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Mach49's Xiao Zhong on the current state of corporate venture capital
121 Plays2 years ago
The venture investing space has seen huge disruption in the past few years, as rising interest rates have triggered a major change in the availability of funding. This week, the hosts are joined by Xiao Zhong, a principal at Mach49 to talk about the big questions - is corporate venturing a useful tool for sustainable innovation? Where does it go wrong? And what does the changed policy landscape mean for CVC?
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Transcript
Introduction and Co-host Welcome
00:00:10
Speaker
Hello, and welcome to Innovation Matters, the sustainable innovation podcast brought to you by Lux Research. I'm Anthony Skiavo. I'm the senior director at Lux and I'm your host. I'm joined as ever by my two co-hosts, Mike Crashing the podcast home end.
Karthik's Excitement for Cricket
00:00:27
Speaker
This is the second time we're recording this introduction because Mike
00:00:31
Speaker
found a way to successfully disrupt the podcast after 20 minutes of successfully recording while just shooting the breeze the moment we actually start doing the actual podcast everything crashes so uh i'm not gonna ask you how you doing today i don't care kartik how are you
00:00:49
Speaker
Yeah, I'm doing all right. Yeah. Um, pretty excited. Uh, because the Netherlands are playing the cricket world cup. Wow. It's my first time hearing this incredible stuff. Yeah. I don't even know that the dot, um, like I spoke to a lot of my Dutch colleagues and friends here and they're like, does the Netherlands even have a cricket team? Like what is cricket? Those are the questions you get. So like a height advantage sport, like having really tall cricketers is that, is that good? It feels like we make it harder to like defend the sticks. You know what I mean?
00:01:18
Speaker
It's the stumps, the wicket. Yeah. And no, I don't think the hide is a big advantage.
Nobel Prize Week and Quantum Dots
00:01:25
Speaker
Come at me. That's not a big advantage, but, uh, yeah, I mean, they're, they're playing well against Pakistan who they shouldn't be playing well against. So, uh, exciting times for the Dutch. Dang. All right, Mike, tell me, tell me what you want to tell me. Carefully, carefully. I'll do my best.
00:01:47
Speaker
No, I was, I'm very excited. It's, I'm always excited for, for Nobel prize week. So that was, that was this week. That was big, but I was pretty York fashion week of nerds. Yeah. But I, the, the winner of the chemistry, Nobel prior, one of the winners, Lewis Bruce was actually somebody who was on my thesis committee. And I knew when I was at, when I was in graduate school, so I was very excited for that. And yeah, just, I think, you know, very,
00:02:17
Speaker
very deserving guy. He was a brilliant scientist, or he still is, of course, you know, when I knew him. And a really, you know, really, you know, kind and thoughtful person, but also just somebody who was so not about the bullshit, right? Like he, he did, he just wanted to, as far as I could ever tell on it, like, no, I'm super duper well, but all just, only ever wanted to like think deeply about scientific problems, understand them really clearly, and
00:02:47
Speaker
never got distracted by any of the hype or the politics or the ego or self-promotion or all that stuff. I always thought his work was deserving of a Nobel Prize. What was his work briefly? He's done a lot of interesting things, but what he got the Nobel Prize for was on quantum dots. He basically discovered the modern semiconductor quantum dots at Bell Labs with
00:03:17
Speaker
who was another one of the prize winners, and Paul Avosatos, who was probably kind of pissed off that he wasn't on the prize. And the third winner was Ekemov, who was a Russian site. He kind of discovered his same phenomenon independently. But this is where she worked on it.
00:03:36
Speaker
in computers. Yeah, it's your quantum. Yeah, your Q LED TVs or whatever it's all like. Yeah, I have an LG solar cells actually, probably a Q LED or whatever. Yeah. But it was Yeah, it always seemed like a good potential prize. And
00:03:53
Speaker
But I never saw his name on the short lists or betting odds or whatever the people would have for this. And I was like, wow, I guess he's just so not a self-promoter.
Upcoming Lux Research Events
00:04:03
Speaker
So that was kind of gratifying to see that that got recognized.
00:04:09
Speaker
Speaking of self-promotion, we, that is to say Lux Research, had an event this week in the Twin Cities. And first of all, we completely failed to promote it on this podcast. So I'm going to take a moment to let all listeners of this podcast know that we have another event coming up. We have multiple events coming up. We've got three more. Yes, three more. New York on the 24th.
00:04:33
Speaker
We are doing November. We're doing let's say October 24th in New York, November 7th in Amsterdam and December 5th in Tokyo. So if you're listening to this podcast, I'm going to be at all three of those events. You want to come out and have a good time. We're going to have some really great talks. We're going to have some great panels. We're going to have some great networking.
00:05:01
Speaker
at all three of these events, they're free to register, free to attend. You just have to be there. And so yeah, that is our, we are actually doing the thing that this podcast was intended to do, which is promote our events.
00:05:17
Speaker
What was your take on the Twin Cities event? How was it? What stood out to you? Did you have a good time? Did you eat any of the sort of questionable Midwestern local specialties?
Sustainability Event Reflection
00:05:34
Speaker
No, we actually went out to this French restaurant. It was like duck confit and stuff. So not necessarily what you expect going to Minnesota, but it was a
00:05:47
Speaker
There do be ducks in Minnesota. That is true. It was a good event. Yeah, we had about 50, 60 people there and a lot of good discussion. This is a collaboration with our Consumer Insights colleagues, Ujwal and his team that we had on the first episode of this podcast. So we talked a lot about how consumers feel and see about sustainability.
00:06:17
Speaker
And, you know, looking at sort of a part of it was a really interesting talk looking at
00:06:28
Speaker
that kind of perpetual question of how do you get consumers to actually be willing to pay for sustainability?
Consumer Willingness to Pay for Sustainability
00:06:38
Speaker
Because it's something that people look at consumer surveys and people always say they want stuff that's sustainable. And they even might say that they're willing to pay more for it, but when it comes down to it, in fact, they don't.
00:06:59
Speaker
which was kind of showing how you really need to, one, you really need to be able to show consumers that there's some kind of social capital or other benefit to them that comes along with the sustainability, right? It's not just for the sustainability factor, but you see some benefits, like, you know, part of the benefit of driving an electric car, right, is the sustainability, but it also, you don't have to stop at the gas stations. This is a convenience factor to
00:07:29
Speaker
to having it as well. So triggers like that sort of, you know, adaptive environment, more engagement, future promise, these type of kind of triggers around like transparency, authenticity, and things like that are key to getting consumers to really buy into sustainable products. It's not kind of enough to just sort of say it's sustainable.
00:07:56
Speaker
And then we talked, especially in the afternoon, about one of the other things that came out of the consumer insights work is consumers are looking at not just sustainability, but resiliency or sort of increasingly associating sustainability with resilience, with this is coming out of all of the experiences we've had with
00:08:22
Speaker
disruptions from COVID and all these other things. New York being underwater. New York being underwater last week. That was a big one as well. We talked in the afternoon a lot about resiliency and how things like flexible manufacturing or business model innovation can also be ways to help deliver on that.
00:08:51
Speaker
So yeah, so a lot of interesting discussions with some of our clients and contacts and things there around all of that and how to put some of those ideas into practice. But it's good. It's always just, you know, since we've been doing these live events, it's been really
00:09:12
Speaker
Great to see after a couple of years of not having a lot of in-person stuff happening, how, I think, eager people are to get out there and meet folks in person and network and all of that. So yeah, the networking and the discussion and just the vibe in the room has been really good for a lot of these forums. And I'm sure that's going to be true for the others too.
00:09:36
Speaker
Yeah, I'm definitely looking forward to the others, especially getting back to Amsterdam, a place I haven't been in many years now. I hear Amsterdam in November is beautiful. I'm really excited for that.
00:09:49
Speaker
Rainy, cold, windy, the usual stuff. The first time I visited Amsterdam, my first Europe trip for Lux, I had a pair of sneakers. I think I maybe told the story last time on the podcast. I had a pair of sneakers that got so soaked between London and Amsterdam that at the end of the trip, I just threw them out. I had them in a plastic bag, a plastic garbage bag in my bag throughout the whole trip because I just couldn't get them to dry out. I would take them out during the day or in the hotel room.
00:10:18
Speaker
They just never dried. And like by the end of the week, they just sort of like a chemical reaction to take a place and they would no longer fit for human wearing.
Bolt Threads SPAC Deal Discussion
00:10:28
Speaker
But we do have some news, some real news this week. The announcement of bolt threads entering a definitive business combination agreement with Golden Arrow merger corporation. That is a SPAC deal.
00:10:44
Speaker
Yes, a SPAC deal in the year of our Lord 2023. It is hard to imagine, but it is true. The deal, just to get some details out of the way, values bolt threads at $250 million. We're going to have pre-money valuation, I believe. We're going to come back to that. Expects $35 million in total financing. We're going to come back to that.
00:11:09
Speaker
So, Bolt Threads is an interesting company. It's a company that we've been covering for a very long time. We've been writing about Bolt Threads at Lux since I think at least 2016, basically since they were founded. They are a spider silk company, right?
00:11:23
Speaker
started in spider silk, but they've had a very sort of tortured sort of journey to this point. They partnered with Patagonia way back in the day to produce some spider silk clothing that never really, I don't think anything ever actually came to that. They launched their first product. It was a spider silk tie in 2017 or 2016. They made 50 of them.
00:11:42
Speaker
I didn't somebody actually wear one of them at a Lux, at a Lux executive summit at some point. I think we talked about wearing one of them, but I don't think we actually I don't think we have enough clout to get
00:11:58
Speaker
They made an acquisition. They raised a lot of money over the years. They raised a total of $350 million or so, which puts their $250 million pre-money valuation a little bit of a yikes. I would describe it as a yikes.
00:12:13
Speaker
But they, I think pretty soon after the spider silk tie, they actually acquired this like weird millennial, they acquired best made goods, which is like this like millennial store online retailer that sold like axes and like heritage, like decor, and like extremely overpriced Chachkies for millennials.
00:12:40
Speaker
really unclear to me as to what the deal was with that, but they acquired that for some years before spinning it out. They pivoted to Mycelium. They did Milo. That was their Mycelium brand. I think they licensed that technology from, possibly from Ecovative or some other Mycelium company.
00:13:01
Speaker
that basically seems to have failed. They put a bunch of Milo products out in the market, they did a bunch of test products, and then it was announced fairly recently that the Milo products were all being like, all those product lines were ending, they were shutting down production, they weren't gonna scale that any further. And they have spider cell proteins, I believe, in cosmetics. That's their beauty and personal care is the only, I think, thing that they're really,
00:13:32
Speaker
Actually selling so I'm super curious to see their their prospectus on this because obviously, you know An IPO you have a much higher level of disclosure that's necessary, but you still have to disclose some stuff for us back So you are gonna we are gonna get some level of financial disclosure from them But
00:13:52
Speaker
I don't know. The end of the zero rate interest rate era is really coming along, I think, pretty swimmingly here. Mike, what do you think about this? To me, there's a couple of interesting things, but what stood out to you about this deal?
00:14:13
Speaker
Well, I think it is interesting to see SPAC activity in 2023, right? That was something we associated with the whole kind of meme stock boom and the zero interest era. But I think what we're seeing here is it's kind of a zombie SPAC, right? Because the way these things work is the SPAC raises a bunch of money in the IPO, they try to go out and acquire a company.
00:14:38
Speaker
If they're not able to acquire a company within, I think it's usually two years, then they basically just have to give all the money back to the shareholders with interest and then fold up shop. And then, you know, the SPAC sponsor, the person who started it up is out all the time and money that they spent on it and they get nothing. So they don't want to do that.
00:15:00
Speaker
And so that's why I think, you know, we also saw somewhat unusual SPAC with Andretti acquisition Corp as in the, the, the driver Michael Andretti. Um, and, uh, acquiring the celebrity SPAC deal, the celebrity SPAC deals. Really incredible stuff. I haven't crawled over it yet. Um, they announced plans to acquire Zapata, which was a formerly quantum computing now sort of rebranded as generative AI company.
00:15:29
Speaker
Those two things have a lot of overlap, so it's easy to make that jump there. I looked into this one with bolt threads. The Golden Arrow merger corporation, I think, is what it's called. They actually already came up on their two-year deadline, and they got their shareholders to give them an extension.
00:15:55
Speaker
But associated with that extension, the shareholders had the option to redeem their shares, and like 92% of them did. So of the $250 million that Golden Arrow raised in their IPO, they've already had to give back to the shareholders,
Challenges of SPAC Deals
00:16:10
Speaker
all but about $20 million of that. So they're really kind of hanging on by their fingernails here and trying to do a deal, which is why I think they're
00:16:22
Speaker
they're looking to sign one with bolt threads, which is, as you sort of outlined there, not otherwise a super attractive looking target. Yeah, ultimately, I mean, this to me,
00:16:39
Speaker
really kind of throws the utility of private market, like the private innovation market into question. Like this is one of those companies where I feel like if you had startups who had raised over a certain amount of money and you required them to do
00:16:57
Speaker
some sort of quasi-public type of disclosure, I feel like we just never would have gotten to this place. The reality of a company who could continue to raise money, not just
00:17:16
Speaker
You know, I'd describe the kind of tortured path that they went through, but they raised 120 million or $150 million in 2022, like early 2022. So right at the end of right before the interest rates started rising.
00:17:32
Speaker
I just feel like if you had been making disclosures about your business, like saying, yeah, we have no revenue or we have this very marginal revenue. We have all this weird financial engineering with this best made stuff. I just feel like we wouldn't have gotten to this point of spending $350 million on something that doesn't really work.
00:17:53
Speaker
you know, we need to spend money on things that aren't going to work as part of our overall innovation process. But this is not the kind of laser focused
00:18:05
Speaker
risk oriented vehicle, if you wanted to make a bet on spider silk being the future of textiles or consumer products or whatever, this is a pretty bad way to do that. And, you know, just because of the the flexibility, I mean, you talk about startups pivoting and that being a good thing, but I really don't think that's good in the
00:18:29
Speaker
In the context of actually important technologies that need to be commercialized, you want the technologies to either work or not work as quickly as possible. And the sort of half-life of a company like Bolt Threads is not actually, I think, a beneficial thing for the innovation ecosystem. I don't know.
00:18:51
Speaker
Yeah, you know, it was a reasonable probably like in the early rounds, right? It's the early financing rounds that they did. It's a reasonable thing to try to invest in as a novel, potentially more sustainable material. But
00:19:08
Speaker
once that hasn't worked out and you're trying to do these sort of increasingly exotic things to keep the company alive, I'm not sure that, even apart from the fact that obviously it didn't work out very well for the whatever it was series E investors who just invested like 12 or 18 months ago at like a nearly $900 million valuation. You would rather see some of that money going into
00:19:38
Speaker
uh, some more interesting new ideas as opposed to trying to kind of salvage this one. That's, that's like you outlined kind of been flailing around for a number of years by that point. Yeah. I think going public also has its consequences right now. You've got to do stuff and you've got to get them done in a timely, timely fashion. Otherwise, uh, you know, you risk, uh, running out of cash and.
00:20:04
Speaker
We saw Helion do this. I know other companies in the nuclear space like Oklo go public. And with nuclear, it's obviously difficult because public scrutiny, you need to get things done on time and you always have overruns in nuclear. The fusion is a completely different story. And I think we were discussing this before the podcast recording as well, that they don't have any technology differentiators per se. So what are they trying to achieve with this PAG deal is not something I completely understand. And I think this could backfire on them big time.
00:20:34
Speaker
Yeah, I think you're right. I mean, there's two ways. One is this exposes you to public litigation, right? Like some amount of people are going to buy this stock, presumably at the IPO. I mean, maybe no one, maybe just no one will, but presumably some amount of people will.
00:20:52
Speaker
And probably the stock is going to go down to zero because this company is presumably going to go out of business. I don't think they're profitable. And I don't think they're in any position to achieve profitability anytime soon. And if the stock price craters after they go and do this deal, like almost every other SPAC, they're not going to be able to raise any money. They're going to basically not have any opportunity to raise any more money.
00:21:17
Speaker
They're going to last ditch financing, right? And if this doesn't work out, by taking that last ditch financing and putting it in the public sphere, you're exposing yourself to a lot of liability. And again, you're exposing people to damage, right? Like some person who's not that sophisticated might
00:21:33
Speaker
buy this, or you could end up as a meme stock. And then there's a lot of opportunity for actual economic harm here as a result of this. And I understand maybe some of those early investors want to get out, but that's not really, to me, A, a useful thing, and B, doesn't outweigh the costs of what could potentially go wrong here. And I want to be clear. We're speculating here. So again, yeah.
00:22:03
Speaker
Yeah, and the lawyers don't at me. Yeah, I mean, it's a little bit of a, you know, kind of last ditch effort on on both sides here, right? Both with their struggles probably isn't doesn't have other good options for fundraising. And, you know, like I said, this, this back, I think they have until December 19, even with their extension to, to close a deal. And if they don't, you know, the sponsors get get nothing out of it. So
00:22:30
Speaker
They're highly motivated to do a deal if it's not necessarily a great one. And I think we might see some more of these. I was looking it up. There are currently, how many SPACs would you guess are out there? That since you played a guessing game with me last week, how many SPACs are out there right now that have not yet announced a pending merger? 250 maybe. If I'm guessing, I would say 900.
00:23:00
Speaker
I think it's a little closer. According to stock market MBA, which may or may not be. There are currently 666 SPACs that have not yet announced, depending. That's cursed, right? I'm reading into this. Yeah, spooky number. And you know, a lot of there, I'm just scrolling through the list. There's a lot of IPO, as you would expect, right? There's a lot of IPO dates in 2011 into early 2022.
00:23:29
Speaker
So these are kind of all companies that are going to be coming up on their expiration. So we're probably going to see a few more sort of desperation deals like this one coming along over the next six months or so. Public markets and startups don't mix that well. They really have to be in a very, very
00:23:51
Speaker
controlled and I'm actually pro a public market for startups, I think in general, but it has to be very, very controlled and very, very structured. Just dumping these guys onto the NASDAQ is not a solution for really any problem as far as I'm concerned.
00:24:19
Speaker
So one of the things that this podcast is really about is the overall effectiveness of the innovation ecosystem. We have this big challenge to solve, whether it's sustainability, whether it's the energy transition, or even just the overall workings of the economy. And we put a lot of responsibility on
00:24:41
Speaker
this group of actors, right? Academics, corporates, VCs, startups to take these technologies from early stage approaches to full scale businesses.
00:24:54
Speaker
And one of the big questions is, does that work? Is that a good system? And if that system isn't working or isn't working well enough, how can it be improved? So today we have a really fantastic guest here to talk about all these issues. I'm delighted to be joined by Zhao Zhang. Zhang, I just immediately fucked up your name. No, that's like, most of everybody's close enough, right? So it's a, yeah, it's a, yeah, anyway.
00:25:21
Speaker
So we're joined here by Zhao Zhang. I'm just, you know, we're going to cut out the part of yours. Like you still don't know my name. That's why it's so embarrassing. I was like thinking about this. I was like, I don't need to clarify. I know exactly what I, I know Zhao because normally I clarify before a person comes to the podcast. But yes, Zhao is a, he is a principal at Mach 49. Um, and he's also a former colleague of ours, a former Luxor, if you will. So Zhao, we're delighted to have you on the podcast. How are you doing today?
00:25:51
Speaker
Yeah, doing good. So, you know, thanks for the invite. This is something that I really care about a lot. And, you know, you guys know that, right? So chat about those and then, you know, kind of spread the word.
00:26:04
Speaker
So maybe we could start with your work at Mach 49. What do you do there? And what is Mach 49 for our listeners who may not be familiar? Yeah, sounds good. So Mach 49 has a very interesting name. I think it's the Escape Speed or something like that, which means, as the name suggests, we're trying to help corporates accelerate their speed for growth.
00:26:30
Speaker
And that means two types of growth. There's the organic growth. There's inorganic growth. So that's why we have two teams, the venture building team, which is responsible for helping clients to achieve growth organically by building ventures internally. And then later, you spin them out. Every case, like I said before, is a little bit specific. There's also the other side, which is inorganic growth, which is our team here, the venture investing team. So we help clients approach
00:26:59
Speaker
you know, inorganic growth mechanisms such as CVC and you know, mergers and acquisitions of venture-backed startup companies. So that's what Mark Fortinet does in a nutshell. Our clients are cross-sector. The clients were sector agnostic. It's more about the methodology and capability building for our clients rather than a specific sector.
00:27:18
Speaker
And, you know, we have offices, I think, definitely in the US headquarters in the Bay Area. And then I think we have a presence in Europe and Asia as well. So what else? What do I do here, right? So first of all, on the venture investing team. What do you do here?
00:27:36
Speaker
I'm here to talk, but what I do at Mach 49, right? So, you know, we, on the Mentoring Investing team, we primarily help corporations, you know, that either don't have a CVC function yet,
00:27:51
Speaker
Then if that's the case, we help them build a CVC function, the investment charter, and assemble the team. And then after that, we'll do the investing with them, not really for them. This is the critical difference here. We're trying to build a capability by A, let me help you build a team. Then once you have a team, have a fund, let's actually do investing together. We're another partner in residence for your audience.
00:28:19
Speaker
That's that, right? So, and also, you know, started recently, we've been seeing lots of, you know, interesting acquisition opportunities of, you know, VC banks from companies, right? So, you think we can talk about the reasons behind that, you know, the economy, make up you're looking for and exit. So, and it's, we're actually seeing demand from our clients that, hey, you guys are doing CVC design and also partner in residence on our CVC team.
00:28:45
Speaker
There was some support for acquisition, right? One of the clients, their mothership CEO actually said, you know what, they talked to the CBC head, please find opportunities for us to do acquisitions, which is not supposed to be what a CBC team does, right? Yeah.
00:29:06
Speaker
That's interesting, right? Because there's a couple of questions I want to ask about that. First is like, you've already kind of touched on something which I feel like happens a lot, which is a company either forms a CBC team and then asks them to do a lot of non-CVC stuff. And sometimes this is good. Like sometimes it works. There's some venture teams I work with who have like a big R&D capability.
00:29:31
Speaker
sometimes that's really great. The CVC team is really able to accelerate startups, and they have a lot of value that they bring. And then sometimes the CVC function is being tasked to do with all this other stuff, and it's not good. Or alternatively, you have someone in R&D, and they're like, yeah, he's the CVC guy.
00:29:54
Speaker
Does the CVC structure work? Is it one of those things that works in theory but in practice has all these problems?
Corporate Venture Capital Effectiveness
00:30:02
Speaker
How do you think about how many of your clients do you go to and you're like, yeah, this is structured well? Or is it? Yeah.
00:30:10
Speaker
Yeah, so, you know, points taken, right? I feel like, so there are several separate questions you're asking. There's one, does the CDC structure work, right? Our hypothesis is, and it's been, you know, proved by a few cases, yeah, it's working.
00:30:29
Speaker
And then, but, there's always a but, right? The reason for our venture investing team to exist here is we see many opportunities to improve for many CBCs. And that's one. And then two, we see many opportunities for corporates that don't have CBC, should actually have a CBC.
00:30:49
Speaker
So those are the two. So like, there's CBC, it's kind of untapped power, and there are people playing that. But then we like to say, hey, for people that are playing, some of them are doing a great job, and others are, they need help. That's number one. Number two here, you know, you see a corporation that it's, you know, you see there any report, oh, this year we did the, you know, four
00:31:14
Speaker
minority investments, you know, and then you don't, you see them don't have a CBC team, you kind of know, okay, there's an argument, there's, I can go much deeper, but there's always a need for the almost always their need for that. Right. So what would you say are the biggest pitfalls that you, you know, things that are good that are wrong or need to be fixed with with CBC groups you run into?
00:31:34
Speaker
Yeah, so I love our clients, right? But then there's definitely suggestions, right? So number one, because I won't call that a pitfall, but it's a misalignment. It's between the mothership and also the CBC team, right? So we all know many CBC teams, right? So they're great investors. So let me give you one specific example about that misalignment.
00:32:03
Speaker
which is, you know, every CBC has a Monday where we call it sometimes called a North Star, right? Are you a financial targeted CBC or are you a strategic? These are actually not, you know, exclusive, right? So then it's not all the mothership people understand this point, right? And then many, uh,
00:32:23
Speaker
You know cbc actually it's a spectrum of different cbc structures from you know all the way from iHawk investment from off the balance sheet all the way to independent and then you have a single LP from the mothership or sometimes multiple LPs and that's kind of like more like a VC but
00:32:39
Speaker
for those that are more sort of still kind of under the corporate side, right? So people would actually like to think, you know, you've got to be a strategic focus, the CBC, which is not wrong, right? So you should actually try to find, you know, mothership alignments between your portfolio companies and some of the business units within the mothership. That's all great, right? But the thing here is because of that, many people, and sometimes, frankly, we see those from investment committee members who are actually making decisions,
00:33:09
Speaker
actually mistakenly think the strategic alignment should be applied to individual deal assessment. And that's not the right mentality. Let me explain what I mean. So let's say you're making four investments every year. And then if you actually only look for strategic alignment and use that as a sort of a deciding factor, you're going to miss many, many, many good deals that can give you financial returns.
00:33:35
Speaker
The right way of thinking about this, even for a strategic CVC fund, you should always be looking for financial performance on the portfolio level. The point here is don't misunderstand the definition of a strategic alignment. I think that's oftentimes miscommunicated.
00:33:59
Speaker
You don't want to take too narrow a view of it. Part of the point is you want to be looking at some things that are a little bit outside your comfort zone. The client that I work with, really interesting investment, could be an investment.
00:34:14
Speaker
could the team, the CBC team feel strongly this is gonna be a good financial return, right? But the mothership alignment is not quite there yet. And then decisions, no, right? So it's many, many things like that. So the misalignment, I think is the one of the biggest, the challenges there.
00:34:30
Speaker
So I'm curious that you said, you know, like you should prioritize or these companies maybe fail to adequately prioritize the financial returns because that kind of cuts against what a lot of CVCs say about them. And frankly, also just the reality, which is that, you know, CVCs, if you're a CVC for a 10 billion dollar business, right, it's hard to make a big dent in an improvement in the financials overall. So what's the
00:34:59
Speaker
What's the reason for that? Is it just because everyone says they don't care about balance sheet, but actually, if your CBC loses money, you just get cut? Or what happens when you fail to adequately prioritize that performance? Challenge number two. Challenge number two here is the financial. So oftentimes, every CBC team has a investment committee. Oftentimes, you have people that
00:35:25
Speaker
not atypical. As a CBC team, you have a CFO, for example. This person, it's managing the P&L of, let's say, a $10 billion business. And then whereas you have a 25, maybe 25 is too small, $15 million fund as a CBC, they don't really care that much. They're like, hey, you're not really moving the needle. You're just a small pie. The pie is too small for me to put it in time. By the way, that's another challenge, the commitment from the investment community member.
00:35:55
Speaker
And then in terms of what is CBC thinking about financial, right? So my thinking, this is just me, is that you should not be calling yourself as a CBC if you're not pursuing financial goals.
00:36:11
Speaker
right? So that's the very definition of venture capital, you have to have a return, you know, the return, it doesn't have to be as aggressive as a financial VC. But then you should definitely sort of, to me, a CBC, it's a blend between, you know, mothership alignment, or whatever I call it, mothership synergy, and also financial return, right? It's not that, you know, you know, so what happens if I don't return, right? So you can think, you know,
00:36:39
Speaker
as a corporation, they gave you $50 million for you to invest, assuming this is an in-house CBC. There's always other alternative asset classes they can do instead of just putting in CBC. So the point here is, number one, you've got to generate some return. Number two, you've got to generate some ownership alignment. Those two are, both of them are needed. If you fail to miss one, you can argue you're not really functioning effectively.
00:37:06
Speaker
So how have you seen the sort of the, I mean, I guess both on the financial and the alignment, you know, sort of mission oriented side, seeing this evolve over the last couple of years, right? Because obviously, you know, interest rates have gone up and SCB happened and all this other stuff, the financing landscape and the venture world has shifted a lot. And, you know, we've also seen companies shifting a lot more into investments that are
00:37:32
Speaker
sustainability related that might be policy driven, you know, looking at an impact to policies like the IRA and things like that. And in the US, that's, I think, for a lot of our clients, and I'm sure for years to seeing some some shifts in focus to like, we need to, you know, kind of focus on on this sort of sustainable innovation, as opposed to maybe more of the digital heavy or whatever other things that they were doing before.
00:37:56
Speaker
Yeah, so I feel like I don't have enough data points to really draw a conclusion that's statistically significant. But what I'm seeing here is it really depends on the industry and also the geography as well. So one client that I used to work with recently
00:38:17
Speaker
So we're trying to refine their CBC strategy, and I'm still talking about raising the next fund. And suddenly, because of the economy, their mothership, their core business, it's heavily impacted. So it's on the balance sheet. It's like, well, everything's going down. We got to cut our budgets. What does that mean?
00:38:40
Speaker
we actually have done some research in that space because of that reason. What are others doing? What are others doing here? It also depends. Within the vertical, it really depends. Some of the CBC teams were shut down and some of them were actually converted into some other type of innovation vehicle such as an accelerator, for example. Accelerator
00:39:01
Speaker
the capital requirement, it's much less intense. And you get more hands-on to really help with the stop teams. Whereas, at least in the case I'm talking about here, it was a CBC team, and the thought was actually, it's a huge amount of money. So that's one type of decision direction I'm actually seeing. The other type here is, although I'm actually seeing one other example.
00:39:28
Speaker
you know, similar situation, mothership is heavily impacted by the economy, but then they actually stepped up by getting another fund in just to focus on sustainability. So it's really hard to really tell from an outsider's perspective about what's really going on within the corporation. But then, so these are observations, right? But then my perspective here is I don't really see
00:39:50
Speaker
at least from the data points that I have, I don't really see the economy as a strong impact in terms of the investment sectors. That doesn't change. If anything changes, there's more focus on sustainability and ESG related companies, very much so.
00:40:13
Speaker
Can you talk about that a little more? Because you kind of said earlier that you've got this situation where companies are looking for exits or acquisitions. Is that a specific funding has just dried up thing? It's not really related to the macro economy or what's going on there? What's driving these acquisitions?
00:40:31
Speaker
Yeah. One, two, three. I know three examples, right? So three specific examples, which is why I'm personally super interested in advising our clients for a venture acquisition, right? So primarily the reason I'm seeing, I interviewed, kind of interviewed, I chatted with the three CEOs, like, what's going on? How can I help, right? That type of thing. I do that all the time. Like, hey, yeah, it's real hard to, it's the funding, right? So people are kind of more
00:41:01
Speaker
I guess, two of those three companies that I talked to, well, first of all, one of them is a Series A company, the other one is a Series D company, and the other one is a Series B company, right? So it's kind of wow. Oh, three data points across the spectrum. Second, I think two of those three companies that I talked to don't have a CDC on their team, I mean, on their investment, right, committee.
00:41:29
Speaker
The three data points are not enough to form a conclusion, but here are some thinkings. Number one, financial VCs are backing out at this point in the sectors that I think all of us are familiar with. It's not like Facebook or other type of social media sector. It's like the hardcore industry sectors. It's becoming harder to raise money. That point is actually true. I know many other
00:41:55
Speaker
founders are telling me the same. So that's number one. And number two here is when you are running out of runway as a company, no matter what size you are, you either pivot to a model that's more economical, which is never a good situation. You'll pivot when you need to, when data suggests so. But then when you pivot because of the funding dried up, it's not a good situation. You're kind of forcing yourself out.
00:42:23
Speaker
Or you should actually cut people, which is for the two companies that I talked to, it's actually impossible because of the specifics. And then all of the three companies are good companies. I know them really well, right? So now there's a situation, I feel very sad, right? We're looking at three companies that are doing really well.
Policy Impact on Venture Capital
00:42:44
Speaker
doing really well in terms of creating value. I'm not saying they are like, hey, they should go IPO. They should go, you know, that's not, but there's value in each of the companies. What's going to happen if nobody wants to buy them? They're going to die, right? So, but from the other side, you know, in terms of value creation, you've got a lot of companies that couldn't meet that value. And then now I'm telling you, Hey, you should buy them. Now it's a cheap deal, right? So that's another reason, you know, it's, it's sad, but it's an opportunity.
00:43:16
Speaker
Okay, that's really interesting. I want to pivot a little bit. One of the other big things that's been coming up a lot in our conversations with clients currently is big picture policy stuff. We've already talked about the interest rates and the funding.
00:43:37
Speaker
in a lot of ways that's a policy, sort of macroeconomic policy question. But there's also a lot more specific policy support for different technologies, whether that's carbon capture or hydrogen, you name it. How much is that sort of intersected with the world of venture capital? Yeah, too much, too much. Too much.
00:43:59
Speaker
All right, tell me. It's limited to a few specific sectors, specifically, let's say, the battery sector. I'm not a policy person, but what I do know here is there's lots of battery star companies really piled up for funding. What I just told you about the three companies, that situation, none of the companies, the three companies in the battery space. On the other side,
00:44:26
Speaker
I talked to a investment director from a CBC team recently. I said, hey, I know a bunch of battery companies that are looking for funding. That's true, right? No, no, I won't touch them. Why don't you want to touch them? Because their valuation, it's incredible. So basically, one thing I personally don't like about the VC space is there seems to be
00:44:51
Speaker
this bubble you know and you know when everybody thinks about where policy is in favor of you know a certain thing that certain thing will actually generate companies and then the companies that are generated from that thing will actually have this valuation that's
00:45:07
Speaker
you know, it's a good evaluation, but then I'm sure not so small portion of companies that are generated from that, you know, thing, right? It's actually overvalued, right? But then I feel like investors know this, but then they still want to jump in because it's a return game. It's, you know, you want to, you want to, yeah, like, you know,
00:45:29
Speaker
Let's say I'm a city master. So I want to get out before the bubble bursts. I know the bubble, I still want to do it. Why? Because I can still generate return before the bubble bursts, which is really not good for the ecosystem. So we've got companies that are either it's overvalued, which means no matter your unicorn, it doesn't really matter. Just one single day when the bubble bursts, you're going to die.
00:45:56
Speaker
It's not really good for the economy. It's a waste of energy and time. So in my personal opinion, it doesn't represent Mach 49, just me. Yeah.
00:46:07
Speaker
Yeah, quickly, I just wanted to ask you a question, Zhao. You work with all these companies, you also partner when you're going for these VC opportunities. How has greenwashing or the possible backlash from greenwashing or these claims of greenwashing affect companies when they go towards VC, even if that's the right valuation, the right time to invest in something? Has that affected companies and made them back out of a deal?
00:46:37
Speaker
Absolutely not. Greenwashing. I've never seen any company or any CBC worried about that. To me, again, maybe my data points are limited, but I don't really see that as a strong impact. In fact, the
00:47:00
Speaker
the passion on sustainability trumps over everything. So it's all about that. Sometimes I think it's too much, but I don't think I see a direct impact there. All right. So we've touched on a lot of different things. I want to ask you a little bit
00:47:22
Speaker
Again, kind of getting back to the sort of macro level, right? This whole ecosystem, we've put a lot of faith into it to be able to solve these challenges, right?
00:47:36
Speaker
Is it good enough? Is it working? What would you change? You know, just stepping outside of your role at Mach 49 and you know, we talked a little bit about CVC, how that's got advantages and challenges, but you know, whether it's academics or startups being formed or, you know, maybe the government funding, you know, is the system working well enough and how could it work better overall?
00:47:58
Speaker
Yeah, I love this question. So I'm actually now have a question called the magic wand. If you can do a magic wand, what would you do? What I would do here is to make people don't think about themselves. Let me explain. Right. So it's, you know, everybody essentially is in a people business, no matter you're like making batteries or you're actually doing consulting or you're doing investing.
00:48:22
Speaker
So the fundamental issue here for the subsector of the micro ecosystem we're working with, large corporations, is people. So we talk about all the misalignments. We talk about some other factors like compensation, all the decision making power, et cetera. It all comes down to people. So we've seen good examples of CVC doing really well. TDK Ventures is one example. So we can talk more about that.
00:48:52
Speaker
reason for that fundamental reason is the the mothership support right the it's actually you can actually zero in to talk about this you know you can say something like hi these three people from this corporation are really so they're in decision making roles they're like maybe the ceo and cxos they are you know they want to take a risk
00:49:13
Speaker
And then every CEO has a tenure. They've been there for a certain amount of time. Oftentimes, they make a decision. They do an initiative. They actually double down in a CDC. They won't be able to see the return before they retire. But that's actually the problem. But some of them are still like, you know what? I want to leave a legacy. I think this is going to work. We're going to do that. We need more people changing their mind toward this direction. And it's not happening.
00:49:40
Speaker
Right. So it's not, it's really hard when you're actually working with a corporation, let's say do a CDC and then your mothership, the key decision-making power, a bunch of people are not thinking this way. It's frustrating. So it's the people, the people have to change, the people have to be more risk-taking and leading towards innovation, which means risk, but it's inevitable.
Conclusion and Acknowledgments
00:50:08
Speaker
All right, Zhao, it remains only for us to thank you for coming on and sharing your insights with us. It was really great. We're going to have you back, I'm sure, on the podcast soon enough. But yeah, everyone check out Zhao and everyone check out Mach 49. They do some really good work in this area.
00:50:28
Speaker
Innovation Matters is a production of Lux Research, the leading sustainable innovation research and advisory firm. You can follow this podcast on Apple Music, Spotify, or wherever you get your podcasts. If you want more, check out www.luxresearchinc.com slash blog for all the latest news, opinions, and articles.