Silicon Valley Has a Century-Old “New” Player in Town (Part I)
Q&A with Kevin Ye, Corporate Venture Advisor and Partner at Mach49
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This story is part of the Entrepreneurship of Life series, a collection of interviews with immigrant startup founders, venture capitalists, and tech business leaders.
Introduction
What do Google and DuPont have in common?
Yes, they are both gigantic U.S. companies. What else?
Both have made some of the most successful corporate venture investments in history. Does this surprise you? You might know Google Ventures is a VC powerhouse, and some of its investments below are certainly familiar. What about DuPont?
In 1914 — the year World War I started, DuPont made one of the first corporate venture investments in history, and it was a home run: General Motors. The automobile startup was only six years old; over the next few years, its stock value appreciated seven-fold as wartime needs increased demand for automobiles. DuPont doubled down after the war, injecting cash to speed GM’s development, which in turn boosted demand for its own products, such as artificial leather, plastics, and paint. This mixed strategy blending financial and strategic aims would later come to define the business model of corporate venture capital, or CVC.
Despite their century-old history, CVCs had not been mainstream in Silicon Valley until around 2010, so in many ways, they still seem “new”. They also carried a checkered reputation, often perceived as slow and less competent than institutional venture investors. But this image is rapidly being redefined. Today, nearly half of US venture deals have CVC participation, and corporations from Intel to Qualcomm to Salesforce are establishing themselves as VC veterans. Even successful startups themselves — such as Slack and Snowflake — find it crucial to start a CVC early. Having simmered for over a hundred years, CVCs appear to be finally embracing their golden age.
Against this backdrop, I sat down with Kevin Ye, the youngest Partner at leading CVC advisory firm Mach49, to pull back the curtain on his field. Among other things, Kevin and I talked about:
- Why is CVC uniquely exciting to him?
- What is the CVC playbook?
- What is the most common trap in CVC and how do you avoid it?
- What does an ideal relationship look like between a CVC and its corporate parent?
- How is performance measured?
While outspokenly passionate about corporate venture, Kevin also enjoys his many other hats, such as an angel investor, a startup advisor to the New Zealand government, a former Chinese A Capella singer, and a whiskey connoisseur from Tennessee. So beyond CVC, we chatted about angel investing and the decentralization of tech innovation. Reflecting on his Asian roots and Southern upbringing, Kevin also shared about how the two cultural identities fuse in him.
Kevin Ye is a Partner at Mach49, where he helps global enterprises develop world-class capabilities within startup venturing (partnering, accelerating, investing, and M&A). His specialty spans the entire corporate venture capital lifecycle, from the design and standup of new venture processes and structures to deal sourcing, negotiation, and closing. Throughout his career, Kevin has been a trusted venture advisor and extended team member for dozens of the world’s largest industry leaders, including TDK Ventures, Goodyear Ventures, Halliburton Labs, UPS Ventures, and many more.
Kevin holds dual degrees in Bioengineering and Corporate Finance from the University of Pennsylvania. Originally hailing from Tennessee, Kevin has an ingrained love for Southern food, whisky, and country music.
Corporate Venture Capital
Q: What piqued your interest in CVC and led to this career path?
My initial encounter with CVC was partly by chance, but it quickly grew on me. After college, my first job was in management consulting. Working with corporate executives was fun and felt natural, but three years in, I wanted to see what else was out there. So I started looking into venture capital, a common “next stop” for consultants. I applied for both traditional VC and CVC jobs, not really knowing the difference. I ended up joining a boutique advisory firm that helped corporates connect with the broader innovation ecosystem, and there this journey began.
As an insider, I started to appreciate what is uniquely interesting about CVCs. I once considered them the “underdogs” in the venture game — Silicon Valley is often referred to as a “walled garden”: you need to both have a way in and know your way around, and neither was easy for CVCs at first. Too often, they either were left out of the best deals (often reserved for a small VC “inner circle”), or dragged their feet through the process, to the great frustration of the startup founders and co-investors.
However, the untapped potential of these “underdogs” was often overlooked. As a startup’s strategic partner, a corporate can lend its brand name, domain expertise, channel resources, and customer relationships. Many VCs promise their investments “value-add”, and in most cases, what adds more value to an emerging company than these things? If corporates can master the game of venture capital and become trusted partners to startups and VCs, isn’t this better for the whole ecosystem?
CVCs are maturing and moving from the edge of the stage to the center. It excites me to be part of this industry shift and help CVCs unlock the potential that they have.
Q: Can you tell us about Mach49 and what you do here?
In early 2020, I joined my current firm Mach49, a growth engine for the Global 1000. Our founder Linda Yates grew up right here in Silicon Valley among entrepreneurs and venture capitalists, and she wants to build a bridge between this ecosystem and the broader world of traditional businesses out there. Our teams in North America, Europe, and Asia help established enterprises deploy a two-pronged playbook: Disrupting InsideOut and Disrupting OutsideIn. The former refers to internal innovation approaches such as incubation and creating new concepts from scratch, while the latter represents external options such as startup investing, partnership, and M&A.
I myself was the first hire by our Managing Partner, Paul Holland, to help develop our Disrupting OutsideIn practice. [Keyi note: Paul Holland has been a General Partner at leading VC fund Foundation Capital (Uber, Netflix, Clubhouse, etc.) for 18 years; previously, he was a C-suite executive at multiple unicorns.] The practice is relatively new within Mach49, but we expanded our client base over five-fold last year alone — in the middle of a pandemic — and continue to accelerate our rate of growth. We work with clients like Goodyear, Xerox, TDK, etc. across various industries.
Q: How should a corporate choose its strategy: Disrupting InsideOut, Disrupting OutsideIn, or dual track?
Ultimately, a seasoned corporate should do both, as they are complementary. Every innovation or growth initiative will have its own optimal approach, and you want to have both strategies in your toolbox so that you never miss an opportunity.
That said, Disrupting OutsideIn is often the easier place to start. You can engage with most new ideas by leveraging what is in the market — there’s no point reinventing the wheel if other smart people already have traction. Investing or partnering can be flexible and can be accomplished in less time compared to incubating new ventures in-house.
Disrupting InsideOut can be a heavier weight approach that takes meaningful full-time resources. However, it could make sense for a strategically crucial concept for which no promising external solution exists. Perhaps the idea is not “venture-able” — i.e., unlikely to draw VC interest — due to hefty capital requirements. Or perhaps the barrier to entry is high but the corporate has a unique edge. For example, the corporate might have either a critical patent or the “right to play” in an exclusive field. If two startups bid for an Amtrak contract to diagnose malfunctioning rails, where one is run by several fresh university graduates and the other created by a reputable rail manufacturer, everything else equal, which one stands a better chance?
Q: Is there synergy between Disrupting InsideOut and Disrupting OutsideIn?
Absolutely. The two teams should be constantly talking and cooperating. “We’re interested in an investment in this space. Have we attempted this before internally?” “This incubation concept seems interesting, what are you seeing in the market?” Keeping the teams in silos is a common mistake that leads to duplicative efforts, suboptimal decisions, and missed opportunities.
Q: For a specific opportunity, how should a corporate choose among build, buy, invest, and partner?
My general advice is to “try before you buy”: avoid presumptions, test out your thesis in the cheapest way possible, and increase your bet only with a well-founded degree of confidence. If Disrupting OutsideIn is more appropriate, consider partnership before investment, and investment before acquisition. You won’t always have the luxury to go through all three steps, but if you can, you put less capital and time at risk by steadily escalating your engagement. The water testing lets you get to know the team, take a look behind the curtains, and validate the strategic benefits you anticipate before paying a lot for it.
Q: What does an inexperienced CVC often get wrong?
Many people think sourcing and deal-making are the trickiest things for new CVCs. The truth is the most common pitfall lies within — it is a lack of internal alignment. New CVC investors commonly underestimate the amount of preparation, relationship building, and even politicking necessary within the corporate parent, what we call the mothership, to set the CVC up for success — even before they get to their first founder meeting.
Therefore, we often see corporate “antibodies” obstructing CVC success. Bureaucracies slow things down when speed is key; hard-fought investment opportunities are vetoed for the wrong reason; or the deal is done, but internal teams don’t work with the startup as you had planned. Passive resistance via noncooperation not only precludes strategic benefits from a deal, but it can also hurt the CVC’s reputation as a potential investor and partner to other startups.
What causes this to happen? Sometimes politics, other times cultural or mindset differences. You also have incentive misalignment where the CVC yields returns over a decade or longer, but the internal business units are primarily judged (and compensated) on their annual, quarterly, or even monthly performances.
Q: How should CVCs avoid this problem?
Every case can be different, but here are some general guidelines.
First, secure top-down commitment in your organization. The CVC initiative should be championed by C-suite leaders or at least EVPs, who have the power and authority to quickly open doors and remove internal blockers as they emerge.
Second, preempt potential issues and prepare early. For example, the mothership’s internal processes might need to be revisited before startup engagement. If you need to onboard a 2-year-old startup vendor and your procurement system requires a 3-year operating history, that is a problem. The protocol would need some changes with involvement from your legal and procurement teams before you even go out to market.
Finally, understand and follow best practices. There are tried and true approaches to everything from internal support-building to investment decision-making. A seasoned advisor helps avoid unnecessary mistakes. At Mach49, we guide our clients through roadmaps developed and refined over decades of experience.
Q: Your team often talks about how the CVC and the corporate are like a speedboat and its mothership, and that the former should be adequately independent from the latter but not lose touch. What does the right balance look like?
While it may seem like more independence means less collaboration and vice versa, it is not a simple tradeoff. You want independence in certain areas and close ties in others.
For example, a CVC should have decision-making autonomy to be fast and nimble, but it should collaborate closely with business units to ensure that they’re actively creating strategic synergies, while also being careful not to allow near-term thinking or incentives to prevent them from exploring frontiers of the industry.
In addition, a CVC should have its own team structure, compensation scheme, and titles to compete with leading VCs for talent. You want the team to have more “skin-in-the-game” than normal corporate pay structures can provide, so new instruments such as “phantom carry” should be considered. And you want your titles to send the right message to the ecosystem rather than confusion. Would a startup founder understand what “VP of Innovation” is? Maybe, but probably not. “Managing Director of XYZ fund” is a lot more standard in the market and makes it clearer what authority and mandate the person has.
It goes without saying, but a strong tie with the mothership is key to the CVC’s strategic partnerships. The CVC should be ready to pull from the corporate experts and resources that can help its portfolio companies. Without this access, it would just be a VC (and probably not a very good one) masquerading as a CVC.
While situations vary, and it’s often an arrangement that CVCs will work towards over time, an ideal CVC structure might be a legally independent fund with the mothership as its sole or primary LP. The fund would have an independent governance and HR system, plus a defined process to maintain engagement with the mothership, including regular meetings to share insights and resources. Nokia’s NGP Capital and Airbus Ventures are success cases of this model.
Keyi (Author): Continue with Kevin’s story in Part II here, where we talk about using smart KPIs to shepherd a CVC, working at a “startup within a startup”, and breaking into CVC as newbies. In addition, hear from Kevin about his secret sauce for angel investing, the “off-Silicon Valley” trend, being an Asian American from the South, hidden traps from the “model minority” concept, and — as bonus— the new HBO show he can’t stop binging!
If you’re interested in my other stories, check out the catelog with links at the end of this piece (which also talks about what this series is about, and why I started it!).
