Presentation at the Digital Strategy Innovation Summit, Sydney 2016, September 6th-8th on corporate venturing

1. Investing in Great Ideas
Digital Strategy Innovation Summit
Michael Vullings
Head of Digital Strategy

2. 2
What is corporate venturing?
Example
Vehicles
Focus
Business
Stage
Portfolio StrategyCommercialisation
Innovation, Research
& Development
Co-working spaces
Accelerators
Incubators
Media-for-Value
M&A
Joint-ventures
3. Mature Operations2. Growth1. Seed / Early Stage
Time
Growth
Corp. Venture Capital
Focus of corporate venturing

3. 3
Corporate venturing is hot
“Westpac has doubled its
investment in venture capital…”
“National Australia Bank is turning
to the venture capital sector to run
its $50 million fund…”
“IAG to create a fund to invest in
disruptors…”
“News Corp launches Scaleup
Mediafund for start-ups”
“Australian venture capital funds
on track to triple money raised”
In the last 6 months….
“VC funding highest ever since
2010”

4. 4
What are the main barriers and challenges and what will
it take to win?
What are the capabilities required to operate a fund?
Getting started has three important questions
What structures and mechanisms are needed to invest
in early stage businesses?

5. 5
Typical venture fund structure
Carry*
General Partners
Investee companies
Deal /
Investment
Return / Exit
proceeds
Distribution
of proceeds
Limited Partners
Disbursement of
commitments
Fund$50m
1. STRUCTURES AND MECHANISMS TO INVEST

6. 6
Options to consider
1. STRUCTURES AND MECHANISMS TO INVEST
Pros  Provides flexibility as
there are no restrictions
on class of assets, size
of investments,
diversification, total fund
size
VCLPUnit Trust / MIT ESVCLP
 Provides an
exemption from
income tax on
profits for foreign
partners
 Legislated tax
advantages only
available to foreign
resident investors
 Can only invest in
eligible venture
capital investments
Cons  Key legislated tax
advantages are not
available
 For MIT’s, qualified
assets can be treated
on capital account; also
benefit of reduced
holding tax
Fund size
restrictions
 Minimum: $10m
 Maximum: None
 Minimum: None
 Maximum: None
 Minimum: $10m
 Maximum: $100m
 Income and capital
gains are exempt
from tax in Australia
for both domestic and
foreign investors
 Investment plan must
be approved, with
demonstrated focus
on early stage venture
capital (gross assets
not exceed $50m)

7. 7
Elements of a venturing playbook
2. CAPABILITIES REQUIRED TO OPERATE A FUND
Processes
Strategy
Governance
Organisation
Decision
authorities
Standard
deliverables
No-go criteria
Deal Team Deal Sourcing Investment
Committee
Process
description
Target list(s) Investment
Proposal
Screening
Criteria
Valuation Post-deal
analysis
Value Creation
Strategy
Deal Archetypes Hurdle rates /
targets
1
2 3
4

8. 8
2. CAPABILITIES REQUIRED TO OPERATE A FUND
Strategic Fit (Branding potential, Fit with P7S1)
Economicattractiveness
(market,competition,financialattractiveness)
Electronics
Music Equipment
Fashion
Plus-Size
Health & Wellness
Pharmacies
Health & Wellness
OTC & Vitamins
Beauty &
Cosmetics
Multi-Category
Fashion
Shoes
Fashion
Lingerie
Low High
HighLow
Sports & Outdoors
Fashion
Multi-cateogry
Fashion
Outlet/Discount
Toys
Household
& DIY
Bike
Specialists
Electronics
Multi-Category
Prints/Posters
Drinks
Cars
Car Parts
Packaged Food
Accessories
Eyewear
Fashion
Luxury
Petfood
Home & Living
Accessories
Jewellery
& Watches
Home & Living
Multi-Category
Fashion
Venture Fund Sector Focus
Target verticals
Relative size
of market
More capital and resources due to 7 years of operation
allows ProSieben to broaden its targeting criteria
SOURCE: ProSieben (2013) ‘ Dynamic growth in digital markets’
Investment strategy and sector focus
Value Creation
Strategy1

9. 9
-5.0 -2.5 0.0 2.5 5.0 7.5 10.0 12.5 15.0 17.5 20.0 22.5 25.0 27.5 30.0
5 21 23 25 27 30 33 36 39 42 46 50 54 58 62 67
10 41 45 50 55 60 66 71 78 84 92 99 107 115 124 134
15 62 68 75 82 90 98 107 117 127 137 149 161 173 187 201
20 83 91 100 110 120 131 143 156 169 183 198 214 231 249 267
25 103 114 125 137 150 164 179 194 211 229 248 268 289 311 334
30 124 136 150 165 180 197 214 233 253 275 297 321 346 373 401
35 144 159 175 192 210 230 250 272 296 320 347 375 404 435 468
40 165 182 200 219 240 262 286 311 338 366 396 428 462 497 535
45 186 205 225 247 270 295 322 350 380 412 446 482 520 560 602
50 206 227 250 274 300 328 357 389 422 458 495 535 577 622 669
NOTE: Assumes average holding period of 45 months; Benchmarks are based on end-to-end pooled LP returns net of fees, expenses and carry
SOURCE: Australian Venture Capital and Private Equity Association; Cambridge & Associates; Team Analysis
Annual
Investment
$ Millions
Nominal returns over over 5-year trading period (Annualised IRR, Percentage)
Australian Avg
VC fund return
(1985 – 2007)
Bench
-marks Leading Aust.
VC fund targets
US VC Index CY13-14
Early Stage Benchmark
Australian Upper
Quartile Returns
AVCAL 2008 Yearbook
Expected returns
2. CAPABILITIES REQUIRED TO OPERATE A FUND
Value Creation
Strategy1Average returns in are low

10. 10
Committees Investment Team
Shareholders Executive Board
Investment
Compliance
 Assess quality and robustness of investment
decisions
 Ensures legal and accounting compliance
 Generate deals
 Conduct due diligence and make
investment decisions
 Identify and mobilise marketing
resources
 Provide JV oversight
̶ Shape strategic direction of JV
̶ Ensure leadership and resources
̶ Monitor and improve performance
1
2. CAPABILITIES REQUIRED TO OPERATE A FUND
2
3 4
Decision
Authorities2Governance

11. 11
Standardised output at each stage
Draft and
close deal
Qualify
investees
Complete
pre-work
Obtain
sign-off
Execute
media
campaign
1
2
3
4
5
Objectives Standardised templated output Vol. (p/a)
 Proactively build network and
identify potential clients
 Determine and check client fit
and best choice
 Prepare documentation for
management to decide on
̶ deal suitability
̶ deal terms
 Formalise internal sign-off and
ensure compliance with
̶ OCEO process, and
̶ company policies and
procedures
 Finalise transaction including
documentation signing and
exchange
 Plan, book and deliver
campaign to the agreed
contract value
Client media
plan
Client media
plan
Client media
plan
Target list & prioritiesBus. Dev plan
Client media
plan
Client pipeline
Client media
plan
Client media
plan
Client media
plan
Client workshop & media planScreening
Investment Com’tee
Std. shareholder agreem’t
Client media
plan
Client media
plan
Client media
plan
Media schedule
Campaign reporting
And results
CEO / OCEO document
Media contracts1
Campaign invoice
CEO / OCEO model
100
(investees)
12
8
6
6
2. CAPABILITIES REQUIRED TO OPERATE A FUND
Standardised
Deliverables3

12. 12
Deep-dive: screening of investments (1/2)
2. CAPABILITIES REQUIRED TO OPERATE A FUND
Screening
Criteria4
Fit with
Priority
Sectors /
Vertical
1
Sound
Business
Funda
-mentals
2
Product
Offering
3
Marketing /
Advertising
Creates
Value
4
High–
Performing
Mgmnt
Team
5
Attractive
Financials
6
2-4%

13. 13
Deep-dive: screening of investments (2/2)
2. CAPABILITIES REQUIRED TO OPERATE A FUND
Criteria Scoring (%) Comments
Fit with Priority
Sectors / Vertical
Sound Business
Fundamentals
Product Offering
Marketing /
Advertising Creates
Value
High–Performing
Management Team
Attractive Financials
>70%
Outcome
Reviewer / Date
Recommendation
Decision Rationale
Company Details
Company Name
Primary Contact
Company Overview
>70%
>70%
>70%
>70%
>70%
Screening
Criteria4

14. 14
Sales of a new product in years 1 and 2
Millions of units sold
2. CAPABILITIES REQUIRED TO OPERATE A FUND
What are you likely to do at
the end of year 2?
Year 1 Year 2

15. 15
If you gave it a third year and it looked like this?
Millions of units sold
2. CAPABILITIES REQUIRED TO OPERATE A FUND
Year 1 Year 2 Year 3

16. 16
iPod sales chart
2. CAPABILITIES REQUIRED TO OPERATE A FUND

17. 17
Four major challenges to corporate venturing
3. WHAT ARE THE CHALLENGES AND WHAT WILL IT TAKE TO WIN?
 “Me too” approaches will fail to create value
 Investment strategy shouldn’t be the same as
everyone else's
 Purpose of the fund should go beyond simply
an ROI case and contribute to the
organisations broader agenda
 Exit options should be considered at the
outset of any investment decision
 Fund structure should fully consider relevant
government incentives, with tax and legal advice
in context of objectives
Lack of
differentiation
Unclear
objectives
Inefficient
Setup
Uncertain
Exit Paths
1
2
4
3

18. 18
Winners will need a mix of mindsets and behaviours
3. WHAT ARE THE CHALLENGES AND WHAT WILL IT TAKE TO WIN?
• Apply concepts of diversification and related
themes
• Accept there will be losers
Portfolio
thinking
• Get entrepreneurs, start-up hubs,
accelerators, VC funds working together
Orchestrating
players
• Have a systematic approach to investing with
a well developed playbook and clear deal
archetypes
Systematised
execution
Commercial
Innovation
• Develop innovative ways to support emerging
businesses and challenge traditional
assumptions in corporate venture investing