Corporate Venturing: The Infinite Relay Race
As I almost always do when reaching a meaningful milestone, I celebrated the announcement of TDK Ventures’ second fund back in April by reflecting and anticipating. I thought back on what we’ve experienced thus far at TDK Ventures, and with an eye toward what we hope to accomplish in the future, I looked ahead. Even after sharing my thoughts in this piece published in Forbes, I continued thinking about both the past and our future. As I had conversations with people from throughout the startup ecosystem, I realized that many of us have a lot of questions about how to best approach launching a CVC’s second fund. One of the things made clear by the many conversations I had is that I’m not alone in thinking there’s something slightly mysterious, and maybe a bit intimidating about second acts — and CVCs are no exception. In this article, and in the video we produced, which you’ll find a link to at the end, my hope is to share what I learned so that it may help others as they plan the launch of their own second fund.
The relay race
One of the most common questions about launching a second fund is when to start thinking about it. My belief is that you should be thinking about it before you’ve fully launched your first. I’ve considered a number of ways I could explain why I believe that. I could reference theories, or include a few charts or graphs to bring my points to life. I could interview a few of the many experts I know, who I’m sure would be more than happy to share their insights, like I did for Cleantech 1.0 vs 2.0. I wrote how starting a Corporate VC requires an Olympic approach, and I returned to an analogy around the Olympics, which were held this summer in the city that just happens to also be TDK’s global headquarters, Tokyo.
Specifically, I thought about relay races. Not just relay races, though: Infinite relay races. Watching the incredibly talented and dedicated athletes this summer inspired me to reflect. For 86 years, our mothership, TDK, has been fine-tuning its skill at anticipating what’s coming next and then sprinting accordingly to ensure that each runner is moving at the proper speed and that the passing of batons is synchronized to perfection. TDK is obviously in it for the long game, and I’m pleased to say that TDK Ventures is as well.
In this analogy, corporate venturing is the relay race. The first runner on the team is the first fund. She passes the baton to the second runner, who represents the CVC’s second fund. Finally, the second runner passes that baton to the third runner, who represents — you guessed it — the third fund. While we’re on the topic of funds, each fund — just like each runner — must be equally strong for the CVC to succeed as a whole. Ensuring each sprint is optimized for the perfect handoff underscores the importance of teamwork. In the same way that each runner in a relay race must deliver her very best, each fund needs to add as much value as possible, and complement/augment previous funds.
The transition: Don’t Drop the Baton
The second runner in a relay race, much like a CVC’s second fund, is not standing still when the baton is passed to her by the first runner as the first runner completes her leg of the relay. Watch closely and you’ll see that the second runner begins running well before the baton is passed. You should also take note of the delicate balance the second runner must strike in order to be as effective as possible. She needs to get a good start, but she cannot start too early. If she does, she’ll tire quickly and not do as well in her own sprint. And yet, thanks to endless hours of practice and an unshakable measure of dedication to the race, by the time the first and second runner are positioned to hand off the baton, the second runner is moving at almost the same speed as the first. As this article, and the video, will make clear, it’s nowhere near as easy as it looks.
The passing of the baton is one of the most critical moments of the relay race — and it symbolizes an equally critical point in the life of your CVC.
The transition from your first fund to the launch of your second needs to be well planned and carefully executed. What that meant for the team at TDK Ventures is that when we started our first fund, we knew we would be spending two years building our portfolio, and that at the end of those first two years, we would need to be ready for the next phase to begin. While watching the relay races last summer, I was struck by the precision that must guide the runners’ training. Exactly how long do they need to run? Where, precisely, on the track should the first runner be when the second runner begins running?
Those are the questions we asked ourselves. In order to execute an effective transition, at TDK Ventures we began preparing for the launch six months before the second fund actually launched. In other words, that’s when our second runner began running, with the singular goal of a smooth transition. After all, when the transition isn’t smooth, things get dropped. In the case of relay races, it’s the baton. In the case of CVCs, what gets dropped is the entrepreneurs.
Becoming (even) more like a financial VC
One of the most interesting and ultimately most rewarding parts of launching our second fund is that this is when we start to become more like a financial VC. We’re still being very careful and cautious, of course, but in the second fund we’re beginning to take greater calculated risks with the goal of realizing even greater rewards.
As I explained in this article about the unlearning that must occur to succeed in venture, investments made by corporations are governed by distribution law, while those made by a CVC must adhere to power law. The two systems are vastly different. In the context of thinking about a CVC’s second fund, the transition — the passing of the baton, if you will — presents an opportunity to push further into power law territory.
During your first fund, it’s important to be highly disciplined about your upsides and downsides. In the case of TDK Ventures, in spite of the Covid 19 pandemic, tumultuous world politics, and trade wars, all our first-fund investments have survived. Under the dictates of power law, that’s not normal. But since our mothership is a corporation that is governed by distribution law, our first fund’s early performance sends a signal that we’re disciplined in our approach to investing.
Investing in solutions
Another question I hear frequently concerns how the companies we’re looking at for our second fund differ from those that were part of our first round of investments. My answer is that our mission is still to identify new mega trends that fit into TDK’s long-term strategy, to learn as much as possible about those trends and then bring the knowledge back to TDK, which can then make an informed choice about whether or not to move into these strategic spaces. That’s what’s the same.
What’s slightly different is that, while most of our first-fund portfolio companies are grounded in science, for the second fund we plan to grow our scope to include fuller solutions. That expansion will require us to redouble our learning so that we develop expertise on what kinds of technology are needed to help bring those solutions to life. Investing in fuller solutions could come with greater risks, but those that succeed may deliver far greater rewards. This is why your second fund can be more open to higher risks/higher reward (also known as higher beta) investments than your very first fund.
To put our strategy of investing in fuller solutions into context, let’s consider humanoid robots. Today, in 2021, it makes no sense to develop a solution that revolves around such robots because they have yet to become anywhere near ubiquitous. But they will. It’s an emerging market, one that’s important for TDK to enter and contribute to. The market will create a huge demand for the batteries, actuators, sensors and other products made by TDK — each of which is a critical component of a robotics solution. In a decade or less, we believe robots will be ready to take jobs that are not safe for humans, and assist us to achieve more. Furthermore, we believe that the entrepreneurs on the front lines of robotics and the teams within TDK that work in related areas have a lot to learn from each other. That’s why there’s a robotics company in TDK Ventures’ current portfolio that we are very proud of, Agility Robotics, and why you’ll no doubt see more investments in robotics in the second fund and beyond.
The size of your fund doesn’t really matter, and a few other surprises
In this 21-minute video, which we produced to share what we learned throughout the process, I explain what I think are the six most important considerations for anyone preparing to launch a second fund.
Under each of the six considerations, I share specific learnings that I believe will help you. Many of the specific learnings revolve around timing — when you should ideally begin raising the fund, and determining the best time to launch. Be sure to prepare yourself to explain the concept of ‘reserve,’ the capital you allocate for follow-on investments in your portfolio companies. This is important because many people within a corporation are not going to understand why you’re trying to raise a second fund when you still have money in the first fund. When we started raising our second fund, TDK Ventures had only invested 40 percent of its first fund, and therefore had 60 percent left to invest. I guarantee you will need to explain this many times to your mothership.
As you’re raising your second fund it’s important to show how your portfolio companies align with people and teams within your company. You need to show people how the CVC fits in and already contributes to the mothership’s strategy. In the video, I also share detailed information about the deep dive we took into six strategic categories to show where our investments were, how we used strategic mapping to demonstrate the progress we’ve made, and how the second fund will accelerate and augment that progress.
I also provide examples of the open-ended questions that are important when engaging with stakeholders. Don’t assume you know what teams really want based on how they answered your questions six months ago. The world of innovation and venture moves at an astonishing speed. Another recommendation: Don’t rush. While you don’t want the raising and launch of your second fund to go on indefinitely, you don’t want to rush through it, either. Regardless of the size of your second fund, there’s a lot of money involved, and it’s important that your top management be able to clearly see that you’re taking the time to develop a sound strategy.
Speaking of the amount of money, here are two things I stress in the video that will probably surprise you. First, you won’t know the size of the fund until you’ve laid out your entire strategy. And second, the size of the fund is actually the least important consideration.
Finally, and perhaps most importantly, as you work toward the launch of your second fund, relentlessly align with your why. Why do you want to raise a second fund? That’s a complicated question with a perhaps even more complicated answer. But to get started give yourself permission to be inspiring. You’re not raising the second fund because you’re out of money. You’re raising it because you believe in the visions and missions of entrepreneurs you’re investing in to make the world a better place. It’s the opportunity to help that got you into venture to begin with, and the opportunity to help even more is why you’re in it for the next round in this ever-so-rewarding infinite relay race.
