, tested, and perfected go-to-market channels and supply chains over decades. New products must be designed to work in sync with these channels, and startups looking to succeed in this space should include a plan to leverage existing channels in their go-to-market strategy, not try to force new ones on the industry. This is particularly true in the world of construction.
All these factors lead to the inevitable conclusion: a successful investment strategy in this space needs a lot of patient capital and should include a plan to leverage proven industry channels.
Corporate Partnerships – Walking Carpets?
Established corporations in the built world are ideally suited to help drive innovation in this sector. However, corporate investment and innovation programs have traditionally been at odds with the venture capital world. The primary reasons for this lack of trust between VCs and corporate LPs are that corporations are naturally inclined to seek outsized rents for their investment, and are risk averse, leading to decision timelines that seem glacial to both VCs and entrepreneurs. Princess Leia’s statement “Can someone get this big walking carpet out of my way?” is what most VCs and entrepreneurs seem to think when they see a corporation on the cap table – an obstacle rather than a resource.
However, just as Wookies are an asset when fighting the Dark Side, corporations can be a startup’s friend when tackling market forces. Rights to corporations can be designed in a manner that accelerates the startup’s growth and valuation versus impeding it, while simultaneously protecting the corporation’s best interests. Most corporations are willing to participate in accelerating startup innovations but lack the understanding to negotiate effective investment terms that benefit both the strategic LPs and the startup. An experienced, trusted, and neutral third party is needed to help smooth the relationship between startups and corporations. A professionally managed “Innovation Exchange” can boost strategic and financial returns for all investors in the built world and cleantech.
Corporate Investment Conundrum
At present corporations that want to participate in the startup ecosystem have two options: go it alone by floating their own internal investment team (CVC) or be a limited partner investor (traditional LP) in a professionally managed VC fund. The internal CVC option also allows for a passive investor role in VC funds. However, neither model fully satisfies the corporation’s need for driving innovation in a strategically relevant manner and receiving a return on investment that justifies the existence of a CVC team.
Direct investing offers freedom of investment and a seat at the startup’s table but comes with operational costs (fully-staffed CVC teams generally cost between $1M -$5M per year in overhead alone) and limited visibility to emerging startups. Investing as an LP in a professionally managed fund brings financial returns and discipline but is fundamentally passive – little involvement in the investment decisions of VCs, and no meaningful engagement with portfolio companies. Neither model fully meets the corporation’s goals around investing for innovation – helping startups, energizing internal processes, or monetizing existing intellectual property.
Corporate Venture Capital’s Track Record of Success
CVC arms have become a core tenet of the broader corporate world's innovation strategy for decades and have proven their worth to their respective startup ecosystems. As the graphs depict below, CVC-backed startups have a significantly lower failure rate than startups backed by purely financially motivated investors over the past decade, while producing materially higher exit multiples (data provided by PitchBook).
The built world's corporate VC ecosystem remains in its infancy, with most AEC CVCs launching in just the past 5 or so years. However, as we’ve noted in previous posts the budding appetite for these early-stage corporate investment programs has become seemingly insatiable, with a new built-world CVC launching every other month as leading players begin to understand the necessity of staying ahead of the accelerating innovation curve amid this sector's digital transformation.
But do the nuances of this highly fragmented sector require a different model for success?
What does success look like?
Ideally, corporations and financial investors join forces to drive innovation in cleantech and the built world. There would be no inter-partner conflict when multiple corporations co-invest. There would be one or two go-to-market champions and innovation partners for the startups to ensure that their breakthrough science achieves spectacular market success. There would be a neutral arbiter of innovation exchange between corporations and startups and between VCs and corporate investors. Corporations would have a say in the investments and be in the driver’s seat as appropriate or needed even when investing in professionally managed funds, as active LPs.
Nymbl Ventures was founded with the core belief that the structural features of the built world and related cleantech investing can be leveraged in a win-win proposition with a new model that brings together corporations and financial investors. Our model has three attributes that substantially differentiate it from other VCs while bringing the same financial rigor and discipline to investing to accelerate innovation:
Consortium of corporate investors
Professionally managed innovation exchange platform
A proprietary hybrid investment model
This model offers financial investors the turbo charge returns that mission-aligned corporations can offer, and corporate investors a model that gives them the best of going-it-alone or being a passive LP. Furthermore, it reduces all investors’ beta by bringing a consortium approach to investing. This substantially de-risks investments while eliminating inter-channel conflict of traditional models.
While this model does not solve every pain point of a symbiotic VC and CVC relationship, we believe that its combination of financial and innovation returns will prove to be industry leading. There are nuanced technical investing details for which Nymbl Ventures offers acceptable solutions, some of which we will discuss in future posts.
As always, we welcome your thoughts and comments!
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