Forming a strategy to venture
“If a far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville down,” said Warren Buffet, chairman & CEO, Berkshire Hathaway, referencing airlines.
Despite Buffet’s warning (one he has ignored himself several times), others are keen to invest. But which is better for founders: traditional venture capital (VC) or corporate venture capital (CVC) funds that are linked to existing corporates?
A VC typically has a fund life of around 10 years with the possibility of two single year extensions. The idea is to invest over five years and then return to investors over the next five. This can be very difficult to do in a highly regulated industry like aerospace, according to Kirsten Bartok-Touw, of New Vista Capital and AirFinance.
Bartok tells Revolution.Aero: “We see more and more VCs come to hard-tech. But especially, with the tailwinds around national security there is enormous benefit to be gained from corporate investors in many areas, both from their deep technical expertise and their greenfield fund structure – which doesn’t have the time and return limitations of a traditional VC fund structure. Hence they can be very complementary.”
Corporate and strategic investors often have a longer-term view of how technology can evolve and can be more patient, says Bartok-Touw. Secondly, they do not view everything through the lens of ‘Will this make the returns I need to improve my portfolio?’ “In a diversified VC fund, one has to compare a hard tech investment to everything else the VC fund is considering investment in. So a software deal will sell for 20 times revenue and takes four-to-six years to scale from seeding funding, versus a hard or deep tech aerospace company that could take eight-to-12 to scale, require significantly more capital and may not sell for as high of multiple as the software company. The VC firm has to make some tough portfolio allocation decisions,” she says.
RTX Ventures, the investment arm of Raytheon Technologies, has been in business since March, 2022. In that time it has invested in hypersonic developer, Hermeus Corporation, two companies supporting a more electrified future of flight in VerdeGo Aero and H55; and autonomous defense expert, EpiSci.
Roman Mueller, executive director & principal, RTX Ventures, says the company approach is very similar to that of a financial VC. In fact, in all of its investments it is a co-investor alongside traditional financial VCs. “That said, we do have a few unique elements to our approach that differ from financial VCs,” he tells Revolution.Aero. “Firstly, we can be more patient – financial VCs need to see a runway to returns in five-to-10 years, and while we certainly do not have infinite patience, we are more flexible in our capital return timeframes; Secondly, we value the strategic merits of a potential investment as much, or more, than the potential for financial returns. We are eager to find ways for our portfolio companies to partner with our business units.
“Each type of investor, financial and strategic, brings something unique and valuable to the startups they support. We very much value having high quality financial VCs investing alongside RTX,” adds Mueller.
Brian Flynn, co-founder and MD, DiamondStream Partners deals with corporate investors on a nearly daily basis. “We’re financial investors only. However, in many cases, we seek strategic investors to invest alongside us. For example, Lockheed invested in Elroy Air [aircraft pictured below] and Embraer is a strategic partner. And Raytheon Technology Ventures is invested in Verdego [propulsion system rendering above] where each of us came in as a co-lead,” he tells Revolution.Aero.
Another example comes at Volantio, a software-based operations optimiser, where DiamondStream has bet alongside six strategic investors, including Alaska Airlines, JetBlue Technology Ventures, Quantas, International Airlines Group, and travel technology firm, Amadeus.
If corporates have the funds to invest, why not develop technology in-house? “Strategics will often tell you that the most creative innovations come out of small companies that are passionate, focused and less bureaucratic,” says Flynn.
Also, crucially, they can work alongside other investors. “What I’ve observed is that these corporate investors come in many different flavours of their motivation for investing,” says Flynn. “They can be wonderful investing partners. From DiamondStream’s standpoint, they provide the type of technical validation of the technology that we cannot do as easily or cost efficiently on our own. That helps make firms like DiamondStream more confident in making their investment.
“In other cases, the strategic has an ongoing relationship with their operating business. In the best cases, this accelerates time to market, reduces risk, minimises expense, etc,” he says.
The ability to test and validate technology is one of the most attractive things a strategic can bring to the table. When investing in startup, building something that solves an expected and future problem is basic. But once you get beyond a strategic technology void an investor must validate or determine if the projected technology can actually be built and on what timeline. The concept of a minimum viable product doesn’t always apply in hard tech.
Bartok-Touw says: “With the exception of a few highly technical VC firms, strategic investors often have better technology and engineering expertise internally to validate a startups’ technology or IP portfolio.” Does the startup really have the engineering stills and capabilities to build what they are saying they can, and do they have the deep tech engineering talent, along with a leadership team that understands certification, the regulatory environment and how to scale? “Deep tech is more complicated, requires a different skill set and is more capital intensive than traditional Silicon Valley software and internet start ups. It’s like how a traditional Silicon Valley VC would validate a new software startup’s approach to their software stack.
“CVCs are an important player in the ecosystem,” she adds. “Especially as we’ve seen with the advent of inflation, capital has become more expensive and exit multiples have gone down. We’ve seen a lot of the traditional venture groups that came in to this space squint a little harder tech and have a hard time getting there – because of the extended timelines and high capital requirements, both of those will result in pressure on a traditional VC fund’s overall returns. Which begs the question will traditional VC continue to invest in deep tech in a high interest rate environment?”
A downside to partnering with a CVC, is that it does not often price rounds and may not have the experience in scaling rapidly growing startup companies.“So that’s why when a CVC partners with a traditional VC, it is often a very good fit. The two complement each other and every entrepreneur should think about that,” says Bartok-Touw.
If you have to invest $1000 in a future flight startup then, the best advice for Buffet is to spread the bet on the trainer running two horses.