BIll Taranto
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There are nearly 2,000 corporate venture capital (CVC) firms in existence, many hundreds of them created by first-time investors, according to Global Corporate Venturing.
As GCV also reports, last year alone, CVCs raised $41 billion in investment funds, mostly from their corporate parents.
Given Merck Global Health Innovation Fund’s (Merck GHIF) track record, I’m often asked as a long-time successful CVC investor to describe the business strategies used to ensure our scale and staying power. Merck GHIF is the digital health corporate venture capital arm of pharmaceutical giant Merck & Co. Merck GHIF was founded in 2010 with an initial allocation of $125 million. Today it’s a $500 million evergreen fund, and we’ve invested $800 million in more than 50 companies to date.
The four key strategies
No. 1: Developed an independent LLC with a defined investment charter
From the beginning, we set up an independent business structure with a well-defined investment charter. We created our investment model, strategy and expectations to ensure strategic and financial balance. As a seasoned corporate VC leader coming from Johnson & Johnson, I knew that there was not a corporate parent who says it’s okay to lose money. I knew that if we lost money as a fund, we’d be out of business.
From the outset, I set out to measure our return on innovation, as well as our financial returns, including what we learned and what we discerned to be valuable technology beneficial both outside and inside Merck.
Our ability to articulate a business strategy and then execute on it through investment themes stands in contrast to many young CVCs, which don’t do this and subsequently struggle. Without a cohesive strategy and vision, execution issues inevitably arise. We recognized that point solutions — solving one particular problem without regard for related issues — do not work in healthcare. Instead, we viewed the data derived from point solutions as a consistent thread across defined ecosystems.
Our flexibility and the application of the same fundamental market vision and ecosystem model enabled us to pivot from investing in diabetes and cardiovascular — our original investment focus — to investing in oncology today.
No. 2 Utilized investment capital-financing strategies to better benefit the portfolio
We worked closely with Merck’s CFO who understood the value proposition of investment capital off the balance sheet versus more costly research and development expense. In addition to facilitating portfolio company commercial engagements with our parent, we were well-positioned to engage startups across the spectrum from next-horizon minority equity investments through growth equity rollups with the potential to accelerate new markets.
No. 3: Hired senior CVC/VC professionals and gave them freedom to operate
My core team and I came to Merck GHIF from Johnson & Johnson. Most of our team members have more than 25 years in healthcare and a decade or more of healthcare investing experience. The team is also well balanced with both an internal and external network of relationships — very important, given that venture capital is a relationship business.
Although retention is an issue for many CVCs, the GHIF team has stayed together since the fund’s inception. That’s because they like what they do and have the freedom to be creative and operate the way they see fit. Additionally, I have used long-term incentives and bonuses as motivators.
No. 4: Understood the importance of communication: top-down and bottom-up
From the beginning, I knew that Merck must understand what we do — the what, why, strategy and potential impact of the fund. So, we set up clear and effective communication standards, which enabled the right people in the corporation to glean the insights they needed about new industry trends, opportunities and threats. We made formal board of directors’ presentations and had executive briefing/sounding board sessions on the corporate and market developments we were executing.
Involving the CVC unit in corporate strategy discussions and innovation-related activities inside Merck fostered the transfer of insights to the relevant corporate stakeholders. These stakeholders represented people both on the executive level as well as other Merck colleagues who could affect the success of the fund.
We also had the portfolio companies provide regular information updates, sponsor new technology seminars and attend meet-and-greets to expose their ideas and insights to as many corporate employees as possible. Through continuous communication among corporate employees, the CVC unit and portfolio companies, a culture of sharing and learning was established.
It wasn’t all perfect: Key learnings and now change of investment focus
Despite Merck GHIF’s success, if I look back over the last 10 years, there are things I would have liked to have done differently. In particular, early on we primarily concentrated on top-down communications with senior management, although we did include bottom-up education, but I don’t believe we did enough.
What I wish we had done more was to go deeper into Merck’s business to better understand their problem sets and then provide strategic input from an external perspective, as well as facilitate impactful engagement with our portfolio.
What I’ve changed today: I’ve implemented an account management system and we now communicate regularly with many levels throughout the Merck ecosystem on a bottom-up, as well as on a top-down basis.
Merck GHIF intends to be a powerful player in this arena for the long-term. In the end — of course — we will continue to make money.
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