Slides from my talk on corporate venture capital and spin-outs in Will Porteous' VC Seminar at Columbia Business School on April 13, 2015.

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Spins on Corporate
Venture Capital
Frank Rimalovski
Executive Director, NYU Entrepreneurial Institute
Managing Director, NYU Innovation Venture Fund
Adjunct Professor, NYU Polytechnic School of Engineering
@rimalovski
April 13, 2015

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Agenda
u Corporate venture capital
o Motivations & models
o Challenges & consequences
u Corporate Spinouts
o Challenges
o Lucent’s New Ventures Groups
o New Venture Partners
u Universities
o NYU Innovation Venture Fund
o Similarities & differences

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Corporate Venture Capital 101
Motivations
u Strategic *
o Provide a window on new
technology (85%)
o Support/leverage existing
businesses (69%)
o Provide window on new
markets (58%)
o Develop new products
(56%)
o Seek new directions (55%)
u Financial
o ROI
Models
u Direct
o In-house venture teams
o Separate CVC groups/
funds
u Indirect
o Invest as LP in externally
managed funds
u Incubators with or
without venture funds
o Spin-in
o Spin-out
* Source: Corporate Venture Capital Study, NIST/MIT 2007

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Corporate Venture Capital 201
Challenges *
u Lack of well defined/
shifting missions
u Insufficient corporate
commitment
u Inadequate
compensation
schemes
* Source: Gompers & Lerner, The Venture Capital Cycle
Consequences
u Conflicting agendas
with VCs/
entrepreneurs
u Slow decision making
u Shallow pockets
u Short lived funds
u Attracts ‘B’ players
u Not welcome by some
VCs/entrepreneurs

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Corporate Spin-outs

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The Search for Innovation…
“The search for innovation needs
to be organizationally separate
and outside of the ongoing
managerial business. Innovative
organizations realize that one
cannot simultaneously create the
new and take care of what one
already has...”
~ Peter Drucker, 1974

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Intrapreneurship challenges
u R&D not always well linked to markets
u Lack of true entrepreneurs
u Underestimating time & funding required
u Overestimating corporate synergies
u Lacked “credible threat” of discontinued funding
u Different biz models make it hard to support
u Different metrics lead to poor decision making
u Ignores portfolio theory
u Different decision making/funding timelines
u Risk tolerance/acceptance of failure

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Intrapreneurship challenges
“The interests of a
corporation and the
venture capitalists are
seldom, if ever, aligned.”
~ Jonathan Schwartz
CEO, Sun Microsystems
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1996: Lucent forms New Ventures Group
1876
1947
1954
1958
1962
1969
1999

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1996: Lucent forms New Ventures Group
u To commercialize “discontinuous”
innovations
u For strategic innovations that can be
developed faster in a venture model
u Mission
o Leverage Bell Labs technology to create new
ventures to innovations to market quickly
o Create more entrepreneurial environment that
nurtures & rewards speed, teamwork and
prudent risk-taking
o Realize value by selling ventures to Lucent
BUs or external investors and/or corporations
1876
1947
1954
1958
1962
1969
1999

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NVG Experience
u Challenges
o Finding the right people to join a startup (inside/out)
o “Spotlight effect”
o Ebbs & flows of macro & micro economic factors
o Contributing to quarterly & annual targets
o Lacked “credible threat” of discontinued funding (early on)
u Critical success factors
o Executive sponsorship with “use it or lose it” POV
o Strong supply/deal flow with lots of pent up supply initially
o Good timing = strong demand / ease of syndication
o Aligned comp incentives: people do what they’re paid to
o Syndication led to more entrepreneurial behavior, risk
sharing, etc.

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2001: New Venture Partners formed
© New Venture Partners

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2001: New Venture Partners formed
u Raised fund to buy out portfolio in 2001
u Operating as independent VC fund since Dec 2001
u Focused on commercialization of corporate
innovations through creation & funding of spin-out
ventures
u Identified, founded & funded +35 corporate spin-outs
u 4 offices & 12 investment professionals in US & Europe
u Experience spans materials & components, to
software &services across IT, comms & cleantech
u Cumulative capital under management of $800M+;
closed last $300M fund in April 2006
© New Venture Partners

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NVP: Strategy and Focus
• Transform corporate R&D into valuable assets
through venture spin-out creation
• Formal & informal partnerships
o 2 cornerstones
o Many non-exclusives
• Three types of deals
o Early-stage disruptive technologies
o Non-strategic commercially-ready
products & services
o Commercially-ready “incubands”
• Provide capital & services in return for equity in
new ventures—a value-added investor, not a
consultant
Business
maturity
Product
maturity
?
© New Venture Partners

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NVP: Why do Corps do Spin-outs?
u Strategic
o Corporate BUs become a customer or partner
o New channels to markets for tech corporate BUs can’t or won’t do
o Preserves option to re-acquire or re-invest later with diminished risk
u Technological
o Brings culture of entrepreneurship to labs, attract young researchers
o Increases clock speed of innovation
o Elicits market feedback to shape project direction
o Relieves researcher frustration
u Financial
o Creates financial gains through equity ownership
o Accesses high risk capital funding otherwise not available
o Complements, does not compete with, a licensing program
© New Venture Partners

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How NVP Does it
Opportunity
Iden=fica=on
Market
Qualifica=on
Transi=on
Venture
Value
Realiza=on
Form
new
company
New Venture Partners’ Role
Traditional VC Role
Go/No
Go
Go/No
Go
Corporate
Decision
NVP
Decision
Exis=ng
product
line
© New Venture Partners

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What do these have in common?

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Universities

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Helping startups start up

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Our Playbook
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Inspire Educate Connect Accelerate Fund

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NYU Innovation Venture Fund
u Philanthropic seed fund
u Evergreen: NYU sole “LP”
u Active diligence
u Help build smart syndicates
u $100-200k direct investments
u Converts, Series Seed & A
u Board observer seats
u Opportunistic follow-ons
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I V F

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Fund Portfolio
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Select Co-Investors
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By the Numbers
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Investments
10
Sectors
Info Tech: 7*
Life Sci/Health: 4*
NYU Founders (School)
CAS: 2 Medicine: 6 Eng: 1
Stern: 5 Dentistry: 2
Law: 1 Courant: 1
NYU Founders (Type)
Students: 8
Faculty: 8
Researcher: 2
IT Investments
Hardware: 2
Software: 5
Invested Capital
Invested: $1,125,000
Value: $1,289,309
Female Cofounders
40%
Total Capital Raised
$20,490,000 (>18x)

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Why this investment model?
u Participate in larger rounds to achieve
meaningful milestones & value inflection
u Invest as part of a larger syndicate
o Leverage diligence, expertise &
connections
o Follow-on financial support
o Co-investors to serve on boards
u Other sources exist in/outside NYU to fill
pre-VC needs
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Critical Role of the Fund
u Return on investment
u Demonstrates University commitment &
importance of entrepreneurship
u Raises NYU's profile amongst peer
institutions & government agencies
u Credibility & bridge building with NYC
investor community
u A catalyst for entrepreneurship within NYU
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Money not 1st item in critical path
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Universities & Corporates
Similarities
u Often based on research
u Publishing & recognition
driven
u Gov’t & corporate grant
funding
u Need to evangelize
entrepreneurship
u Personnel not always
suitable for a startup
u A lot of handholding
Differences
u Limited development
u Not measured on IP
creation
u Less access to
commercial validation
u Less aware of IP &
commercialization
pathways
u No secondment
u College is a lot more fun!

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Questions?
entrepreneur@nyu.edu
@nyuentrepreneur
nyu.edu/entrepreneur
nyuentrepreneur.com
16 Washington Place
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Helping startups start up