By Blake Luse
Blake is the Managing Director of Ferguson Ventures, the CVC arm of the largest plumbing and HVAC distributor in the US.
After more than 26,000 hours in Corporate Venture Capital (CVC), here are some areas to think about when establishing a new CVC unit. Ferguson Ventures is now 3 years and 10 investments into our journey. We built our CVC with internal talent that had a deep understanding of our customers’ needs, years of industry experience, and foundational relationships established within Ferguson. After engaging with hundreds of other CVC groups, I have learned that there isn’t a “cookie cutter” one size fits all approach to Corporate Venture.
Here are eight key areas new CVCs need to consider ahead of launch. As I reflect on my journey, I felt these could provide value to others on a similar path. Feel free to reach out to brainstorm through your CVC approach whether you are starting up a new CVC team or looking to revitalize.
1. Create value for the startup
If you are not creating value for the startups you are investing in, then you are not doing it right. This article is focused on enabling you to move with speed, have clarity of purpose, know where you fit and where you don’t, all so you can better position yourself and your company to support the startups you invest in (and not waste the time of those you don’t). It is important to remain founder focused on your path and empathize with their journey. The best CVCs know that it’s what happens after you cut the check that matters most. Determine how you will add value post investment and remain focused on following through. One key area of value a corporate provides a startup is customer acquisition. The corporate can become a channel to market or a customer. As an industry leader you also have knowledge and relationships that are extremely valuable along the startup journey.
Ferguson Ventures (FV) is a founder focused team, we pride ourselves in helping our portfolio companies thrive. We established a portfolio management function on our team early on. We have dedicated resources to work with our portfolio companies after the investment to ensure the startup company has a path to engage with our business. We lead service design workshops with portfolio companies to co-create customer journeys with shared value propositions. These sessions create value and align goals and objectives.
2. Create value for your parent company
Creating and capturing value for your parent company is a key to longevity of your CVC. Many CVCs seek to support business unit strategy and position the company for future success. As a strategic investor you may be looking to create optionality and capture learnings that could help evolve your business model. This focus can lead to the early detection of disruption and identifying new partners to deliver innovative solutions to customers. Make sure you are working closely with your business units to understand challenges and opportunities to better deliver on customer needs. You will need educate associates in your company on the value of corporate venture and how you can help them better serve the customer.
Ferguson Ventures is a strategic investor that is focused on helping our business units identify innovative areas to meet customer needs now and into the future. We capture and share learnings around areas we see as vital to future success in the industry. Our goal is to best position Ferguson and our customers for the future. We are building a portfolio of partners that can help us create a better future for trade professionals and help them run a better business.
3. Clarify your purpose
Corporate Venture can take many different forms that are not just about investing (unless you want it to be). Outline why your group exists and the value you seek to deliver. Many times, a new CVC unit will also be delivering a new capability into the organization. It is up to you to deliver the clarity of purpose to the organization along with your executive leadership team.
Why would a corporation want to setup a CVC unit? Most seek to engage the startup community to identify disruption early and gain learnings on new business models and emerging technologies. Some see corporate venture as a way to create optionality in how to develop new innovative products or services. CVC could also be a feeder system into your mergers & acquisitions (M&A) team. Some CVCs invest for financial returns no different than institutional venture capital firms.
Also, there are benefits in establishing a “Google X” type model where you incubate and launch your own ventures into the market. These new ventures could focus on accelerating external entrepreneurs or intrapreneurs.
Ferguson Ventures is focused on being the on-ramp for startups into new value add partnerships with our business units. We are reaching into the startup community and finding opportunities to learn about future trends and add value to our customers. In doing so we become a great go to market channel and add value the startup, our business units, and our customers. FV established an Innovation Lab in Atlanta, GA to engage the thriving corporate innovation and startup ecosystem. We are also working closely with business unit leaders using Service Design to identify key customer needs and organizational support structures for delivery.
4. Develop your Investment Thesis and focus areas
Your investment thesis is a forward-looking summary that guides where you invest. Write out the ideal or future you envision for your industry. Begin to layout gaps you may have in achieving success in that future. These gaps inform focus areas and investment themes. What areas would you need to develop or strengthen to succeed in this future? These become your investment themes. It is important to reduce this down into a succinct summary. You will want to communicate this to the market to get your deal flow started. Startups and VCs must know where you invest so they understand when to engage you.
At Ferguson Ventures, we are investing to create a Connected Ecosystem to connect trade professionals with end-customers, supplying products, services, and solutions to build and maintain America’s infrastructure. Our investment themes guide where we spend time and are broad enough to capture a wide array of opportunities. That said, we focus on construction technology and property technology and this keeps us scoped down to where we can create and capture value with startups.
Our investment themes at a high level are:
- Building information modeling (BIM) and offsite construction
- Smart home, smart building, smart cities
- Contractor software and business tools
- New business models where emerging technologies are being used in new ways in the construction & property maintenance industries
5. Know your strike zone (stage, check size, lead or follow, geography)
You only have so many hours in the day (and so do founders). Make sure you understand your strike zone so you can be efficient with everyone’s time. In addition to your investment thesis and focus areas, document the stage you will invest, whether you lead rounds or follow, what check size will you write, and what geography you focus on.
Determining which stages in startup development you want to invest in is important. This will make sure you focus your time on startups that are investable per your thesis and at stages you are comfortable from a risk perspective. You may or may not be able to help startups at each stage and it is important to understand where you can add value. If you’re primarily a Series A investor, getting to know premier seed stage companies is a good thing. That said, make sure to not spend all of your time there.
Here are a few quick thoughts that will help you determine what stage you want to invest in:
- Pre-Seed investors are OK with investing in a promising team, solving a big enough problem for a large market, and that may only have a PowerPoint slide deck. Mostly Angel investors come in at this stage.
- Seed investors, in addition to the above, need to see a prototype being tested or a minimal viable product (MVP) in market. Revenues at this stage are also a plus to show traction. This stage is where smaller VCs invest as well as Angels and some CVCs.
- Series A investors will look for a validated product in market that is ready to scale. Revenues are very important at this stage as they prove traction. The startup will need a team fit for purpose and ready to take the market. This is where most CVCs target.
- Series B and on investors are looking for further maturity and have lower risk appetites. These investments are done by CVCs and begin to bring in private equity.
Check sizes and ownership could also determine at what stage you invest. If you seek a higher ownership stake, then you will either invest more or invest earlier. If ownership is not important to you but a board seat is, then you will need to lead rounds.
Leading rounds means you set the terms and help fill out and facilitate the round coming together. This typically gives you a board director seat in the process. You may simply want to follow on to rounds and as a strategic that is a choice many make. Most CVCs are looking for a board observer seat and information rights.
Understand if you are investing globally or focused solely on the United States or another country. This will help you streamline time and ensure it is spent on targeted deal flow. Understanding the startup landscape globally could be a good thing, however not everyone can create or capture value in a global setting.
Ferguson Ventures is a Series A through C investor. We add the most value when a startup has a product that has been validated in the market and they are ready to scale. Our customer relationships and deep industry expertise provides a path to market that is second to none in our industry. We have led roughly 30% of the rounds we have invested in so far. It is important that we gain a board observer seat and information rights so we can learn alongside and help accelerate the startups we invest in. All of our investments have been in US based companies and our main focus is on North America.
6. Determine your investment process and governance
Your goal is to move with speed. Venture is fast paced, and you will need to keep up. Each corporation is different and thus company culture and norms will factor into your approach. You will want to think through your deal flow process (how you work deals towards an investment) and your investment committee decision making process.
A process could look like this to vet an opportunity:
- Ventures team has first engagement with startup and determines fit with the investment thesis and strength of the startup
- Business Unit identifies fit with strategy and customer needs, lends support
- Initial due diligence completed, investment memo created
- Investment Memo presented to venture investment committee to gain commitment to negotiate and invest
- Further financial and legal diligence completed
Try to have as few stage gates as possible. This will help streamline decision making. Setup a diverse but small investment committee to approve deals and help provide good governance. Some CVC groups will want business unit buy in while others do not. It all depends on the best fit for your company in delivering your objectives.
7. Network and Invest with Top VCs
Ultimately you want to invest in startups alongside the best Venture Capitalists (VCs). It is important to engage Institutional Venture Capital groups early to discuss your focus areas and how you add value to startups. Look at the VC’s portfolio for any investment opportunities or to make business unit introductions. Build a strong network to increase your deal flow (investment opportunities) and invest with top VCs to strengthen your ability to find winners.
Ferguson Ventures has built a strong network with VCs focused on construction tech, real estate and property tech, insurance technologies, and other emerging tech areas. FV has also invested as a Limited Partner in two Venture Capital funds: Brick & Mortar Ventures as well as MetaProp Ventures. These two partnerships have increased our access to quality deal flow and pull in key insights from top VCs focused vertically into areas of interest for us.
8. Support your local startup community
Founders need the right mix of capital, programs, and places to successfully grow their startup. It’s important for corporates to engage in their local startup community and there’s no better group to do that than the CVC team. Not only does a thriving startup ecosystem create economic development for the region, it also brings a diverse pool of top talent to the area. Make sure to mentor startups at local accelerators that are both aligned and not aligned with your investment areas. This will help you to build empathy for founders and make you a better corporate VC.
Ferguson Ventures supports the Virginia startup community where our headquarters is located. After traveling to the traditional startup cities (San Fran, NYC, Boston, Chicago) we decided to make sure our support was felt locally as well. I am on the board of 757 Angels, ranked in the top 10 of angel groups nationwide. After serving on the board for two years, I recently accepted the Chair of the 757 Accelerate board and will get started in January 2021. We are also partners of an accelerator in Richmond called Lighthouse Labs, Start Wheel a digital startup hub, and a founding partner of 757 Startup Studios in Norfolk, VA.
We have also engaged universities and partnered in helping students grow as entrepreneurs. For instance, FV supports William and Mary’s Rocket Pitch Friday’s with weekly prize money. Our 3rd Annual Ferguson Innovation Challenge recently kicked off as well. These partnerships support founders and help us to engage as mentors and coaches in our communities. In the end, being founder focused and supporting their efforts is the key to a successful CVC.
Let’s connect: Message me on LinkedIn or @blakeluse on Twitter
Please reach out if you are setting up a new Corporate Venture group and would like to bounce ideas to ensure your structure and launch will be successful.
If you are a startup or VC driving innovation in construction tech, property tech, or insurance tech let’s have a conversation.