Thread by @ryan_caldbeck

1/ A Google search would have you believe that every big CPG company has a sound venture strategy. But the CEOs and execs of these companies would tell you something different.

Or at least that is what they are telling me….

2/ Everyone is trying to play emerging consumer. I’m also on record saying that I can see the future of Corporate Venture Capital (CVC) given I still own a magic ball from @Target.

In broad strokes, I’ve seen a few approaches. None seem to be working.

https://twitter.com/ryan_caldbeck/status/1075923640867348480

3/ Here are the two most typical: (A) the first is a venture/incubator/foundry that is 98.5% marketing and 1.5% action - the word "partnership" is used a lot (B) the second is a true CVC with [$X00M] allocated

4/ Let’s touch on the problems with each and eventually I’ll offer up a different kind of solution.

5/ Option (A) The Marketing Play: This looks like the team buying very fancy office space and perhaps investing in/incubating 2-4 deals a year. If goal is to get some PR and 10 likes on twitter, this is sound. If the goal is to drive real innovation internally, this is a joke.

6/ Please also don’t do a yearly trip to Silicon Valley, with a nice dinner at @RWSandHill, and say that you’re really innovating. All those trips end the same way. Swag, fun memories and everyone back in the cold office building in Minneapolis/Atlanta/NY/Cincinnati the next day.

7/ These teams are flat out not empowered. They don’t have real investing budgets -they are constrained from above.

How can you drive innovation at the parent company by making a few small investments each year?

8/ Option (B) The CVC: I’ve covered in the past why this doesn’t usually work. The teams usually don’t have venture backgrounds. The implied (or actual) ROFO leads to adverse selection.

9/ They are also completely lost strategically and internally at the parent. Are they investing to make money or for strategic insights? Turns out those goals are not the same and are often in conflict.

10/ Typically CVC, particularly in CPG, is focused on “strategic alignment” for the driver behind where they invest, not financial return.

That is a mistake. And gets messy real quick.

11/ The 3 yr strategy for big CPG changes roughly every 6 months. It’s because big CPG is flopping around like a fish.

The things the CVC invests into in May 2019 become outdated relative to strategy 12 months later. But they are a part of the portfolio for another 5 yrs.

12/ Also- the Big CPG co. is atrocious at seeing the future.

Let me give some examples:

@Chobani
@redbull
@HaloTopCreamery
@KindBar
@native_cos
@DollarShaveClub / @Harrys
@RXBAR
@mydrunkelephant

13/ All of those captured meaningful share from large stale incumbents. None of that disruption was on the long-term strategic roadmap for the Big CPG for literally YEARS after the companies started.

14/ If you think Yoplait was looking at greek yogurt in a meaningful way in the first 2 yrs of Chobani’s existence you’re wrong.

15/ If CVC is investing based on what is strategically aligned with their Big CPG mother? Well you’ll be swinging around aimlessly and at best be investing into yogurt companies that license the @DanielTigertv . But careful, you also aren’t aloud to cannibalize core products.

16/ An alternative that is getting VERY little press is large CPG/retailers investing into external funds focused on consumer (as an LP). Almost every retailer, and big CPG, you can think of is either doing it or talking about doing it.

All done outside of the eye of the press.

17/ Think of it as a shotgun approach, while CVC is the rifle.

Rifle may work if you have a ton of confidence in what you want and your ability to select it. But lets be clear, if the CVC has that level of precision….they wouldn’t be working for Big CPG. Would start own fund.

18/ Regardless of the talent level- typical CVC make too few bets. They end up drifting up market and investing into $10m+ revenue companies because the cost to find smaller companies is too high. Hard to fly around the country to write small checks.
SO they invest into <5 / yr

19/ Investing in external funds as an LP is giving Big CPG a few things. (I) Ability to cast a wider net. (II) Professional managers, (III) Ability to decide when they want to lean in.

20/ (I) Wider net- They are trying to find innovation for the future. The best VC investors in the world have >50 companies in their portfolio. Do you really think your CVC can find innovation with doing a <5 deals a year?

21/ (II) Professional managers- bring in someone who has built their career on investing into innovation. Being responsible for writing a check is an incredibly clarifying moment. Don’t just pick someone internally- that person doesn’t have the experience to do the job.

22/ (III) Ability to decide when to lean in. Here is what I mean- if Big CPG invests into Co. X, and decides Co. X isn’t that interesting (financially or strategically).....it's really hard to pull back their engagement with the co.

23/ If they did then very quickly Big CPG gets negative reputation. Remember Big CPG’s CVC likely won the deal by convincing the co. of their amazing value add. Also they are early (almost certainly) in building a name for the CVC- which means negative references hurt even more.

24/ If that co. is in an external fund, through which Big CPG is an LP…...ah well then they can decide when to lean in or not, without any of the nasty backlash.

Expectations are simply different. The fund investment is series of call options effectively.

25/ The smartest big CPG and Retailer companies are realizing quickly CVC isn’t very effective (what is the CVC’s KPI?!) and are moving to a model where they are investing as LPs into external funds. I dont think the press will cover it, but it’s happening.